It’s no secret that Pakistan’s economy has long been skating on thin ice. In a bid to turn things around, the government has rolled out not one but two ambitious economic plans — ‘Uraan Pakistan’ and the ‘National Economic Transformation Plan’ — each promising to reshape the country’s financial future. Together, they aim to stabilise the economy while fostering sustainable growth and job creation.

But it will take a lot more than the mere conceptualisation of these plans to keep them from becoming yet another set of overambitious pledges destined to fade into political oblivion.

Here’s the situation in a nutshell: bold economic plans are meaningless without a governance model that can execute them. And right now, that model simply doesn’t exist.

The economy needs to be fuelled, not drained

Pakistan’s current economic governance model is designed for consumption-based, import-led and debt-driven growth which is the textbook definition of unsustainable. All the structures, institutional arrangements and policies of economic governance are geared towards stabilising the economy instead of expanding it. Low growth is an inevitable outcome. This design is intentional. Expect nothing more.

A framework relying on overvalued exchange rate, increasing the General Sales Tax (GST) as well as income tax on the salaried class as major strategies to beef up tax revenues, cannot deliver structural reforms. In the same vein, depending on import restrictions to bridge the gap between exports and imports and celebrating friendly deposits to inflate foreign reserves will not elevate the economy to higher productivity levels or ensure sustainable growth at a higher rate.

To shift towards a high-growth, sustainable economy, we need a radical overhaul — an entirely new model which is the antithesis of the current one. This means an exchange rate that works in our favour, investment taking precedence over consumption, exports bridging deficits, and foreign direct investment replacing friendly deposits.

True economic transformation demands a model that is based on revenue mobilisation through empowering businesses and stimulating economic activity — growing the pie rather than overburdening those already in the tax net. Growth is achieved when the economy is fuelled, not drained.

While there is much to do for institutional rearrangements and streamlining the processes of economic decision making, we can initiate change with four key policy resets. First, move away from the treasury-centric approach of governing the economy. Second, establish an intendant monetary policy design. Third, transition to a market-driven exchange rate. Fourth, incentivise provinces to contribute to economic resources through more efficient financial arrangements between the centre and provinces.

Where did we go wrong?

Economic governance in Pakistan has traditionally been limited to managing government finances, focusing mainly on fiscal policy. This approach has its roots in the country’s inward-looking economic strategy, which prioritised import substitution. To control imports, the government relied on tariffs, duties, and tax exemptions.

Over time, a misguided emphasis on revenue collection as the sole measure of economic success placed excessive weight on fiscal policy, to the point where it became a substitute for broader economic governance. Consequently, Pakistan developed a consumption-driven economy with minimal focus on investment — an expected outcome of an inward-looking model.

Government expenditures remained the primary mechanism for economic stimulus, while critical areas such as monetary policy and a balanced exchange rate strategy were largely neglected. In particular, exchange rate policy was unconsciously reduced to maintaining an overvalued rupee, artificially inflating consumption in both domestic and external sectors.

Fiscal policy, particularly tax policy, emerged as the primary tool of economic governance, further compromising the role of monetary policy. Exports, which require a dynamic exchange rate and supportive monetary policies alongside fiscal measures, were ignored until recently. This neglect of the tradable sector placed the burden of revenue generation solely on the domestic economy. What naturally followed was that the annual budget, with its ambitious revenue targets and frequent tax policy adjustments, became the central instrument of economic management.

Ultimately, the treasury, enjoying fiscal dominance backed by the structure of economic policies, became the only face of economic governance.

Only a bold shift can turn things around

The evolving economic structure of Pakistan, coupled with the increasing role of financial markets in shaping outcomes, has put the long-standing reliance on fiscal policy as the sole tool of economic governance to a serious test.

As Pakistan pivots towards an export-led growth strategy and places much of its future economic aspirations on the China-Pakistan Economic Corridor (CPEC), the need for a more integrated governance framework has become critical. A coherent economic policy must now emerge — one that ensures a balanced interaction between fiscal, monetary, and exchange rate policies to drive sustainable growth.

The current model of economic governance in Pakistan fails to truly take account of diverging prices and wage developments in general and external imbalances in particular. Macroeconomic crises, soaring trade deficits, balance of payments challenges, and mounting public debt have not only been recurring over the past 70 years but have also grown in scale and severity with each new crisis surpassing the previous one.

Treasury-leading governance has exclusively focused on the domestic revenue-expenditure gap. To effectively manage external imbalances, monetary and fiscal policies must be better coordinated with the treasury, without allowing fiscal dominance to overshadow the need for balanced economic management.

At the same time, central banking in Pakistan requires a fundamental rethink. The focus should extend beyond central bank independence, to reconsidering the very scope of monetary policy. The global financial crisis has challenged the conventional view that monetary policy has only short-run objectives.

There is general consensus among experts that short-term fine-tuning often leads to deeper monetary and financial imbalances. This realisation has shifted their thinking toward a monetary policy framework with medium-term goals, positioning central banks as key players in economic governance. To remain effective, the State Bank of Pakistan (SBP) must align its policies with modern approaches to the conduct and scope of monetary policy.

The rising deficit-to-GDP and debt-to-GDP ratios — which Pakistan is facing in all their severity — also underline the importance of monetary policy. Fiscal policy, constrained by these challenges, may not be able to ensure the sustainability of public finance. Unsustainable public finance, in turn, has implications for monetary policy — not limited to the treasury, as the widely held conventional view suggests. For example, a higher debt-to-GDP ratio impacts long-term interest rates, investment, inflation, returns on government bonds, and exchange rates.

The agenda for economic governance reforms and the medium-term economic framework must go beyond surface-level adjustments — it requires a fundamental reorganisation of institutional structures to give monetary and exchange rate policies a more decisive role. To decentralise economic responsibilities effectively, mechanisms for surveillance and rectification of macroeconomic imbalances must be reordered. A modernised governance framework should prioritise reducing the excessive discretion within the current fiscal surveillance framework.

The new governance framework essentially needs to balance economic coordination between the centre and the provinces. The current finance distribution formula followed in the 7th National Finance Commission (NFC) award is predominantly needs-based, and its structure is such that it falls short of ensuring equity in distribution, notwithstanding all the equity-based indicators it includes.

Further, the efficiency indicator in the current formula only considers the total tax revenue a province collects. It fails to account for the significant differences in the size of the four provincial economies in Pakistan, each of which requires a varying level of effort to generate revenue. Therefore, the true measure of efficiency should not be the absolute volume of tax collected but rather the effort required to achieve it.

Future NFC awards should gradually transition from a needs-based resource distribution to an efficiency-driven allocation model. Rather than merely achieving political consensus through formulas designed to please all parties, the awards must consider a more results-oriented approach. As some experts and academics have pointed out, the mechanisms exclusively based on consensus always suffer from inertia.

Instead, the NFC awards should serve as a tool to promote efficient provincial spending and incentivise progressive taxation. This can be made possible by adjusting the weights of existing indicators, introducing alternative parameters for some, and incorporating new metrics. In particular, reducing the weight assigned to population and increasing the weight for tax effort are critical steps.

The reforms must also include measures to ensure independent economic and fiscal analysis with standardised quality and enhanced transparency of economic statistics. Arrangements shall be made to standardise economic statistics reporting across provinces. The thesis does not deny the role of fiscal policy in economic management; rather, it underscores that within the enhanced macroeconomic governance framework, fiscal policy must align with monetary policy objectives. So far, the practice has been the other way around.