One of the highlights of the FY22 federal budget is the massive hike in the federal Public Sector Development Program (PSDP). The finance ministry’s budget documents show that the federal PSDP budget has been raised to Rs900 billion for the next fiscal, a jump of about 40 percent compared to what was originally budgeted in FY21. Clearly the growth-seeking government is banking on PSDP to prime the economic pump. However, it is one thing to allocate large sums and quite another to actually spend it.
Keeping things in a historical context, so far as the exercise of “budgeting” is concerned, the Rs900 billion federal PSDP is the second-highest for Pakistan. The highest so far was budgeted under the last government, when the PML-N was going into an election year and accordingly allocated Rs1 trillion under federal PSDP in FY18. But as mentioned above, if wishes were horses, beggars would ride. Since the PSDP development model has limited absorption capacity, the previous government could only spend 66 percent of that lofty spending target.
The current government also faces similar limitations on development spending, perhaps even more, considering it is under an IMF program that imposes fiscal constraints. It would only become clear a year from now as to how much of the Rs900 billion that the PTI government has budgeted for FY22 is actually spent. If recent history is any guide, a significant part of the PSDP would likely be slashed by then, to rein in the fiscal deficit. A Rs250 billion cut would improve the deficit by half percentage point – that may come in quite handy if the fiscal situation demanded some spending-related sacrifice.
Already this fiscal year, the actual spending has been on the low side. Fiscal data from the finance ministry show that in the Jul-Mar period of FY21, Rs353 billion had been spent on federal PSDP, as opposed to Rs650 billion original budget and Rs630 billion revised budget. The latest Planning Commission data show that Rs374 billion had been spent as of April end. This yields a 57 percent budget utilization in 10MFY21. It would be a herculean task to dole out Rs250 billion+ in the remaining period.
Perhaps the new finance minister will surprise everyone by following his rhetoric on prioritizing development spending, and he gets the benefit of the doubt. However, the trend of PSDP utilization in recent years does not provide much hope that FY22 will be different and achieve full utilization. Official data show that the PTI government could only spend 70 percent of what it had budgeted for PSDP in its first year in office (FY19), albeit the following fiscal it obtained a better utilization level of 89 percent (FY20), thanks mainly to lower budget. Now this fiscal, utilization is expected to fall below that level.
The government has some catching up to do. The PSDP utilization in the PTI government has averaged about 70 percent so far in its term, lower than the PML-N government’s average of 84 percent (range: 66% to 96%) during its term. The current government also lags when it comes to development spending’s share in overall expenditures. The last government’s PSDP spending had averaged 14 percent of its overall spending (FY14-FY18). PTI’s PSDP spending has averaged just 8 percent in its first two years.
And for the next fiscal, the federal government has allocated 11 percent of its total expenditures to PSDP. From a quantitative perspective, economists maintain that at least a fifth of yearly spending has to go towards development. Even the previous government didn’t manage it. The new finance minister must ensure that PSDP funds are released on time, and as per the optimum pace set by Planning Commission. But this much is about the quantum of spending. What often goes unnoticed is the quality of spending.
Independent economists are not optimistic that high PSDP allocations will make a qualitative difference even if 90 percent+ utilization rate is achieved. The delivery mechanism of PSDP spending is essentially the public sector, where financial, administrative and planning-related inefficiencies lead to large overruns on project costs and timelines. As a result, what gets spent has lower economic and social contribution than originally anticipated. Sans reforming an archaic PSDP vehicle, simply pumping down more money may not provide the value-addition in the economy that it should. Right now, it is business as usual.
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