1HFY19: PSDP feels the cut

Amid the need for fiscal adjustment, the current government’s development spending has stalled but its current expenditures continue to cause the fiscal headache. The multi-billion dollar, flagship Public Sector Development Programme (PSDP) is often the only fiscal casualty to contain the deficit. The show goes on this fiscal, too, under a new government that is facing economic headwinds

As per the Ministry of Finance’s latest fiscal numbers for Jul-Dec 2018, some Rs183 billion were spent on the federal PSDP – about 26 percent lower year-on-year. In relative terms, the government has spent 8.4 percent of its overall spending in 1HFY19 on PSDP – down from 12.5 percent seen in 1HFY18 and also down from the 9.7 percent PML-N government average in its five years.

Comparing actual PSDP spending to original PSDP budget – a better comparison is with “original” budget because it is usually in the second half of the fiscal when budget revisions occur – the PTI government is trailing, but it is not afar. It had spent 23 percent of the original PSDP budget of Rs800 billion in the first six months – slightly lower than 25 percent in 1HFY18 and 24 percent on average during PML-N years.

If one is to use “revised” PSDP budget in the half-yearly analysis, the PTI government – which had revised the PSDP budget down to Rs675 billion as part of the September 2018 mini budget – then the government matches the PML-N average actual spending of 27 percent of revised PSDP budget.

In relative terms, the PSDP spending is not off the rails. But it must be pointed out that the PSDP spending is nearly not enough for an economy the size of Pakistan. Independent economists have recommended at least 20 percent of all government spending on development projects under a reformed PSDP regime. But the fiscal wagon has yet to cross that milestone.

The current government, which is facing a ballooning fiscal deficit amid talks about entering an IMF programme, will be no exception and continue to under-spend on development for at least a couple of years. Meanwhile, the economy is feeling the cold, with the LSM sectors contracting by 10 percent year-on-year in December, the latest reading, with an overall negative growth in 1HFY19.

But there is still an opportunity in this crunch time. It looks inevitable that PSDP spending will remain low for a few years. The government’s reform-minded advisers and ministers should consider reforming the inefficient PSDP regime during these lean years.