Development spending

Contrary to the federal government’s hopes of priming the economic pump in FY21 through increased development spending, the public sector development program (PSDP) has had a visibly slow year. Latest data shows that the actual spending incurred by several ministries and divisions on their PSDP projects continues to remain short of what is authorized for spending by the Planning Commission.

The recently-released fiscal numbers by the Finance Ministry show that the “actual” spending on the PSDP projects stood at Rs353 billion during Jul-Mar FY21. This figure is 15 percent lower compared to Rs417 billion that was spent on the PSDP portfolio in the same period of the last fiscal year. The tally is also significantly lower than what the last government achieved in the same period in its final year.

Adjusting for inflation, the decline in the PSDP spending becomes more pronounced in real terms. The story of backtracking on PSDP fiscal commitment is not new, and it's a current that has flown through successive governments. However, a lower spending this fiscal does not bode well for any prospect of higher PSDP allocations in the upcoming fiscal. The economy requires a booster from the public sector.

The IMF has already projected a cut in PSDP this fiscal from Rs650 billion to Rs503 billion for FY21. And for FY22, it expects a PSDP budget of Rs622 billion, which would be lower than the original PSDP budget of this fiscal. Only by FY26 does the Fund project the PSDP budget to cross Rs1 trillion, a level the previous government had attempted in its final year during FY18.

For its part, the Planning Commission has been regularly clearing the funds for release. In the Jul-Mar FY21 period, nearly Rs500 billion worth of PSDP funds had been given the go-ahead for release (including the foreign aid component). But the actual spending was 28 percent lower than that amount.

As of May 7, 2021, the Planning Commission had authorized Rs566 billion, or 87 percent of the original PSDP budgetary allocations of Rs650 billion. One now notices that the PSDP budget has been slightly revised downwards by 4 percent to Rs622 billion. Even so, full utilization of the budget can be ruled out.

Another concern is that the development spending’s share in the government’s overall expenditures is on a declining trend, thereby reducing the effectiveness of public spending. The government’s PSDP spending was 7.6 percent of overall expenditures during 9MFY21, down from 9.4 percent in the same period last fiscal.

The GDP-growth-oriented finance minister is in a bind, for the growth rate he wants the economy to achieve in the short-term is pretty much off-limits, considering the constraints on development spending. The government has so far been unable to push for higher PSDP spending, for incremental revenues have been eaten up more and more by non-productive expenditures. Will the next fiscal be different?