Subdued development spending?

The latest IMF staff report for Pakistan has confirmed the suspicion that the federal government won’t be able to fully fund even a curtailed public sector development program (PSDP) in the ongoing fiscal. At Rs650 billion, the federal PSDP budget was already small compared to previous years. The IMF report now projects federal PSDP spending at Rs503 billion for FY21.

Call it a budget cut, of nearly Rs150 billion. This was inevitable to keep the fiscal deficit around 7 percent of GDP. Just over half of the revised Rs503 billion figure stands spent as of February 2021, based on Planning Commission data. The projections for subsequent years have also been made by the Fund.

For FY22, it has forecast Rs627 billion in federal PSDP spending, or a growth of 25 percent over revised FY21 level. How this double-digit increase will be funded is a big question when the recent trend has been of slashing the development spending. The allocations are project to rise to Rs722 billion in FY23, Rs851 billion in FY24, Rs969 billion in FY25 and Rs1,082 billion in FY26. The annual growth in these years is in the range of 14 percent to 18 percent.

Similar treatment is visible in the provincial PSDPs, which have also been revised down for FY21, to Rs665 billion. Next fiscal, Rs799 billion have been projected under this count, at a growth of 20 percent over revised figure. Then in later years, the PSDPs will be raised from Rs917 billion in FY23 to Rs1,318 billion in FY26, with yearly growth ranging from 12 percent to 15 percent.

Collectively, the federal and provincial PSDPs are projected to rise marginally from 2.6 percent of GDP in FY21 to 2.9 percent of GDP in FY26, indicating that the growth in allocations are slightly higher than growth in nominal GDP over this period. Over the same time, current expenditures are projected to reduce from 20.2 percent of GDP to 17.5 percent of GDP, mainly due to lower burn on domestic debt servicing, federal subsidies and grants.

At this stage, projections until FY26 are highly prone to variations. But the fact remains that Pakistan is not spending nearly enough on development. What the IMF has projected for federal PSDP in FY26 is the same as what the last government had budgeted for FY18. But there is apparently more than the fiscal woes that affect development spending.

There is an argument that more money sent down the PSDP pipe won’t do much good unless the public sector’s capacity to administer large PSDP programs is significantly upgraded. If indeed that is the case, perhaps the ongoing lean spending years offer a good opportunity to grab the toolbox, open the hood and get working on overhauling a complicated development machinery.