Global Policy Forum

By Mark Dodd

In an effort to mend an economy devastated by the violence that accompanied the Indonesian withdrawal in 1999, the United Nations transitional administration in East Timor is trying to get the American dollar widely accepted as the only legal tender.

This is a sensitive undertaking in a territory that was a Portuguese colony for several hundred years before being invaded by Indonesia in 1975 and annexed the following year. UN officials estimate that more than $25 million worth of the Indonesian currency, the rupiah, still circulates in East Timor. For most East Timorese, particularly the large majority in the countryside, the rupiah is familiar and remains popular. Despite its instability, it remains the chief store of value in village markets.

In the first step toward making the greenback East Timor's only legal tender, the country's coffee farmers are being paid in crisp new dollar bills for their organically grown arabica beans, sought after by international buyers. The initial response has been quietly encouraging, said Alistair Laird, an adviser to Cooperative Cafi Timor, the territory's biggest coffee buyer. The Central Payments Office, East Timor's equivalent of a reserve bank, is using the start of the coffee buying season to give momentum to the stalled initiative to dollarize the economy.

First moves to establish the greenback as East Timor's official currency in early 2000 met with a lukewarm public response. The next push came on April 26 when Sergio Vieira de Mello, the head of the UN transitional administration, signed two key pieces of legislation paving the way for the introduction of the U.S. dollar. Coffee is East Timor's biggest export earner, employing 200,000 people, a quarter of the territory's population. Until this year, farmers were paid in Indonesian rupiah. But a 50 percent depreciation of its value against the U.S. dollar over the past 14 months has strengthened calls by the new political leaders of East Timor for a switch to a more stable currency.

The head of the Central Payments Office, Fernando de Peralto, said recently that more measures are being planned to ensure the success of the program, including new legislation requiring local businesses to price products and services in dollars only.

The coffee farmers may turn out to be the key to the success or failure of the program. If they hold on to the money without exchanging it into rupiah then the chances for dollarization look good. But if unlicensed exchange traders move up into the mountains to relieve farmers of their dollars at rip-off exchange rates, then violence is a possibility. To preempt another bout of conflict in East Timor, Mr. de Peralto's office plans to send mobile exchange vans into the coffee-growing districts to buy up rupiah. It also wants to store quantities of cash in the villages to ensure prompt payment to farmers.