Delivering the John Exter Memorial Oration in Colombo last week, Deputy Governor W.A. Wijewardene of the Central Bank offered some timely thoughts on the dangers of printing money to fund wars or provide subsidies to populations that are being impoverished by inflation. In recent years, Lankans have been battered by inflation and embittered by the visibility of profligate governments and their leaders who, true to human nature, have grown fat on the public purse. Post-1977, thanks to the liberalization of the economy, while we have been compelled to endure galloping inflation, the people of this country were not subject to the scarcities and shortages of a previous era, particularly between 1970 and 1977. While poverty continues to be a harsh reality in our society, we are no more subject to degrading spectacles of desperately poor people foraging in dustbins that we saw in the days when our rulers marketed socialism. As a post-1977 political leader once said at that time, ``the people will tolerate high prices to some extent, but never again scarcities (of the scale they had known.).’’

Wijewardene made no bones about the fact that terror has to be fought and there is no alternative to that. This is a view that the vast majority of the people of this country share. The government marketed the war in its successful campaign to win both the North Central and Sabaragamuwa Provincial Councils recently in much the same way Mr. Ranil Wickremesinghe marketed peace to a war weary nation when he won the parliamentary election at the end of 2001. But given the LTTE’s iron clad separatist objective and its use of peace negotiations as a mere device to buy time when it is under military pressure, the recent election results were a clear indicator that the majority of the voters, despite economic travail, preferred to see the Tigers militarily crushed and a durable peace achieved rather than risk what many perceive as the appeasement policies of the president’s chief rival. The peace that prevailed in the aftermath of the Ceasefire Agreement of February 2002 was widely hailed and universally valued in all parts of the country, most so in the theatre of war. But that proved to be ephemeral and the LTTE which had re-armed and re-grouped during that period of euphoria was soon back in business marching along the military route.

One of the main points made in the Exter oration was that terrorism must be fought with ``real resources’’ mobilized from society. Wijewardene warned that it was not advisable to use a Central Bank’s nominal resources to fight such wars, explaining that inflation, like a terrorist, has no mercy on anybody. ``Irrespective of age, sex, creed or wealth, inflation impoverishes everyone,’’ he said. ``A terrorist exerts fear in the minds of the people. In the same manner, inflation too exerts fear, helplessness, destitution and hopelessness in people.’’ The Deputy Governor therefore argued that that the best way that a Central Bank can support a government fighting terrorism was to maintain price stability and help society to create more wealth. Given the external shocks that global oil and food price hikes have dealt poor developing countries like ours, this has been no easy task. All governments elected by the votes of the people and seeking re-election have to various extents sought to keep their vote banks intact with subsidized essentials. But this, at best, has proved to be a temporary palliative for which the people have had to later pay a higher price.

There is no argument that democratically elected government, like ours at present and its predecessors up until the time the LTTE first mounted its separatist-terrorist challenge during the J.R. Jayewardene administration, must enforce law and order using the armed might of the state. This has resulted in what was previously a largely ceremonial military, with internal security responsibilities at times of unrest, having to be converted into a fighting force capable of taking on a determined and fanatical enemy. This meant vastly increasing military expenditure that now gobbles up a significant slice of the country’s GDP. While it is comforting to delude ourselves with the thought that the young people enlisting in the forces to fight the war are motivated by patriotism, the reality is that the army, navy and air force are among the few avenues of employment easily available to youth. They join up not to die for their country but to get a job and earn some money.

As Wijewardene pointed out, for governments already constrained by lack of resources, finding the means to fight a war against terrorism means foregoing other useful activity on which that money could have been spent. He said that many governments have resorted to taxation, borrowing or ``simply inflating the economy by issuing currency’’ to raise the required resources. Alternatively, Central Bank credit (through the printing or issuing of currency) is used to fight wars. This results in high inflation and possibly economic collapse and such practice was akin to terrorism. To ordinary people, both hats would seem to fit our present situation. The people of Sri Lanka are burdened with ever increasing taxation, much of it indirect, as well as the inflation tax that has long been a fact of life in this country. This, unfortunately, is little understood by our people who grumble consistently about ever increasing prices without realizing that phenomenon includes a sizable element of invisible taxation. They donsee it and therefore do not revolt against it.

Ironically, John Exter, who went on to hold senior banking positions in the U.S. Federal Reserve (Fed), the World Bank and the commercial banking industry in the United States, hated financing government expenditure by using the inflation tax, Wijewardene recalled. ``He was a scathing critic of the Fed running its printing presses and debasing the value of the dollar,’’ he said. Having warned the movers and shakers of the financial system in his own country, Exter cannily converted his own dollar assets to gold and in due course made a killing from the events he knew must eventually unfold. Already, those of us fortunate to be in jobs that entitle us to EPF benefits, are being robbed of our savings in EPF coffers with the inflation rate running well ahead of the interest paid on such savings. Like Exter, EPF members would have done better buying gold, or land or building a home to call their own.