IMF Staff Country Reports

This Selected Issues paper analyzes Timor-Leste’s historical economic performance and structure under dollarization. It considers several dimensions that determine the benefits and costs of the regime: (1) growth and inflation performance; (2) business and financial cycle synchronization; (3) adjustment to external shocks; and (4) competitiveness. Dollarization has helped Timor-Leste achieve relatively low and stable inflation in the context of post conflict fragility, but may be contributing to weakening competitiveness. The severe overvaluation of the real effective exchange rate, following a series of external shocks in the past 10 years may be a contributing factor in addition to the structural bottlenecks that constrain the development of the private sector. While the choice of currency regime lies with the authorities, progress at addressing these challenges, as well as building technical capacity at the central bank, and improving the regulatory and legal framework for the financial system, should be seen as both important reforms to strengthen the economy’s performance under dollarization as well as pre-requisites before consideration is given to the introduction of a national currency.