Subject: U.N. To Set Up E Timor Monetary Body; Currency Undecided

Dow Jones January 14, 2000

U.N. To Set Up E Timor Monetary Body; Currency Undecided


JAKARTA -- East Timor took its first step Friday towards establishing a monetary system when the United Nations signed a measure to set up a central fiscal authority in the formerly Indonesian-held territory.

The new authority will enable U.N.-administered East Timor to tap into international donor funds that are vital for rebuilding the shattered country and its moribund economy, as well as lay the groundwork for its future monetary policy.

But no final decision has been made on what will be the official currency in the territory, although the UN Transitional Administration in East Timor (UNTAET) will begin shortly to pay local workers in Indonesian rupiah, officials said.

UNTAET chief Sergio Vieira de Mello said he will consult next week with local representatives on the creation of an embryonic central bank in the territory to handle these and other payments from a UNTAET trust fund for East Timor.

"What is important is to pay these people, not the currency in which we pay them," Vieira de Mello said at a news conference in Dili, East Timor.

The measure was approved Thursday by a consultative council made up of local political and church leaders as well as UNTAET representatives.

The new monetary authority will be the central fiscal, budgetary and regulatory body in the territory, Vieira de Mello said.

"This is fundamental because no country can function without such a central fiscal authority and because no donor will give us a penny unless such a capacity is in place," he said.

The devastation of East Timor has also created the need to rebuild a banking system from scratch.

With at least four currencies in circulation and political qualms about adopting the still widely -used Indonesian currency, UNTAET is anxious to take a pragmatic approach to this and other monetary issues.

Portugal Suggests Using Escudo

Former colonial master Portugal has suggested that the Portuguese escudo be adopted as legal tender in East Timor, raising the possibility that the tiny half-island could become yoked to European monetary policy.

Portuguese state-owned Banco Nacional Ultramarino last December opened a representative office in Dili, currently the only bank in the territory, to pay pensions to former civil servants in East Timor.

Portugal is among the largest contributors to a $520 million aid package pledged last December at a donors meeting in Tokyo.

Meanwhile, an influx of Australian soldiers as part of the multinational UN peacekeeping force has injected Australian dollars into the local economy, as well as U.S. dollars that have begun arriving with foreign aid workers.

Luis Mendonca, a senior economist for the International Monetary Fund, said any decision to adopt an existing currency as official tender in East Timorese would depend on what monetary support is forthcoming from the other country.

"The choice can't be made before we know exactly what support the monetary authorities of the different currencies are willing to provide," he told reporters at the news conference.

Along with the World Bank and UNTAET, the IMF is playing an advisory role on monetary policy, but Mendonca stressed that it was ultimately up to East Timorese leaders to make a final decision on which currency to adopt.

East Timor doesn't need agreement from Bank Indonesia, the Indonesian Central Bank, to pay workers in rupiah, he added.

With Indonesia likely to become one of East Timor's main trading partners on account of its geography and size, analysts say it makes commercial sense to adopt the rupiah, despite its recent instability. Some members of the Timorese resistance are known to favor the escudo.

Direct commercial air links between Indonesia and East Timor are set to resume shortly with state-owned Merpati Nusantara Airlines planning services between Dili and Kupang, West Timor.

Indonesia is also preparing to open a diplomatic mission in Dili in time for a planned visit by President Abdurrahman Wahid in February.

Australian Troops Using Aussie Dollar

Xanana Gusmao, head of the National Council of Timorese Resistance and widely tipped as the first president of an independent East Timor, has adopted a conciliatory tone towards Jakarta since the orgy of violence that marked the end of Indonesian rule.

Pro-Jakarta militia backed by Indonesian troops went on a killing and looting rampage in the territory, after East Timorese voted overwhelmingly for independence in a UN-sponsored referendum last August.

The arrival of an Australian-led peacekeeping force in East Timor restored order to the territory but not without sparking a major diplomatic rift between Indonesia and Australia that has yet to fully heal.

Australian and Indonesian companies are likely to jockey for business opportunities in East Timor as donor funds begin to pour in, analysts said.

-By Simon Montlake; 62 21 3983 1277;

(Heather Paterson, of the Associated Press in Dili, contributed to this article).

13 Jan 00 13:27 EU Presidency: Lisbon Backs Lifting of Indonesian Arms Embargo

Brussels, Jan. 13 (Lusa) - As a gesture of "good will" towards Jakarta, the European Union's Portuguese presidency plans to propose the lifting of the EU arms embargo on Indonesia. A Portuguese diplomat in Brussels told Lusa Wednesday that the initiative would likely be formally approved in the first general affairs council to be chaired by Lisbon's foreign minister, Jaime Gama, Jan. 24-25 in the Belgian capital. The embargo was imposed in September, after pro-Indonesian militias launched a scorched-earth campaign in East Timor, following the territory's self-determination ballot for independence. -Lusa-

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