Gusmao steps down

In a move that marked a new chapter in East Timor's short history, the nation's president accepted the resignation of Xanana Gusmao as prime minister on Monday, February 9. The 68-year-old had submitted his resignation to President Taur Matan Ruak only three days earlier, after serving the Southeast Asian country either as president (2002-2007) and premier (2007-2015) since it gained independence from Indonesia in 2002.

Former health minister and opposition politician Rui Araujo was selected by the president as Gusmao's successor, as the country seeks to form a national unity government. An official speaking on condition of anonymity told Associated Press, the Cabinet was expected to be reduced in size from 55 to 34 ministers and would become more inclusive, with opposition members among those appointed.

Gusmao, who remains widely popular in the half-island nation, had reportedly been considering stepping down for some time to make way for a new generation of leaders.

The former guerilla leader, however, has not ruled out staying in politics, with analysts saying he may accept a ministerial post in order to continue playing a role in guiding the nation's economic development. Last week, Gusmao urged the people of East Timor "not to panic" during the transition to a new government, and called on everyone to "contribute towards stability."

From guerrilla fighter to national hero

East Timor had been a Portuguese colony for centuries until it declared independence in late 1975. But just over a week after the Portuguese had left, the territory was invaded by Indonesia. The ensuing 24-year-long occupation was brutal, resulting in an estimated 170,000 deaths.

This only changed in 1999 when East Timor voted overwhelmingly in a UN-backed referendum to end the occupation and thus become a sovereign state. In May 2002, the Democratic Republic of Timor-Leste - better known as East Timor - became Asia's youngest country.

Gusmao is credited with being an important driver of East Timor's struggle for independence as well as playing a critical role in rallying and keeping alive international support. He initially led an armed resistance as a guerrilla fighter, but was later imprisoned and spent the last seven years of the occupation in an Indonesian jail where he continued with his struggle from behind bars.

Gusmao was then released in 1999 as part of a UN-brokered deal and returned to his homeland a hero. He was elected the new nation's first president in 2002.

But decades of violence left the country and families torn apart. According to the World Bank, nearly 70 per cent of all buildings, homes and schools were destroyed, and an estimated 75 percent of the population was displaced. Nevertheless, analysts agree that Gusmao, the former guerrilla fighter, has served as a unifying figure during the fraught early years of the country's independence.

As Gregory Poling, a Southeast Asia expert at the Washington-based Center for Strategic and International Studies, explains, Gusmao has been a central figure in Timorese politics for decades and is as responsible for the nation's political development as anyone else.

Throughout much of the time he was either president or PM, Gusmao also served as an independent candidate atop centrist coalitions that helped moderate the more radical politics of FRETILIN, the largest political party and former heart of the independence struggle.

Difficult beginnings

As with most young democracies, the greatest challenges facing East Timor have involved stability and economic development. There have been several episodes of renewed civil unrest after independence which have also delayed economic development.

In 2006, for instance, the economy of the small independent state shrunk following a deterioration of security. Gusmao, who was president at the time, was at the heart of the crisis which started with violence from members of the military and their supporters and ended with an international intervention and Gusmao demanding the resignation of the then prime minister as well as the establishment of an interim government until elections the following year.

The government also faced significant post-election violence in 2007, and Gusmao and then-president Jose Ramos-Horta both survived assassination attempts in 2008. But as Poling points out, despite these incidents, the relatively peaceful and well-run elections of 2012 gave cause for hope that East Timor has turned the corner toward a stable democracy. The UN also decided the country was stable enough to withdraw its peacekeepers.

During Gusmao's term as PM, which began in 2007, the economy also progressed rapidly, with strong GDP growth and a rise in per capita living standards as large new oil and gas revenues gave the government considerable new funding to spend on economic and social development. However, ensuring equitable and sustainable economic growth was to become one of Gusmao's key administrative challenges.

Over-reliance on oil and gas

East Timor continues to be one of the world's poorest countries, with about half of its 1.2 million people living in poverty. The country's per capita GDP is still very low, at 1,450 USD in 2014 and high inflation, unemployment and an over-reliance on gas reserves still plague the young nation which has also faced difficulties in addressing malnutrition.

"Despite rapid economic growth driven by oil and gas revenues from the Bayu Undan field since 2007, the transmission effects have not been sufficient to transform the domestic economy, with much of the population still living and working in rural areas, notably in subsistence farming," Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, told DW.

The analyst explains the poor economic development is largely the result of years of protracted conflict, a lack of civil administrative structures and shortages of skilled workers.

East Timor has been blessed with significant offshore hydrocarbons, which have become the primary driver of economic growth and primary source of government revenue. But as analyst Poling points out, Timorese leaders have been keenly aware of the so-called "resource curse" that tends to create a cycle of dependency in oil-rich nations.

Oil and gas currently fund around 90 percent of the annual government revenue and also account for around 80 percent of GDP and 93 percent of exports. With the proceeds from gas extraction the government has established a sovereign wealth fund, hoping to ensure a more diversified economy and more widely distributed economic growth.

Economic woes

But many analysts say the young country is still struggling to diversify its revenue sources, and now faces the problem of depleting reserves from its major Bayu Undan oil and gas field, with reserves from this field projected to be exhausted by around 2024.

Negotiations on the development of a major new oil and gas field, Greater Sunrise, have been protracted with no agreement reached so far. Moreover, economists such as Biswas point out that the recent slump in world oil prices will likely be a further shock for the country's economy, as it will reduce oil and gas revenue.

"Unless the Greater Sunrise project can get the green light soon, the country's economy could face a devastating fiscal position and become highly dependent on donor aid as well as depleting the assets of its sovereign wealth fund, the East Timor Petroleum Fund," said Biswas.

While East Timor's sovereign wealth fund will likely provide a temporary buffer for the loss of oil and gas revenues, the size of the fund is still moderate, with an estimated 16.6 billion USD in assets, according to experts.

A key challenge for the new government will therefore remain the diversification of the economy, with analysts saying the administration should also focus on alternative new export industries such as tourism and developing new oil and gas projects to replace Bayu Undan.

'An invaluable precedent'

Analyst Poling believes that after a storied career, Gusmao's decision to step aside might end up being one of his best legacies.

The CSIS expert argues that the nation has been ruled since independence by a generation that served as guerilla commanders and politicians-in-exile during the struggle against Indonesia. Some have made the transition to civilian leaders better than others since independence, but the older generation's jockeying for power has been at the root of the country's repeated political crises.

"Gusmao, who is without a doubt the nation's most popular political figure, is now making a graceful exit that could set an invaluable precedent," said Poling.