I refrain from writing to newspapers because it distracts me from other pre-occupations. However, the continuing controversy over monetary policy between my much valued friend Dr. Harsha de Silva and the Central Bank, to which I owe much, impels me to permit myself to be distracted, briefly.

Dr.de Silva is on rock solid ground when he argues that the Central Bank has the authority and indeed the instruments to control inflation. Let the Central Bank raise its repo rate to 25 percent per year and inflation would be down to zero. (It has other instruments, as well, which can do the same.) Such high rates of interest for central bank lending to banks is not unknown. Indonesia and several countries in Latin America provide examples. Firms will wither and high unemployment will result. In the short term the exchange rate is likely to rise with capital inflows attracted by high real interest rates.

The Central Bank is in a hard place because while it has authority it has no power to pursue monetary policy independent of government. (An obvious example of possession of authority and lack of power is the common failure of the Police Department to arrest ministers accused of crime.) The appointment of Mr.Cabraal as Governor, a party man, by the current President is symbolic of this relationship. It is not true that the Bank staff do not know what they are about. You have to engage some of these people in conversation even briefly to realize that some of them match the best anywhere else.

Although inflation is a monetary phenomenon, controlling it is useful only because it has consequences on the real economy. Consider those consequences on the real economy of such monetary action. Government expenditure will rise when it sells Treasury Bills at new high interest rates and debt interest payment rise. Tax revenues will fall because at such high rates of interest, as economic activity, which in our country depends heavily on bank loans and overdrafts, will wither. Tax revenue will also fall because exports will fall with a rise in exchange rates. If Government will not cut government expenditure drastically, inflation will rage on with high money interest rates. If the Central Bank then raises money interest rates further to control inflation, this whole spiral will continue screwing down the economy to high unemployment. A brilliant young economist in the Bank, Chandrakant Amarakone in a recent seminar, clarified the logic of this situation in another context.

If the Central Bank does nothing of the sort, high government expenditure will bring about the same miserable results through another route, because some laws of economics are inexorable. Absent monetary controls, uncontrolled government expenditure will raise inflation higher. In order to keep import prices down, government will not permit the exchange rate to fall. With an overvalued exchange rate exports will fall. With a fall in exports, import capacity will fall. There will be import controls and all prices will rise again. And economic activity will grind to a halt. In both instances, there will be chaos.

Now, you must see that the fundamental problem is not that the Central Bank is irresponsible, but that we have a government which has lost control over government expenditure. Now do not blame the President and the Cabinet of Ministers entirely. They were elected precisely to spend as now. Government policies received further endorsement from the public at recent provincial government elections. You will recall that a government led by Wickremasinghe, which behaved with fiscal responsibility, was thrown out in 2004 and its candidate for President did not win in 2005, although by a small margin. Any political party which demands fiscal responsibility and discipline on government expenditure will lose resoundingly at elections. Current expenditure policies are pretty much what the public of this country want. (Read Mahinda Chintanaya and recall speeches by the President at recent provincial government elections.)