ISSN: 1391 - 0531
Sunday November 4, 2007
Vol. 42 - No 23
Columns - The Sunday Times Economic Analysis  

The rising cost of war: A heavy burden for the future

By the Economist

The LTTE attack on the Anuradhapura air base would no doubt add to the escalating war expenditure. The opposition claim of the losses may be an exaggeration. On the other hand, the government’s claim that it is not much of a damage is a factual inexactitude. At present, at best, one could only guess what these damages would really cost. What the government states as the cost of the damage is likely to be an undervaluation. Their replacement cost is likely to be more than their value at the time of damage. Whatever be the estimated losses of the LTTE attack, there can be little doubt that it would be large in terms of foreign exchange and would add to the swelling war expenditure. This is especially so, as the added cost may include extra planes than the mere replacement of the destroyed ones owing to the perceived additional threat of the air power that the Tigers possess. No doubt new fighter planes and helicopters are likely to be purchased.

The huge war expenditure has been one of the serious financial and balance of payments problems for the country. This is quite apart from the consequences of the war on the economy and the undeniable fact that it is a serious check and constraint on the growth of the economy. The expenditure on hardware and the armed services has had a serious direct damaging impact on the economy in many ways. War expenditure has been an important cause for the accumulation of the public debt that now exceeds the GDP. The servicing costs of the debt are itself a serious burden on the budget and contribute to the continuing escalation of the debt. The debt servicing costs are a large proportion of the budget and now will absorb an even higher percentage of government expenditure.

One of the destroyed aircraft at the Anuradhapura air base

A significant proportion of war expenditure is also for import of hardware and other requisites for the war. This means that it is one of the factors that leads to a huge trade deficit of over US$ 3000 million last year and is likely to be around that figure this year as well. By the end of August this year’s trade deficit had risen to US$ 2122 million. This in turn affects the strength of the currency. The recent continuous depreciation of the Rupee is a consequence.

The end result of all these is that prices rise through the inflationary impact of the budget, on the one hand, and the increase in the price of basic items owing to the rise in import prices due to the depreciation of the currency, on the other. In addition, various taxes heap burdens on the common man, to meet defence expenditure. Although the current inflation is not entirely due to the war, it is one of the most significant contributors to it. The war expenditure which in due course transforms itself into a debt is one of the leading causes for the weakening of the economy. These inflationary pressures are in the context of rising international prices of petroleum, wheat, milk and fertilizer.

We have lived in the expectation that the war would come to an end. It has proved an illusion, for neither by negotiation nor by aggression does the conflict abate. The only relief was during the spell of the CFA. Yet this was hardly a period on the path to peace. It was an interlude for another and perhaps more serious warfare involving greater costs in hardware imports. The attacks by air and the LTTE equipping itself with aircraft has indeed raised the character of the war with even more serious implications for the economy. Now the import costs of the conflict are likely to escalate to serious proportions. Much of the additional expenditure is likely to be in military hardware imports.

The worst suspicion that the loan of 500 million US dollars would be spent on the war appears to be inevitable now. Finance is fungible, transferable between uses, and therefore it is not of relevance to identify whether it was the loan amount or any other that would be spent on the war. The hard fact is that more money would have to be spent on the war and a good proportion of those funds would be on the import of military hardware. This would be an additional strain on the trade balance and through it on the balance of payments. The economy is already facing the problem of an unprecedented escalation of petroleum prices that shows no signs of declining. To compound this problem the price of other imports of basic items are increasing due to international shortages for various reasons. The increasing price of wheat and milk are in particular onerous to the people and a heavy strain on the trade balance that is already sporting a huge deficit of over US$ 2200 million. The additional costs of the war are likely to put the figure even beyond last year’s huge deficit.

We have drawn attention to the need to use the foreign loan funds for productive ends, especially economic activities that would increase the amount of tradable goods. Expenditure on the war or even for infrastructure is likely to strain the balance of payments. It would be especially so in five years’ time when the entirety of the borrowed funds would have to be repaid. The unfolding of events in the recent weeks makes it most likely that there would be a huge expenditure on military hardware imports. Such expenditure may be rational in the context of the war. However such rational belligerent strategies are damaging to the economy, not merely immediately, but in the long run. It appears that the attitude of the government to this is the same as the response of the great economist Lord John Maynard Keynes, who said that “in the long run we are all dead.” Certainly in the long run we would be all dead. But the economy would be scarred by the wounds we inflict on it now.

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