Broadly speaking, economic governance is a process of decision making that affects economic activities. In many studies it refers to capability in government to achieve stable economic conditions. Evidence, in general, suggests that economic governance has a positive impact on economic performance and development through improved economic efficiency and macroeconomic stabilisation. Poor economic governance, on the other hand, leads to inefficiencies and instability.

Pakistan has been trapped in policy uncertainty and serious macroeconomic challenges, including, but not limited to, volatile economic growth, balance of payment crises, eroding external competitiveness and low investment inflows.

While many solutions have been proposed to get out of the trap, the debate on rethinking and restructuring economic governance has been relatively limited.

The first and foremost challenge in Pakistan is the very concept of economic governance. Economic governance in Pakistan, mainly starts and ends with announcing policy changes. Governance reforms, therefore, largely focus on end product and ignore improving the process of choosing and implementing these reforms.

Recent examples of this include the reforms agenda agreed under the current IMF programme and SBP Amendment Act 2021. The new economic management team has retreated from the former and the latter has encountered resistance largely because it came as a surprise.

Transparency and broad-based participation of stakeholders in setting the IMF reform agenda and formulation of the SBP Amendment Act would have avoided many of the problems and most of the resistance.

Further, a disproportionate focus on fiscal policy — as an exclusive tool of economic management — led to ignoring supporting reforms needed in other sectors of the economy. This created a bifurcation in macro-economic policy on one hand and compromised the effectiveness of reforms on the other.

Pakistan must learn that an enhanced understanding of economic governance after global financial crisis in the past and most recently Covid-19 involves coherent fiscal, monetary and trade policies formulated and implemented with improved participation, transparency and accountability.

The treasury-only model of economic governance in Pakistan has a background. First and foremost, Pakistan followed an inward-looking policy for growth and relied on import substitution. Tariffs, duties and tax exemptions have been the major tool for managing imports.

Second, there is a misplaced focus on revenue collection - call it revenue extraction rather - as the single major success criterion of economic management added extra weight to fiscal policy to the extent that it emerged as substitute to economic governance.

Third, the country, as expected in an inward-looking growth model, generated a consumption-based economy with trivial focus on investment. Consumption, including government expenditure, emerged as the major policy to boost economy.

These, and many other factors, led to neglecting the importance of trade policy in general and monetary policy in particular. The role of monetary policy got limited to financing deficits and keeping the rupee overvalued to artificially stimulate consumption.

Fiscal policy, particularly tax policy, therefore, emerged as the single major tool of economic management. Research from the academia and civil society to a large extent limited itself to tax policy. Annual budget, setting high revenue targets and changes in taxation policy, emerged as the single most important tool of economic management. All in all, treasury, enjoying fiscal dominance backed by a structure of economic policies became the only face of economic governance.

The Covid-19 crisis and the increasing role of financial markets in shaping the policy outcomes have put fiscal-policy-only economic governance approach to a severe test.

Now that Pakistan is recovering from Covid-19 and moving towards export-led growth, the idea of economic governance needs a new think. A coherent and efficient economic governance structure is required.

The present model of economic governance in Pakistan has failed to take account of diverging price, productivity stagnancy, negligible wage growth and external imbalances. Macro-economic crises, soaring trade imbalances, balance of payment crises and escalating public debt have occurred routinely over the last 70 years. Also, every new crisis beats the previous one in scale and severity.

Treasury-led governance has focused exclusively on the domestic revenue-expenditure gap. To properly handle and focus on external imbalances, monetary and trade policies need to have improved coordination with treasury without super-imposing the fiscal dominance.

At the same time, the SBP needs a rethink on two fronts, at least. A global financial crisis has already challenged the conventional view that monetary policy has a short-run objective only. Experts agree that Covid-19 has demonstrated that monetary policies pursuing short-run fine tuning created monetary and financial imbalances.

Monetary policy decisions affect medium and long term outcomes, such as inequality and climate action. These and similar other concerns earn the central banks a key position in economic decisions-making and governance. The SBP needs to align itself with modern thinking on the conduct and scope of monetary policy.

Further, decision-making in monetary policy in general and setting transformative agenda, like SBP Amendment Act, need to be more open and broad-based in seeking opinions. Public opinion must carry a greater weight in agenda setting.

Finally, monetary policy communication needs to go beyond announcing decisions, such as monetary policy statement. It must provide information behind these decisions and conclusions. Many central banks now publish minutes of meetings of monetary policy committee meetings. Such a practice can help the SBP improve policy effectiveness and create an audience for monetary policy.

Transparency of government accounts and transparency of economic and regulatory environment for private sector activity are fundamental ingredients of good economic governance. The reforms, therefore, must also be put in place to ensure independent economic and fiscal analysis with standard quality and enhanced transparency of economic statitstics. Arrangements should also be made to standardise economic statistics reporting across the provinces.

The writer heads the Policy Solutions Lab. He tweets @sajidaminjaved