The Fretilin party, which won the July election by a narrow margin, did not receive enough votes to govern alone and has formed a minority coalition government with the Democratic Party.
With only 30 seats in the 65-seat house, the government relies on confidence and supply from other parties in parliament.
Prime Minister Mari Alkatiri said the defeat in parliament on Thursday was “poison to my government.”
“I asked everyone to remain calm, I will go to you and talk to you,” Alkatiri said in tears following the vote.
The bill outlined the government’s five-year strategic plan for the impoverished young democracy and included initiatives to improve health, infrastructure and better access to clean water.
East Timor analyst Damien Kingsbury, from Australia’s Deakin University, said if the government failed to pass the bill again the country could return to the polls.
“The president has two choices he has either to call for a majority in parliament to choose a new leader and appoint a new prime minister or the country goes to election, probably January next year. That would seem the most likely outcome at this stage,” Kingsbury said Friday.
Opposition parties, including the CNRT, PLP and Khunto, have said the current minority government was unconstitutional and its program unrealistic.
Nurima Ribeiro Alkatiri, from Fretilin, vowed the government would push ahead with its work.
“We are going to continue to work even though the opposition doesn’t believe in our program,” Alkatiri said.
East Timor, a former colony of Portugal, was invaded by Indonesia in 1975 before it gained independence in 2002 after UN sponsored referendum.