Tom Wright

Tom Wright Dow Jones Dili

East Timor's leaders are stepping up moves toward a national currency to replace the U.S. dollar, which the United Nations imposed after the territory's violent separation from Indonesia three years ago.

A growing national desire for its own currency could bring East Timor into conflict with international donors, who have committed US$440 million in aid for the country in the next three years.

Donors are open to a national currency in principle, but warn that East Timor - one of Asia's poorest economies, where two- thirds of workers rely on semi-subsistence agriculture - isn't nearly ready to make such a change.

Although East Timor's new government continues to work with foreign experts to build its fragile economy around the dollar, there are signs of dissatisfaction with the U.S. currency, which is increasingly viewed as a solution imposed by foreigners.

"We already talked about the possibility of having a national currency," President Xanana Gusmao said in an interview this month. "I believe the dollar isn't appropriate for our economy."

The government is hoping to set up a full central bank soon which could issue a new currency, he added.

As yet, talks on what exactly what would replace the dollar are in an early stage, but Investment Minister Jose Texeira said an idea to peg an East Timorese currency to a basket of other currencies is gaining acceptance.

"There's no doubt that all of us would like to see our own currency," Texeira said.

Driving the desire to replace the dollar is the fact that East Timor's people, about half of whom are illiterate, are finding it hard to use the U.S. currency, meaning Indonesia's rupiah is still accepted in rural areas.

The Banking & Payments Authority, East Timor's monetary body set up last year under the U.N. administration, says it's succeeded in making the dollar the means of payment for 90 percent of businesses and in most major towns. Outside the cities is proving more difficult.

Farmers are baffled by the foreign nickel, dime and quarter, which don't say in numbers anywhere on the coin how much they are worth. As a result, some vendors aren't willing to accept purchases of less than $1, which is making business difficult.

The international community recognizes the dollar is causing some problems in agricultural communities, but says the country isn't ready to launch its own currency.

In response to the problems East Timorese are having with U.S. coins, the monetary authority, BPA, is considering minting its own local coins with numbers or writing in the local Tetum language. The coins, which might be minted in Australia, would correspond exactly to the U.S. denominations, and East Timorese would only be able to use them inside the country, said Luis Quintaneiro, a Portuguese national appointed by the International Monetary Fund to head BPA.

Such coins could form a first step toward a national currency, but because people wouldn't be able to exchange the coins for other currencies, this proposal would stop short of what East Timorese ministers are talking about.

"They are not yet at a stage to manage a currency," said Kadhim Al-Eyd, the International Monetary Fund's representative in East Timor. "It's not something we are advising them to do."

BPA only has capital of $5 million, an insufficient amount to back a currency. The government plans to increase this to $20 million, but with most spending in the next year going on education and health, BPA's capital isn't a priority. The authority is training local staff, but still has a way to go in developing statistical analysis to be able to manage a currency, Al-Eyd said.