The decline in the federal government’s Public Sector Development Program (PSDP) has been more severe than expected, as per the latest data reported by the Planning Commission. The authorities had budgeted Rs727 billion under PSDP in FY23, however just Rs 151 billion are reported under ‘expenditure’ at the close of the half-yearly period in Dec. 2022. That’s just a fifth of the budget utilization with half the year gone by, despite authorization to spend about 36 percent of the PSDP budget in 1HFY23.

One had expected funding to somewhat improve from earlier levels, but it’s almost the same. As per the official funds' release mechanism by Planning Commission, up to 20 percent of the PSDP budget’s funds could be released in the first quarter of the fiscal and up to 30 percent could be released in the second quarter. The current spending level is not even half of the 50 percent half-yearly spending ceiling.

In a ‘normal’ fiscal, about 30-35 percent of the funds are released from the PSDP budget by the end ofthe first half, with spending picking up in later quarters. However, this is not a normal fiscal, as the government has a non-existent capacity to reasonably fund the development budget. Scarcity is not only due to the exacerbated cash crunch on account of lower taxes and higher current expenditures but also due to floods-related emergency spending in earlier months of the fiscal. Had large amounts of international aid materialized, PSDP funding could have been protected.

Actual figures published by the Finance Ministry in the first quarter also show average PSDP spending at Rs25 billion/month. At that level, overall PSDP spending in FY23 will be about Rs300 billion, even below the reports of a much-curtailed, revised budget of Rs350 billion for the fiscal. Once ‘actual’ PSDP spending numbers for 1HFY23 is released by the Finance Ministry in a few weeks, one expects a figure below Rs150 billion. That would reflect a nearly 50 percent decline from the same period last fiscal.

Halving of PSDP spending this fiscal relative to the last one has contributed to the contraction that is currently underway in the industries, with the YTD output of the majority of manufacturing sectors in the deep red, as per the latest PSDP data. Lower infrastructure development affects industries. During FY23, over 70 percent of the PSDP budget was allocated to infrastructure-development-heavy entities like NHA, WAPDA, NTDC/PEPCO, Railways as well as local-level development in cities and villages and special areas (e.g. AJK, GB, and ex-FATA). However, just a quarter of those allocations could be spent by end of 1HFY23.

The prospects for an uptick in spending in the second half are not bright, despite the fact that 2023 is an election year and governments tend to spend big ahead of electoral transitions. Revival of the IMF program is contingent on, among other things, measures that create fiscal space – so PSDP spending is expected to further shrink. With KP and Punjab governments gone, there is also little incentive to compete in development. Then there is uncertainty about the central government lasting until June. In the end, the viability of national-level development projects will be the main casualty of low PSDP spending.