IMF says East Timor could join Euroland

IMF says East Timor could join Euroland

DILI, East Timor (Reuters): The tiny, traumatized Southeast Asian state of East Timor could adopt the euro as its currency, an International Monetary Fund official in the territory told Reuters on Friday.

East Timor voted in August to break free from more than two decades of often brutal Indonesian rule, setting off a wave of violence by pro-Jakarta militias and the Indonesian security forces. As it moves towards independence under U.N. supervision, it faces the task of choosing a new currency.

East Timor's main political umbrella group, the National Council for East Timorese Resistance (CNRT), is advocating the Portuguese escudo. Portugal ruled East Timor for centuries before Indonesia invaded the territory in 1975.

But Portugal has joined the euro zone, and IMF economist Luis Mendonca said the European single currency was a more favorable option than the escudo.

"I think the East Timorese themselves consider three currencies for the future -- the U.S. dollar, the Australian dollar and the euro," Mendonca said.

"The escudo really doesn't exist. It is just a division of the euro and the euro of course is a stable currency. It is internationally accepted and gaining importance in the international market, but one negative point...is that the international trade of East Timor is done in U.S. dollars."

However, given the strict criteria for countries wanting to join the euro, it is not clear whether East Timor would be allowed to use the currency.

The Indonesian rupiah remains the most widely used currency in the territory, followed by the Australian and U.S. dollars which gradually came into circulation once East Timor voted to sever ties with its giant neighbor.

East Timor's official currency will be decided by the 15- member National Consultative Council (NCC), established by the U.N. in December to ensure East Timorese were involved in the decision-making process over the next two to three years as the territory moves toward full independence.

"The IMF will not decide the currency for East Timor," Mendonca said.

"It has a view based on technical grounds, on the advantages and disadvantages such as the stability of the currency, the worldwide use of the currency and the composition of the trade of East Timor in terms of the currency."

He said the rupiah was too unstable to be considered a viable option.

Portugal has pledged considerable economic support for East Timor as the impoverished territory struggles to rebuild.