On PSDP cut

The earlier indications of potentially-record PSDP spending taking place this fiscal now stand dissipated. For recent reports indicate that the federal Public Sector Development Program (PSDP) budget – originally budgeted at Rs900 billion in FY22 – has been reduced by about Rs200 billion. It has been done so, ostensibly, on the demands of one IMF.

In the current fiscal environment, it won’t come as a complete surprise if the remaining Rs700 billion budget is further decreased. This is not the first time – and most likely it won’t be the last – that a major slice has been taken out of the PSDP budget, in a bid to contain the fiscal deficit.

However, the implication of this latest (as-yet-officially-unconfirmed) development is that the PTI government will leave behind a legacy of significantly low PSDP spending (both in absolute terms and as share of GDP) compared to its predecessor and arch-rival PML-N. (There are plenty of question marks over efficacy of just pumping more PSDP spending, but that’s a topic for another day).

If budgeting high and spending low is a norm with respect to PSDP, then the government is doing it alright. Earlier in September this year, the Planning Commission had cleared Rs393 billion for release to PSDP project during the Jul-Sep quarter of FY22. This stirred optimism that the government was indeed serious on its spending commitment after allocating Rs900 billion PSDP budget for the fiscal.

But when the actual numbers came out in the Finance Ministry’s 1QFY22 Fiscal Operations report, only Rs144 billion had been actually spent on PSDP projects in the said quarter. Albeit that spending was a big jump over 1QFY21, and it was also the PTI government’s largest first-quarter PSDP spending in four years, it cemented the impression that it’s going to be business-as-usual on PSDP spending, that development spending may again be sacrificed for other pressing spending needs.

The latest data from the Planning Commission show that Rs385 billion had been authorized upfront by the Ministry of Planning & Development, for release in the period Jul-Dec. Within that sum, Rs232 billion worth of funds had been cleared (release sanctions issued) by relevant ministries and divisions running PSDP projects. And actual PSDP expenditure as of October 2021 stood at Rs178 billion. That’s about a fifth of original PSDP budget, and a quarter of presumably-revised PSDP budget.

It remains to be seen whether PSDP spending speeds up in coming months. Don’t bet on it! Facing external imbalances and inflationary pressures, it is imperative to make serious fiscal adjustments, so that monetary-policy tightening can suppress demand. But as things stands, it is the development spending alone that has taken the fall, while there are no apparent efforts to budge the inflexible current expenditures. In these times, fiscal prudence demands spending cuts across the government.