The development cut

The development budget continues to remain an obedient sacrificial lamb for fiscal planners. Already, PSDP spending has been slow-walked by the federal government this fiscal, with just 61 percent of the trillion-rupee allocations funded in the Jul-Mar period. (For more on that, read “Target PSDP?” published April 3). Now, news reports suggest that the PSDP budget for next fiscal would be reduced to Rs750 billion, which is about 25 percent drawdown over FY18 budgetary estimates.

A trillion-rupee spend in FY18 was wishful thinking anyway, despite the usual pre-election spending frenzy. But a year-on-year reduction in PSDP budget – well, that’s surely novel in Pakistan’s recent fiscal past. So is the government’s promise that no new schemes would be added in the budget so that projects that are near completion can be adequately financed.

Major cut in development spending may cut some ice with critics of PSDP regime. Independent economists cite weak institutional capacity in areas of project planning, execution and evaluation as the culprit behind large time-delays and cost-overruns in PSDP portfolio. The throw-forward – the financing needed to complete 1,100+ outstanding projects – stands over Rs3.8 trillion, as of March 30, 2018.

At current funding levels, it will take more than five years to finish just this stock of development projects. Including the impact of cost escalations would add a few more years; besides project viability after years of delays also comes into question.

If more money going into the system doesn’t necessarily lead to more socioeconomic benefits, a 20 percent or 25 percent development cut should mean less good money thrown after bad. But reduced funding alone cannot fix the system: the inefficient PSDP regime needs to be reformed for efficiency, effectiveness and transparency.

A longtime planning czar remains insistent that higher PSDP spending is required to continue the growth momentum. Ahsan Iqbal is reportedly demanding an Rs1.3 trillion federal PSDP to help Pakistan cross the 6 percent GDP growth threshold next fiscal. But the finance team doesn’t seem to have much financing room, given higher anticipated allocations for debt-servicing and defense, on top of an expected drop in tax-collection next fiscal.

Without getting into the debate of whether funding development over defence is paramount or vice versa, the reality is that the federal government needs to control its spending to contain fiscal deficit. A higher fiscal imbalance in FY19 has the potential to worsen the external account situation by exacerbating demand-side pressures. Already, the monetary authority is on the lookout for further tightening.

But the federal government doesn’t look like embarking towards the path of fiscal contraction next fiscal. Yes, it will reportedly cut the development budget. But the fiscal space thus created will likely go the way of funding subsidies in the energy sector (curtail load-shedding in peak summer) and in agriculture sectors (keep inflation under control). Though it may serve political ends, it is hardly prudent.