Target PSDP?

The federal spending on “development” is apparently going downhill this year. For the Public Sector Development Programme (PSDP), the government released funds in the environs of a measly Rs21 billion in March (based on calculations per Planning Commission data). This figure is down from roughly Rs75 billion sanctioned in February and some Rs108 billion released in January earlier this year.

Since this fiscal year dawned, the government has been running against time. The government term expires in late May, circumventing the typical spending bonanza seen every June. Thus far, in 9MFY18, the government has released Rs467 billion on PSDP projects, which is 56 percent of its PSDP commitment. It is unlikely that all of the remaining Rs371 billion will be dished out in April and May.

Some succor has come from the foreign aid (FA) component. The FA totaled Rs140 billion between July 2017 and February 2018, about 86 percent of the budgeted FA component for FY18 PSDP. Most of the money arriving thus far has been from China, making its way to two CPEC-related departments: National Highways Authority and Water & Power Development Authority (power sector).

The total PSDP releases – federal government plus FA – have totaled Rs607 billion as of March 30, 2018, signifying a 61 percent funding level. Given that circular debt payments are looming and the provinces might again defy great federal expectations of budget surplus due to election-year spending, it looks likely that the federal government would further tighten PSDP spending in the remaining months.

Back when the FY18 federal budget was announced, many fiscal watchers had become skeptical on whether the PML-N government at the center could adequately fund a huge PSDP budget, regardless of an election year. After all, a trillion-rupee PSDP wish list, unprecedented as it was, had to compete with some “untouchable” current-expenditure heads. Also consider, time and again before, development spending has been culled to narrow the fiscal breach.

The consolidated fiscal deficit – coming in at 2.2 percent of GDP in 1HFY18 – is expected to balloon in the current half. This is despite the fact that tax revenues have grown in double digits thus far this fiscal, thanks to growth in large-scale manufacturing, impact of a bunch of regulatory duties on non-essential imports, and currency depreciation leading to higher petroleum levy collection.

At the core of Pakistan’s macroeconomic weakness lie fiscal slippages that exacerbate demand-side pressures, which eventually lead to falling import cover. At the risk of compromising growth momentum, Pakistan has been forced to undergo stabilization, unlike other emerging economies. Sizable cut in PSDP funding, which provincial capitals will resist, would be in step with a restrictive monetary stance. A consistent fiscal-monetary stance is also apparently required to tap external financing from multilaterals.