PSDP reform

An economic slowdown looms large. Monetary tightening has been dialed up a notch. The new finance team has little choice but to enter stabilization phase. If the PTI ends up doing the needful and it economically costs them in the near term, a payback might reward handsomely in the latter half of their term. This could be the inspiration behind a double-digit cut in development spend right off the bat.

Among the fiscal adjustments proposed in the mini-budget, the federal Public Sector Development Programme (PSDP) has been slashed by Rs125 billion, or ~16 percent, out of Rs800 billion which had been budgeted by the PML-N government for FY19. Nearly all divisions and corporations had their development budgets trimmed, including heavyweights like the NHA, Wapda, Pepco, Railways and HEC.

At Rs675 billion, the FY19 revised PSDP budget is lower than what the previous federal government had laid out three fiscal years ago (FY16: Rs700 bn). But it matters because it is realistic, for spending difficulties abound. After all, the last federal government could spend only Rs661 billion on PSDP in FY18 – against a revised budget of Rs750 billion and an original target of a trillion rupees! PSDP budgets usually go under-funded in Pakistan (see illustration) as they are the first to face the fiscal axe.

The PSDP cut was clearly ordered to restore some fiscal space. This fiscal realism also meets the need for ‘demand compression’ in the near term in order to stabilize the twin deficits. But this mathematical game of slashing lofty PSDP budgets is business-as-usual. Instead, the PTI government needs to reform the whole PSDP paradigm to make public spending more effective in creating maximum economic value while remaining within the constraints of budget and time. To be fair, the new government has taken some steps towards reforming the PSDP portfolio. For instance, several schemes of political nature have reportedly been discarded. Also, as new schemes have not been reportedly entertained in large numbers by the new government, the focus seems to fund projects that are already under progress.

Those steps have reduced the PSDP portfolio to 829 projects and schemes as of September 2018, down from 1,284 projects and schemes when the PML-N government left the scene in May 2018. This step towards PSDP portfolio rationalization is welcome, but it is not systematic and it does not equate to wide-ranging reforms in the way development has been done in Pakistan for the last many decades.

PM Khan’s lineup features several reform-minded individuals, including those who have had public administration experience. One expects them to produce a reform-blueprint in the PSDP domain as well – holistically covering aspects like public-private financing, project approval processes, and monitoring & evaluation mechanisms. The looming slowdown may cause economic pain, but that time can be seen as an opportunity for a radical overhaul of the development machine.