On PSDP spending

Amid growing budget deficit in an uncertain macroeconomic environment, development spending has again become the sacrificial lamb to contain fiscal leakages. The federal government had budgeted Rs727 billion under the Public Sector Development Program (PSDP) for FY23. Recall, actual spending was reported in Finance Ministry’s 1QFY23 fiscal data at Rs74.5 billion, which was lower by 48 percent year-on-year and reflected only a tenth of the budget utilization after a quarter of the year gone by.

More recent data by the Planning Commission shows a continuation of lower spending. In the Jul-Oct period this fiscal, actual spending was reported at roughly Rs99 billion, leading to 14 percent of budget utilization. Recent data suggest that just about Rs25 billion is being spent on average in a given month. With that pace, the annual PSDP spending will remain confined to Rs300 billion, potentially resulting in just two-fifth of the budgetary target being met at the end of the fiscal. It would be an all-time low!

There are already news reports that the PSDP budget has been slashed to Rs350 billion to meet the IMF’s requirements, but it is not officially confirmed yet. There is a huge gap between the positions of the Planning and Finance ministries on the question of PSDP funding. As of October end, the Planning Commission had cleared Rs241 billion worth of PSDP projects and schemes, equivalent to a third of the year’s budget.

That clearance pace, or a go-ahead for spending, will be adequate to meet a budget utilization rate in the high nineties. But only if spending keeps up with the pace of approvals. And right now, that is not happening, leading to dissatisfaction with Planning. The Finance team has its own reasons to curtail or block PSDP spending. They need to tap all the avenues they can in order to lower the budgetary shortfall arising out of lower tax collections and runaway current expenditures on account of higher debt servicing and post-flood emergency spending.

Like it or not, ‘development’ is about the only area where Finance can choke off funds’ supply without causing a lot of hue and cry. Especially when there is a politically-strong finance minister in charge of things. (Another area where they can ‘manage’ fiscal deficit is through slower disbursement of funds to provinces under the divisible pool. Going down that path, however, can cause political issues, as was obvious earlier this week in the joint press conference by the provincial governments of Punjab and KP).

On the other hand, while the need to tame fiscal deficit is understood by Planning, they are dealing with a huge challenge of their own: chronically-underfunded projects that see allocations revised downwards almost every year. This especially impacts the country in the case of mega, national-scale infrastructure development projects (e.g. water, power, highways and bridges, connectivity, as well as infrastructure development in special/remote regions). Lower-than-budgeted allocations create uncertainty in project execution as time and cost overruns lead to a dilution in project ROI and socioeconomic benefits.

In all likelihood, funding for PSDP will remain constrained in the remainder of the fiscal, as government needs fiscal space to clear IMF’s 9th review and beyond. While the government may be unable to spend the PSDP budget even in half, there are reports that it is keen to fund constituency-oriented development schemes, as an election year is approaching. Meanwhile, provinces also look to turbo-charge spending on their own annual development plans. That goes against the fiscal prudence needed at the time. Both the center and provinces need to prioritize available funding for projects that meet strict development benchmarks.