ARTICLE (December 03 2008): Quality of economic governance Taking the cue from the one-sentence quote at the beginning of this paper, I define good economic governance simply as presence of transparency, accountability, public interest, and public responsibility in all government and semi-government institutions.
In the context only of monetary, exchange rate and fiscal policies, the above four characteristics of good governance are elaborated below, within a limited perspective gleaned from earlier retrospective analysis. Transparency is the free and timely dissemination of self explanatory reliable data and information regarding economic policies, events and public transactions.
Accountability is the obligation (legal, moral, or both) on the part of an institution to explain its policy actions and performance to public at large. Public interest is the objectives which are being pursued by economic policy makers, which are primarily about increasing the welfare of people.
Public responsibility is the ability to generate and implement appropriate and timely policy responses by the institutions, which are collectively responsible and accountable for the economic policy management. I pose a few questions regarding these four features of good governance and also attempt to answer briefly, with a view to obtain useful lessons:
Question 1. Is monetary and exchange policy regime transparent?
2. Is monetary and exchange data transparent?
3. Is State Bank of Pakistan accountable?
4. Does SBP uphold the public interest?
5. Does SBP exercise public responsibility?
6. Is existing SBP charter adequate to ensure good central bank governance?
ANSWER 1 Obviously, the answer has to be different from a simple yes or no. Monetary policy transparency has increased considerably after issuance of six monthly Monetary Policy Statements initiated by the former Governor, Dr Ishrat Husain in January 2003.
During the regime of the present Governor, Dr Shamshad Akhtar, transparency has increased manifold because of her detailed press conferences to explain monetary policy stance. Monetary policy, however, is still relatively opaque because, policy formulation process is not clearly known to public. In order to move forward on this issue, several amendments in SBP Act, 1956 would be required.
ANSWER 2 A detailed reassessment of monetary statistics dataset of the Report on Observance of Standards and Codes (ROSC) Data Module was conducted during November 1-15, 2006 by the IMF.
Assessment was done using Data Quality Assessment Framework (DQAF), which has six dimensions of data quality, with a total of 22 elements of quality practices. Reassessment concluded that out of 22 elements of data quality practices, 18 practices were fully observed and four were largely observed. Element of data transparency was found to be largely observed.
ANSWER 3 SBP is accountable to Parliament under Section 9A of SBP Act, 1956, which requires it to submit quarterly reports on the state of the economy and its annual accounts. Moreover, Governor SBP is periodically called by the Parliament to give briefings about monetary policy, financial sector and state of the economy.
Furthermore, SBP publishes a number of monthly, quarterly and annual publications to keep the public fully informed about its activities and reviews of inflation, economy, banking and the financial sector.
ANSWER 4 SBP tries its best, within its chartered powers, to achieve its objectives that are multiple. These objectives include keeping monetary and financial stability and providing support to economic growth. The existing charter of SBP does not clearly define these objectives in terms of priorities to be assigned to each.
Current central bank best legislation practices prefer a single objective of keeping inflation at low level. Hence, there is need to amend SBP Act, 1956 to make these objectives clearly stated to ensure upholding of "public interest" (by keeping inflation at low levels).
ANSWER 5 SBP regularly exercises its public responsibility about changing its monetary, exchange and banking polices with the changing circumstances. Timeliness and appropriateness of policy responses depend on the professional competence and integrity of the staff and Central Board of Directors of SBP.
It is generally recognised that there was a considerable capacity building of SBP staff during the regimes of former Governors. This process is also continuing in the regime of the present Governor.
ANSWER 6 Existing SBP Act, 1956 does not fully conform with the norms and practices that are followed in the legislation of best practising central banks. Some observations, in this regard, have already been mentioned in answers 1 and 4 above.
For good macroeconomic governance, the most crucial aspect that can ensure transparency, accountability, public interest and public responsibility, is the nature of the financing arrangement between the ministry of finance and the central bank of a country. This aspect is also at the core of the concept of independence and credibility of any central bank.
From this point of view, several important changes are required in SBP Act to improve the corporate governance structure at SBP. One very obvious point is that since the GOP is the largest borrower of money from the SBP, its representative should not be a member of Central Board of Directors of SBP, to remove the clear and dangerous conflict of interest.
Also, since the SBP Board is required to give independent reports on the state of economy to Parliament, this independent assessment should not be tainted by the views of the GOP through its representative in SBP Board. Moreover, SBP Act should include clearly defined, explicit, and enforceable limits of credit that can be extended to GOP by the central bank.
Another reform in SBP Act, related to strengthening of its independence as well as co-ordination of monetary and fiscal policies, is also needed. The existing functions and cadre of the Monetary and Fiscal Policies Co-ordination Board make it either practically ineffective in strengthening the needed co-ordination, or run the risk of impinging SBP autonomy.
Co-ordination can be effectively achieved by timely sharing of all necessary information and data between SBP and MOF. A working committee with senior officers from both institutions can perform this job more efficiently. Also, there are existing high level fora in the GOP, where macroeconomic targets can be aligned for integrated formulation of broad macroeconomic plans.
National Economic Council (NEC) can effectively perform this function, and as such, a case can be made for abolishment of Monetary and Fiscal Policies Co-ordination Board specified in Section 9B of SBP Act, 1956. Similarly, suitable amendments are also needed to remove any ambiguities about the exchange rate regime. In short, considerable work is still required to increase the autonomy and independence of the SBP.
SOME LESSONS FOR IMPROVING ECONOMIC GOVERNANCE In conclusion, I can draw the following lessons from the analysis and discussion presented so far.
1. Independence of policy making institutions (especially of a central bank) plays a paramount role in inculcating good economic governance.
2. Dissemination of timely, regular, and reliable information and data by economic institutions is essential for promoting good governance.
3. Accountability can only be strengthened by providing greater autonomy to any policy making institution.
4. Public responsibility of a policy making institution can only be strengthened by adequate capacity building of its human resources.
5. Public interest can only be ensured by clearly defining the ultimate objectives of a policy making institution.
Check statistical chart here
