East Timor's Parliament has an unusual gift in mind for its people today, the second anniversary of independence. Since East Timor first raised its national flag in 2002, popular euphoria has been slowly but steadily seeping away. Last year the fragile economy declined. Poverty is growing, the urban unemployment rate stands at more than 40 per cent, and a bitter dispute with the Australian Government over oil and gas revenue in the Timor Sea is stoking frustration and resentment. There is not much the Government can afford to give away.

Its planned gift, then, is legal clemency. A general amnesty law passed its first reading in Parliament earlier this month in "the spirit of national reconciliation". It notes, in part, "the importance of forgiving without forgetting, even those who committed so-called serious crimes".

The law is intended to give a new start to all those who committed non-violent crimes before March 31 this year. International human rights groups, however, believe many of those involved in the carnage which marked the withdrawal of Indonesian troops in 1999 may benefit. The law may also hamper the very difficult task the United Nations-backed serious crimes unit is facing in securing even symbolic justice for past abuses.

But, the signal the new law sends is clear. East Timor's Government is determined to "bury the past", partly because it is seeking to reconcile its relationship with Indonesia as its most urgent diplomatic priority.

During the 24-year-long Indonesian occupation, about 200,000 East Timorese, or about a quarter of the population, died. Such overwhelming losses cast a very long shadow over many communities. East Timor's Government, however, argues the task of nation building is so urgent that it cannot afford to be diverted by sentiments of revenge. This means the Indonesian presidential candidate and former armed forces chief, retired General Wiranto, and many others, are unlikely to ever face trial over crimes against humanity.

For Indonesia, the loss of East Timor was a deeply humiliating moment.

Along the common land border, the remnants of the same militia gangs which razed East Timor's towns and villages in 1999 still linger. It is the imbalance of power between the tiny new nation and its vast neighbour which is fuelling Dili's concern for Jakarta's wounded pride. East Timor has no army. It knows that only good relations with Indonesia can secure the land border. Indonesia is also its most important source of desperately needed technical and further education for young Indonesian-speaking East Timorese.

There is another consideration – Dili's reluctance to expose its former independence fighters to similar scrutiny. Pro-independence guerillas committed serious human rights abuses against fellow East Timorese during the protracted conflict. The well-documented role of the Indonesian military in the destruction of 1999 is one relatively clear-cut issue.

But when local loyalties are violently divided over decades of war, the moral boundaries blur. Many will still want to see serious crimes against humanity – committed by Indonesian soldiers and East Timorese alike – punished. Unfortunately, but for reasons Dili understandably sees as compelling, this appears increasingly unlikely.