Timor-Leste, a nation with a rich history, has a unique relationship with its currency. Following its separation from Indonesia in 1999, the country opted to adopt the United States Dollar (USD) as its official currency. Timor-Leste stands as one of the few nations that have not introduced their own currency. But what led Timor-Leste to choose the USD as its currency, and what were the reasons behind this decision?
According to the United Nations Peacekeeping website, the USD was officially adopted in Timor-Leste in the year 2000, with the issuance of Regulation 2000/7 on January 24, 2000. This regulation mandated that all official transactions must be conducted using the USD. Nevertheless, the population was still allowed to use other currencies, which were also in circulation, such as the Indonesian Rupiah, the Thai Baht, the Portuguese Escudo, and the Australian Dollar.
At that time, the United Nations Transitional Administration in East Timor (UNTAET) and the transitional government of Timor-Leste argued that the USD was chosen because it was a stable and strong currency widely accepted worldwide. This decision was later ratified by the National Consultative Council (NCC).
Initially, the adoption of the USD created some turmoil among the population. This was due to the fact that the value of the USD was significantly higher than the standard prices of goods and services in this former Portuguese colony. Adopting the USD as the official currency caused prices of goods to quickly skyrocket. However, the Timor-Leste government remained steadfast in its position, asserting that the use of the USD did not affect prices; rather, it was the responsibility of the citizens to adjust through the quantity of goods or services they consumed.
Timor-Leste government argued that the price increases during the transition were not a result of using the USD but rather a consequence of market principles (supply and demand). The decision to adopt the USD was made by the United Nations and the Timor-Leste government to rescue the nation from political and economic instability. The adoption made it easier for foreign investors to trade and conduct business in the country. American tourists only needed to bring their money to Timor-Leste and could spend it as they pleased.
Additionally, in 2003, there was a currency called the Centavo used for coin transactions, which was produced and supplied directly from Portugal. In contrast, the USD was supplied directly by the United States Federal Reserve (The Fed) starting in 2000.
Both the United Nations and the transitional government claimed that the use of the USD would only last for two to three years after gaining independence from Indonesia. However, in practice, this rule continues to be in effect to this day. Timor-Leste still uses the USD as its official currency. The Indonesian Rupiah is still widely used, especially in regions bordering East Nusa Tenggara (NTT). In rural areas, some Timor-Leste residents continue to engage in barter trade.
While in theory, using the USD may benefit Timor-Leste, the country's economic conditions remain unstable. The prices of goods are relatively higher than when it was Indonesia's 27th province. The high prices in Timor-Leste are, in part, a legacy of the political and economic turmoil following independence 24 years ago. Timor-Leste still grapples with poverty and an unstable economy. In other words, developing its own currency is not a top priority for the government at the moment.