The Wall Street Journal March 15, 2000

East Timor Creates a Financial System Aiming to Reduce Outside Dependence

By EDUARDO LACHICA Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- East Timor is setting up a rudimentary but workable financial administration, with the aim of eventually reducing its dependence on international donors, the International Monetary Fund says.

"They don't want to live on charity" longer than they have to, says Luis Valdivieso, chief of the IMF's East Timor mission.

In an interview, the Peruvian-born economist recounts one of the fund's trickiest assignments in Asia: helping East Timor recruit native talent to run a central payments office and a central fiscal office. These, he says, are the embryos for a future central bank and finance ministry.

Most of East Timor's former civil servants were Indonesian immigrants, who fled the scene after the East Timorese people voted overwhelmingly for independence on Aug. 30. There isn't much local experience in fiscal management, either, because this task used to be left entirely in Jakarta's hands.

Currently, East Timor draws for its expenses on a United Nations-administered $31 million trust fund and a $150 million trust fund handled by the World Bank and the Asian Development Bank. However, the East Timorese are determined to bring in new banking services, create a stable, dollar-based payments system and raise enough revenue to at least partly meet their administrative expenses of $30 million a year. The East Timor fiscal authorities expect to collect as much as $15 million this year from proposed taxes and duties, as well as from receipts of public utilities.

Although the economy is still in disrepair, some banking services have resumed, Mr. Valdivieso says. Westpac Banking Corp. of Australia is handling the payments for U.N. personnel, while Banco Nacional Ultramarino, based in Portugal, is taking care of the pensions of retired Portuguese administrators. East Timor will allow any other foreign bank with a minimum of $2 million in capital to set up shop.

East Timor suffers from some degree of monetary muddle because several other currencies besides the U.S. dollar are in circulation, including the rupiah, the baht, the Portuguese escudo and the Australian dollar. However, Mr. Valdivieso expects the officially endorsed U.S. dollar to eventually become the dominant currency, with the rupiah serving as an alternative for retail trade. He says East Timor's fledgling administrators are minimizing transaction costs in the meantime by posting daily quotations from Jakarta currency exchangers.

As soon as a new system of border controls is in place, East Timor will start collecting a 5% import duty on all commercial goods except infant formula and women's hygienic products, which will continue to enter duty-free, the IMF official said. He also expects the country to later impose sales taxes of 15% on cars, 5% on gasoline and diesel fuel, and 10% on home appliances, mobile phones and satellite dishes. In addition, a $15-per-kilogram levy will be imposed on imports of tobacco and tobacco products.

East Timor authorities are also planning to levy what the IMF calls a "presumptive income tax" of 5% on exports by Timorese coffee producers, most of which weren't seriously affected by the rampage of anti-independence militia. Mr. Valdivieso says the Timorese producers can afford the added tax burden because they no longer have to trade their coffee through Indonesian middlemen. He also expects some still-profitable service industries like hotels and restaurants to bear a similar burden.