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The Shehbaz government is reportedly allocating Rs800 billion for the federal Public Sector Development Program (PSDP) for FY23 (next fiscal year). While the confirmed figure will be known when the budget is announced at the Parliament later this week, the reported sum is significantly higher than Rs500 billion revised PSDP (but lower than Rs900 billion original PSDP budget passed under previous government) in the ongoing fiscal. During 9MFY22, only about half the original budget could be spent, as per official data.

The bitter reality of the past is that allocating higher budgets for development spending does not necessarily mean that the portfolio of large, medium and small projects will actually get the required financing during a given year. The higher the original PSDP budget, the greater is the likelihood in Pakistan that those steep allocations would be chopped multiple times down the road in the fiscal.This situation is exacerbated by pressure to fund new schemes when old projects are languishing mid-way.

With reduced fiscal space amid stubbornly high current expenditures, it has been becoming increasingly harder for federal government to spend a higher share of their overall expenditures on development. Even budgeting for PSDP has become regressive now: when the PML-N government left office last time in FY18, it had approved original budget of Rs1.001 trillion for the federal PSDP. Five years later, the PSDP budget they are putting forward for a bigger-sized economy is only Rs800 billion.

PSDP spending in recent years has gone down significantly in real terms, both due to lower yearly allocations and the discounting impact of persistent inflation. As a result, the share of development spending in federal government expenditures has taken a serious hit. Economists estimate that development spending should receive at least 20 percent share in overall spending. Pakistan doesn’t meet that mark. Over the past decade and a half, only 12 percent of all expenditures has been on PSDP.

When the PPP-led coalition government left office at the end of FY13, it had spent on PSDP 11.2 percent of all its federal expenditures during its five years in office. The succeeding government raised the bar. By the time the PML-N majority government bid adieu in late FY18, they had spent 14.3 percent of their total federal spending in five years on PSDP. As for the PTI, during the party’s truncated term in office between FY19 and 9MFY22, PSDP spending had a share of 9 percent in overall federal expenditures.

Based on past evidence, the PML-N-led coalition government may not achieve 10 percent share of PSDP in overall federal expenditures for next fiscal, even if it fully utilized the proposed Rs800 billion allocation. There are already rumors that the government’s deal with the IMF puts a cap of Rs500 billion on PSDP spending next fiscal. Even if thegovernment is able to eke out 12 more months in office, the fiscal crunch is so acute (along with the urgency for lower public spending to curtail the twin deficits) that full PSDP utilization may be off the cards.Let’s see how Shehbaz, the development czar, navigates the challenge.

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