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"Under pressure from the International Monetary Fund and elements of the East Timorese political leadership, UNTAET is intensifying its efforts to achieve what it calls “dollarization”—making the U.S. dollar the sole currency of the territory. ... The potential for inflation caused by dollarization is very real in East Timor. ... Given this, what are the plans on the part of UNTAET and the IMF to protect East Timorese—especially the poor who live on the margins— from the effects of increasing prices?" La'o Hamutuk: East Timor Institute for Reconstruction Monitoring and Analysis
See also: BD: Financing Reconstruction in East Timor - A collection of recent reports and articles

BD: Peoples' Participation - A collection of recent media releases, reports and articles

 

From: The La'o Hamutuk Bulletin

Volume 2, Nos. 3
June 2001

Issue focus: 
The International Monetary Fund in East Timor

Table of contents: To read this entire issue on the internet, or to download a printable PDF version of all of it, go to:
La'o Hamutuk Bulletin: http://www.etan.org/lh/bulletinv2n3.html



LH Editorial: Dollarization and Democracy

Under pressure from the International Monetary Fund and elements of the East Timorese political leadership, UNTAET is intensifying its efforts to achieve what it calls “dollarization”—making the U.S.  dollar the sole currency of the territory. There clearly are potential benefits to dollarization; there are also potential problems. As such, it is imperative that there be wide-ranging discussion and debate on the matter—which thus far have been lacking. And, if dollarization continues, it must be a slow and deliberate process.

Although the U.S. dollar has been UNTAET’s official currency since January 2000, the currency of choice in East Timor’s markets and villages has been the Indonesian rupiah. In a more limited sphere of the economy, namely upscale stores, restaurants, and hotels, the Australian dollar has also been an important currency. As well, approximately 1500 East Timorese receive from the Portuguese government a civil servant’s monthly pension paid in Portuguese escudos that averages US$400.

The current plan is to eliminate the use of the rupiah and Australian dollar. As part of this effort, UNTAET head Sergio Vieira de Mello signed an executive order on 26 April that imposes fines of up to US$5000 on illegal money changers and their customers. In addition, UNTAET’s Central Payment Office (CPO) has plans to introduce legislation that would compel all businesses to price their goods and services in U.S. dollars, and that would impose steep fines to prevent the unlicensed importation of all other currencies.
At the same time, the CPO will reportedly soon launch an educational campaign for all of East Timor to explain to the public the need for a U.S. dollar-only economy and the logistics of how to use a currency that is very foreign to the vast majority of the population—a huge problem associated with dollarization.

As East Timorese are familiar with the rupiah, it will take a considerable amount of time for people to become comfortable with the U.S. monetary units, which are growing increasingly complex. Most U.S.  currency denominations, for example, currently have two different types of bills. In the case of the U.S. quarter dollar coins, there will be 51 different types by 2008.

Growing instability of the Indonesian rupiah has provided much of the impetus to accelerate dollarization. According to an internal IMF memo, in the last year the rupiah has lost 50 percent of its value vis-…-vis the U.S. dollar, a development that “has been a silent destroyer of the value of the few remaining assets in the hands of the public.” Along with the declining value (although to a much lesser extent than the rupiah) of the Australian dollar, explains the IMF, the weakening of the rupiah has hurt the ability of the public to buy goods and services, especially imports and those that involve many inputs from abroad.

The IMF contends that using the U.S. dollar as the official currency will significantly increase the stability of the East Timorese economy by allowing for more predictable prices and lower interest rates. For such reasons, the IMF and many East Timorese political leaders assert that it will benefit all East Timorese, especially the poor.

The United Nations implemented a similar program of dollarization in Kosovo. And a number of “developing” countries use the U.S. dollar as their official currency. Most recently, El Salvador and Ecuador adopted the U.S. currency.

Before rushing ahead with dollarization, it would be very helpful for there to be consultations between elements of East Timorese civil society and counterparts from places like Kosovo and El Salvador to discuss the potential benefits and pitfalls of adopting the U.S.  dollar.

Until now, discussions on this very important transition have been largely limited to the upper echelons of UNTAET/ETTA and IMF staff.  The National Council’s participation has been marginal at best.  According to sources within the NC, there was barely enough time to photocopy the most recently proposed regulation regarding dollarization before the NC meeting. This regulation finances the purchase of five million U.S. dollars for the CPO by appropriating that amount out of the Consolidated Fund for East Timor (CFET).  Nevertheless, NC members approved the proposed regulation without discussing it or asking any questions.

The case of Ecuador illustrates why such a course of action might be dangerous. There, the adoption of the U.S. dollar caused a rapid rise in prices and led to massive street protests. The government of Ecuador even had to mint coins similar to those of the U.S. due to a shortage of those of the American variety.

The potential for inflation caused by dollarization is very real in East Timor. As the General Manager of the CPO, Fernando DePeralto admits, “Shifting from one currency to another with different denominations will create inflation.”

