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Buoyed by around US$17 billion of oil and gas revenues, East Timor's economy is no longer a basket case. Photo: AFP

Oil rich East Timor weighs the risks of ditching the US dollar

With the country's fragile prosperity built on the US dollar, experts warn that introduction of its own currency could make or break the economy

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East Timor's fragile new prosperity has been built on the US dollar. Ditching the dollar, economists say, could make or break its economy. But it might be on the cards.

The central bank in Dili is an unimposing building, but the Banco Central de Timor-Leste has come a long way from its origins as the United Nations "Central Payments Office" (CPO), and has earned a reputation for financial prudence. In the streets outside, the results are plain to see, in terms of advertising hoardings, people going to work and other signs of economic growth.

In terms of economic policy, though, the central bank is still largely dependent on the US Federal Reserve. When the UN briefly took over the running of East Timor after its bloody 1999 vote for independence, the CPO arranged for the import of thousands of dollars in US banknotes to get the economy of the ruined half-island going again.

Fifteen years on, the US banknotes are still there.

Buoyed by around US$17 billion of oil and gas revenues in a "petroleum fund", East Timor's economy is no longer a basket case. The US coins were long ago sent back and replaced by local centavo coins but East Timor is still firmly a "dollarised" country, which restricts the central bank's control over its economy.

For many East Timorese it is an issue of national pride. Many ordinary East Timorese feel an independent country should have its own currency. Experts wonder if it is worth the risk.

Central bank economist Gastao Gama de Sousa was extremely reticent when questioned about suggestions that East Timor might be preparing to ditch the dollar. The bespectacled Gama de Sousa did, however, reveal that a study on the idea is under way, that a public consultation is expected some time this year and that towards the end of the year, the result should be in.

"It depends on the result of the study itself. From that study we can take a conclusion that East Timor can or not have its own currency," Gama de Sousa, manager of the central bank's division of economics and statistics, told the

"Privately, we want to have our own currency, depending on the conditions of the economy. We are going to look at all the countries to see the advantages and disadvantages of having their own currency."

The Hong Kong dollar and its peg to the US dollar would be among those examined, he said.

"As a dollarisation country we don't have autonomy to make monetary policy. But if we have our own currency, the central bank has the power to make monetary policy," he said.

Economists familiar with East Timor say, in principle, the idea has merits.

Brett Inder, a development economist at Monash University in Melbourne, says East Timor's economy is peculiar because it is so heavily dominated by oil and gas revenues, which are denominated in US dollars.

Apart from oil and gas, currently the only significant export from East Timor is coffee, although there is a tiny amount of pepper.

East Timor is also heavily dependent on imports, including its main staple food, rice. Around three-quarters of the rice eaten in East Timor comes from abroad.

With oil and gas revenues eventually predicted to fall in the coming decades, and a growing, young population, East Timor's government is under pressure to find new exports. Launching its own currency could lead to devaluation, increasing the attractiveness of East Timor to investors, thus promoting diversification of the economy, assuming investors can be found.

On the other hand, the new East Timor dollar could potentially go into freefall. "Probably the biggest impact of floating the currency would be the potential to devalue the currency," Inder said.

The dollar-denominated oil and gas revenues would be worth more locally. However, East Timor's other significant export - coffee - is not currently competitively priced on the international market and to make it competitive would require a devaluation of around 50 per cent. This in turn would mean that rice would roughly double in price, leaving many poorer East Timorese potentially going hungry.

"That would be a massive shock. The social impact of that would be huge," Inder said. "My one piece of advice would be - tread cautiously. If you are going to create your own currency, then peg it, don't float it."

This article appeared in the South China Morning Post print edition as: Oil rich East Timor weighs risks of ditching the dollar
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