The big PSDP cutback

The Federal and Provincial Budgets of current fiscal year envisaged a ig push on the development front as a part of the revival strategy with a combined PSDP of Rs1,155 billion. The larger share, 53 percent, was to be implemented by the four provincial governments and the remainder, 47 percent, by the Federal Government. The targeted growth in development spending was 60 percent over what was spent in FY13.
The negotiations with the IMF on the Extended Fund Facility led to a scaling down of the national PSDP to 834 billion, as part of the stabilization programme. This represented a cut of 22 percent in Federal PSDP and 33 percent in the combined provincial PSDP/ADP. However, even after the cut, the overall development programme was still expected to increase by 16 percent over last years level.
The outcome in the first six months reveals an even larger cut in the national PSDP than anticipated. The overall development spending has been Rs215 billion, 56 percent at the Federal level and 44 percent by the four provincial governments combined. Rather than showing an increase, this is even lower than last years level by 19 percent.
Why has there been such a large reduction in releases for PSDP in the first half of the current fiscal year? The overall fiscal deficit at 2.2 percent of the GDP is substantially less than the level agreed with the IMF of 3.3 percent of the GDP. As such, there was enough fiscal space available to execute a larger PSDP in the first six months. The behaviour by the provincial governments is even more in explicable. They have preferred to carry a large cash surplus of as much as Rs165 billion rather than spend more on the development of their respective provinces.
What are the consequences of this unprecedented cutback in the PSDP? Fortunately, the Planning Commission has protected the allocations to some priority sectors. WAPDA has already received 69 percent of the proposed annual allocation for projects in the power sector and the Pakistan Atomic Energy Commission (PAEC), 71 percent.
But other important sectors have suffered. The water sector has been given only 28 percent of the proposed allocation for FY14. The corresponding percentages for the Railways, HEC and NHA are 37 percent, 40 percent and 36 percent, respectively. The lump sum allocation for new development initiatives, largely of the Prime Minister, has been abandoned.
A large part of the annual development programme of the provinces consists of expenditures on social services like education, health, water supply and sanitation. The sharp cutback implies that progress on human development will remain limited and the people will be deprived of any significant improvement in the quality or coverage of basic services.
Within the four provinces, the largest decline in development spending in relation to last year is observed in the case of Balochistan (63 percent), followed by a fall of 43 percent in the case of Khyber-Pakhtunkhwa and 33 percent in Punjab. This raises the issue of capacity for implementation of programmes/projects. The only province which has shown growth is Sindh of 52 percent.
It needs to be emphasised that development spending is not only vital for expanding the productive capacity of the economy and raising thereby the future rate of growth but also for creating a multiplier effect in the short run on incomes and employment. The retreat by most of the new governments from the focus on development does not augur well for the future performance of the economy.