Wither PSDP?

Amid tight fiscal space and political instability in the country, the prospects for higher spending under the federal Public Sector Development Program (PSDP) in FY23 are further complicated by the devastations brought on by the intense monsoon rains and floods.The size of the FY23 federal PSDP under the new government stands at Rs727 billion, up from Rs558 billion actually spent under last government’s Rs900 billion budget in FY22. (Official data is unavailable on PSDP spending until mid-September this fiscal).

While the floods-related economic losses are mounting by the day, the government has yet to receive tangible, direct foreign aid transfers that could boost fiscal coffers. In this evolving situation, PSDP funding is likely to face significant pressures. If floods-related foreign assistance continued to remain on the low side, the government will be forced to divert significant amount of PSDP funding towards projects in flood-affected areas. It may further depress economic growth, but it’s about having right priorities now.

The PSDP funding may be further affected if the country’s key international development partners chose to re-purpose or re-direct funds from their existing PSDP-related commitments to provide floods-related assistance for rehabilitation and reconstruction. While the government may not like such a scenario panning out, the likelihood of such an eventuality very much exists. Global development partners are themselves facing funding challenges amid multiple humanitarian crises, higher interest rates, and economic downturn in key donor countries.

At play is also the current state of the federal-provincial coordination (especially with Punjab and Khyber Pakhtunkhwa). While the federal government had managed to get the provinces’ nod to provide a large provincial surplus at the end of FY23 (in order to meet one of the IMF’s key fiscal demands), the provinces have recently warned that floods-related spending requirements may reduce the size of the promised surplus. In that case, the federal government will have to make up for the shortfall, by driving an even bigger stake in the sacrificial lamb that is PSDP.

Situation may become clearer after the federal government providesthe international community and the provinces with a firmed-up estimate of the floods-related damages to physical infrastructure and general economic losses. While figures of $30 billion+ in losses have been doing the rounds, it is unclear if the bilateral and multilateral partners will be able or willing to help out in a major way. Increasingly, it appears that the country is on its own. In other words, development spending will have to wait for better days.