Given this, what are the plans on the part of UNTAET and the IMF to protect East Timorese—especially the poor who live on the margins— from the effects of increasing prices? Also, given the recent legislation outlawing unlicensed money changers, what provisions exist to help the money changers—who reportedly number four hundred in Dili alone—who lose their jobs?

Both the IMF and UNTAET/ETTA  preach transparency and accountability—virtues that have been largely lacking in the dollarization effort. The two institutions must make greater efforts to consult and discuss with the East Timorese the wisdom and/or folly of a dollarization campaign that will significantly impact daily life in the soon-to-be independent country.

--

UNTAET Regulation No. 2000/20 on Budget and Financial Management, Section 11, provides that “[t]he Head of the Central Fiscal Authority may prepare a special funds budget that contains details of . monetary amounts” and “estimates of any aid-in-kind provided by international organizations or foreign governments for the benefit of East Timor.” Under this provision, civil society can request that the CFA prepare a public accounting of the IMF’s financial activities in East Timor. La’o Hamutuk has made such a request and awaits a response from the CFA.


Tetum: (the most common East Timorese language)
La’o Hamutuk, Instituto Timor Lorosa’e ba Analiza no Monitoring Reconstrucao  Updated May 18
Saida mak La’o Hamutuk? La’o Hamutuk organizasaun klibur Ema Timor Lorosa’e no Ema Internacional ne’ebe buka atu tau matan, halo analize ho halo relatorio kona ba hahalok (actividade) instuisaun internacional ne’ebe oras ne’e haknaar iha Timor Lorosa’e, liu-liu hahalok sira ne’ebe iha relasaun ho rekonstrusaun fizika no social Timor Lorosa’e nian. La’o Hamutuk fiar katak Povo Timor Lorosa’e mak tenke hakotu iha procesu rekonstrusaun ne’e nia laran no procesu rekonstrusaun ne’e tenke demokratiku no transparante duni.
Staf Timor oan: Inès Martins, Fernando da Silva, Thomas Freitas; Staf Internasional: Pamela Sexton, Mark Salzer; Kuadru Ejekutivu: Sr. Maria Dias, Joseph Nevins, Fr. Jovito Rego de Jesus Araùjo, Aderito Soares
Local Contact:  P.O. Box 340, Dili, East Timor (via Darwin, Australia)  Mobile fone: +61(408)811373;  Telefone Uma: +670(390)325-013
International contact: +1-510-643-4507 Email: laohamutuk@easttimor.minihub.org  Homepage: http://www.etan.org/lh
Boletim La’o Hamutuk: [Tetum PDF format]
Vol. 1, No. 4, 31 Dejembru 2000 Banku Mundial iha Timor Loro Sa’e: http://www.etan.org/lh/PDFs/lhbul4tm.pdf
Vol. 1, No. 3, 17 Novembro 2000 Hari Sistema Saude Nasional iha Timor Lorosa’e:  http://www.etan.org/lh/PDFs/LHbul3tm.pdf
Vol. 1, No. 2, 17 Julho 2000 Protesaun ba meio ambiente iha TL: http://www.etan.org/lh/PDFs/bulletin02tetum.pdf
Vol. 1, No. 1, 21 Juñu 2000 Rekonciliasaun: http://www.etan.org/lh/PDFs/bulletin01tetum.pdf

English:
La'o Hamutuk: East Timor Institute for Reconstruction Monitoring and Analysis  Updated May 16
La'o Hamutuk (Tetum for Walking Together) is a joint East Timorese-international organization that seeks to monitor, to analyze, and to report on the reconstruction activities of the principal international institutions. It believes that the people of East Timor must be the ultimate decisionmakers in the reconstruction process and that the process should be as democratic and transparent as possible ...
East Timorese staff: Inès Martins, Fernando da Silva, Thomas Freitas; International staff: Pamela Sexton, Mark Salzer Executive board: Sr. Maria Dias, Joseph Nevins, Fr. Jovito Rego de Jesus Araùjo, Aderito Soares
International contact: +1-510-643-4507  Email: laohamutuk@easttimor.minihub.org  Homepage: http://www.etan.org/lh
La’o Hamutuk Bulletin: http://www.etan.org/lh/bulletin.html
Mar 23 2001 LH: Job announcement for La'o Hamutuk in East Timor: http://www.pcug.org.au/~wildwood/01marjob.htm
Activity Report: Mar 16 2001 LH: http://www.pcug.org.au/~wildwood/01marlhreport.html


See also:

BD: Financing Reconstruction in East Timor - A collection of recent reports and articles

BD: Peoples' Participation - A collection of recent media releases, reports and articles


BACK DOOR Newsletter on East Timor      home  June news
Website: http://www.pcug.org.au/~wildwood  Email: wildwood@pcug.org.au
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