E.Timor sets lenders economic challenge

By Janet Guttsman

WASHINGTON, Jan. 25 (Reuters) - International institutions are starting from scratch as they help build an economy on the rubble of the new statelet of East Timor and key decisions on how it will all work are still only in outline form.

Experts from the World Bank and International Monetary Fund stressed in recent interviews that the Timorese needed to take the lead in determining the priorities for their new country, which voted last August for independence from Indonesia.

But some choices -- what currency to use and how to ensure the new government would be able to pay its bills -- were essential to reverse a slump in living standards and pave the way for economic success.

``There was an institutional vacuum,'' said Luis Valdivieso, the IMF's point man in the territory. ``We have tried to develop a set of recommendations to leave things under control in the medium term, studying what sort of economy they want to see.''

World Bank expert Klaus Rohland said staff advising the East Timorese were drawing on the lessons from other regions in similar circumstances -- so-called post-conflict situations, which demand urgent international help.

``We are trying to build a country, not on our own but with the people of the country,'' he said. ``That has implications for the speed at which we work. It is tempting to be very fast, to do everything on your own, but you need to do capacity building at the same speed.''

Valdivieso said building a payments system and choosing a currency were key decisions for East Timor, and, speaking before Monday's decision to opt for the U.S. dollar, he said that unit and the Australian dollar would be simpler to introduce than Portugal's escudo or the Singapore dollar.

Indonesia's rupiah, the most-used currency in East Timor now, was unpopular with the region's new leaders because it was viewed as the currency of the post-colonial oppressor. Indonesia seized East Timor in 1975 after the Portuguese colonial administration withdrew.

An estimated 200,000 people -- a quarter of the population -- died in a famine and military crackdown that followed the December 1975 invasion by Indonesian troops.

POLICIES MATTER MORE THAN CURRENCIES

Valdivieso said policies would be even more important than the choice of currency. ``Stability can only be assured by macroeconomic policies that underpin stability,'' he said.

Many in East Timor's new administration had pushed for the Portuguese escudo, already used to pay some colonial-era pensions. But Valdivieso said the escudo is barely a currency in its own right -- it disappears soon to make way for the European currency, the euro -- and that complicates matters.

``There are currently four currencies in circulation: the Indonesian rupiah, the Australian and U.S. dollars and some escudos, but it's very difficult to operate with multiple currencies in the absence of a banking system or foreign exchange system,'' he added.

The international community has promised hundreds of millions of dollars to help East Timor recover from violence before and after its Aug. 30 independence referendum. Buildings were destroyed and infrastructure badly damaged, Indonesian administrators fled, East Timorese stopped paying for basic services and administrative systems ground to a halt.

Valdivieso said work was already advancing to create a central fiscal authority to handle tax revenues once collection gets properly under way and deal with donor cash. A civil service could eventually employ some 6,000-7,000 people, compared to about 28,000 in Indonesian times.

``These are the two pillars of macroeconomic management: a fiscal and a monetary,'' he said. ``This is a very elementary structure that we think should provide the basics for sound management. It is the minimum that should be presented to donors to give them assurances on the use of their resources.''

The World Bank's Rohland agreed that a tax system was essential for development in East Timor, where per capita income has halved to some $180 a year since the turmoil surrounding the referendum. The new country, long the poorest part of Indonesia, is now one of the poorest in the world.

``If you do not set up a tax system and a revenue system for the country, it is very difficult to develop a self-sustaining economy and a self-sustaining country,'' he said. ``It is an important step to independence.''

The bank says other priorities include systems that will allow trade flows with Indonesia and with other countries and ensure the basic supply of food and other goods. New farm sector initiatives will reduce the dependence on imports.

Rohland said the key decisions were up to the East Timorese. ``It's not people from outside coming in and rebuilding the country, it's the country reinventing itself.''

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