Dow Jones Newswires February 21, 2000

IMF Advice Helping East Timor Plot New Economic Course

By DAMIAN MILVERTON

WASHINGTON -- The reconstruction of the East Timorese economy has begun to take shape in recent days, with advisers from the International Monetary Fund and the World Bank helping draft a blueprint for a new ministry of finance and a central bank.

In the past few weeks, the East Timor National Consultative Council (NCC) has enacted laws establishing the U.S. dollar as the former Indonesian territory's new currency and laying out a bare framework for macroeconomic policy.

Luis Valdivieso, the IMF's head of mission for East Timor, said in an interview with Dow Jones Newswires Monday that the transition authority in East Timor is scheduled to begin tax collections next month, largely through a small number of sales taxes and import duties.

Valdivieso said the public administration likely will only be able to cover half its costs through local revenue measures, leaving the fledgling nation dependent upon the flow of foreign aid for some time to cover the shortfall.

The number of East Timorese civil servants has swelled to more than 2,000 from virtually zero last September, when Australian troops led an international force into East Timor to halt bloody attacks by anti-independence militias.

Public servants began receiving wages Feb. 1, a week after the NCC voted to adopt the U.S. dollar as legal tender, supplanting the patchwork currency system that comprised the Indonesian rupiah, U.S. dollar, Portuguese escudo and the Australian dollar.

IMF Says Free Services Won't Last Forever

"There are signs of encouragement, but the road to be followed is very long," Valdivieso said at the conclusion of the first IMF technical mission to East Timor.

"There are a broad range of activities that need to be developed in the areas of fiscal and monetary management," he said.

As in many so-called post-conflict nations, revenue collections for basic services have ceased, and an enormous number of everyday services disappeared with the withdrawal of the Indonesian administration.

"You have to consider that today all water and electricity is free, and the use of the ports and the airport is free," Valdivieso said.

"That can't continue forever, but we've got our expectations in line with reality," he added.

Essentially, this means that "those who can pay, are to pay," the IMF official said, while those who can't be expected to meet eventual tax demands will "remain outside the net."

"They can't continue as some sort of tax-free haven," Valdivieso said of East Timor.

"There will be significant reduction in the tax burden from what there was before; that's very important to realize, because, on the surface, it looks almost draconian to levy taxes on people who have almost nothing left," he said. "The tax on those who can pay will be higher than before."

Some Banks To Merge; New Banking Rules Introduced

The NCC also has embarked upon the creation of a new financial sector for East Timor, passing new banking regulations only Saturday.

Before the violence that followed the independence referendum Aug. 30, 1999, eight banks served East Timor, seven of them offshoots of Indonesian groups. The other was a provincial development bank of the kind established by the Indonesian government in each of its provinces.

"Of the Indonesian banks, three were in difficulties and will be merged," Valdivieso said.

"The other four are still interested in doing business in East Timor," he added.

Additionally, Portugal's Banco Nacional Ultramarino and Westpac Banking Corp. (WBK) of Australia also provide some specialized services, with Portugal's paying retirement benefits to former employees of the defunct Portuguese administration in East Timor.

Westpac has been paying the salaries of local U.N. employees and Valdivieso said he expects both companies to be interested in widening their activities in Asia's newest nation.

"They have the opportunity to do more business in East Timor," he said. "I haven't talked to them yet about it, but I'm sure there will be a great deal of interest from outside because this will become a rapidly growing economy."

Valdivieso said the IMF expects East Timor to follow a pattern seen in other post-conflict societies, where expansion has occurred rapidly from a low base in the transition to peace and stability.

Under the guidelines approved Saturday, banks in East Timor will be required to have a minimum capital of $2 million and will be permitted to engage in wider and more sophisticated activities with each increase in capital.

Dollar The Official East Timor Currency For Now

Although East Timorese leaders are adamant that the dollar has only a limited future as the nation's official currency, Valdivieso said they are also under no illusions as to the necessity of having a stable currency during reconstruction.

"There is a very explicit determination of the East Timorese leadership to have their own currency," Valdivieso acknowledged.

"That will take a long time, because the currency will have to be as strong as that it replaces, and that means there must be strong institutions, stability in the economy and capable individuals to run the institutions that emerge. There is a long way to go," he said.

The next phase in East Timor's emergence as a independent state will begin Wednesday when the Australia-led international military force hands is replaced by U.N. peacekeepers.

This will mark the beginning of what the U.N. expects to be a three-year process of helping East Timor rebuild the basic foundations of its shattered society.

For Valdivieso, there are already some promising signs of "normalcy" in the handful of new restaurants and hotels that have sprung up in recent weeks.

A civil police force is now charged with keeping order and, perhaps most importantly in the interim, the "institution of the NCC is working."

The IMF will now seek to establish a permanent outpost in Dili for officials from its Asia/Pacific department, who will continue to assist the present and future administrations come to grips with drafting policies for the new nation.

-By Damian Milverton, Dow Jones Newswires; +202-862-9272; damian.milverton@dowjones.com

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