PSDP in 1HFY23

The Ministry of Finance’s fiscal scorecard released last week confirmed what many observers have been pointing out about the Public Sector Development Program (PSDP). In the six months to December 2022, the actual spending on federal PSDP stood at Rs162 billion, showing a huge decline of 44 percent year-on-year compared to 1HFY22. Paling in comparison with 11 percent average yearly growth in first-half PSDP spending over the previous decade, this slump is also the largest one on record in recent years.

In relation to the FY23 original budget figure of Rs727 billion, the 1HFY23 actual spending corresponds to a budget utilization level of 22 percent (compared with 32% utilization in the same period of the previous fiscal). The maximum allowed PSDP spending in the first half, as per the official release mechanism, is 50 percent of the yearly budget – the quarterly ceiling is 20 percent in the first quarter and 30 percent in the second quarter. The current utilization level is also visibly lower in the historical context (see the graph).

The PSDP spending has been a direct casualty of recent economic shocks. Facing fiscal challenges at the outset of getting its chance at the center, the PDM government had to go for a 20 percent cut in the previous government’s FY22 original PSDP budget of Rs900 billion, presenting a Rs727 billion budget for FY23. Few economic observers believed that the fiscal’s budget would be fully spent, considering the pressing need to curb the fiscal deficit and meet the IMF’s targets under the EFF program.

As the natural disaster in the form of great floods in August and September posed difficult fiscal choices, the PSDP spending (already under duress) had to be slowed down significantly, in order to make room for emergency humanitarian response, as international financial aid was inadequate and slow to arrive. In more recent months, lower tax collections, growing fiscal slippage, and the need to coordinate monetary and fiscal policies ensured low average PSDP spending of around Rs25 billion to Rs30 billion per month.

Considering the likelihood that a revised IMF program will pose more spending constraints on discretionary spending that is ‘development’, the full-year PSDP spend may barely cross the Rs300 billion mark. That would yield less than 50 percent utilization of the original budget – a rarity, even in difficult economic times. In real terms, PSDP spending has already been set back by more than a decade. It is time to re-think the whole ‘development’ paradigm and implement deep-rooted reforms in PSDP design, approval, implementation, and M&E architecture. Let’s make whatever funding is available more effective!