In light of the country’s difficult fiscal situation, the Centre is considering discontinuing funding for provincial development projects and instead focusing on five strategic areas — exports, energy, equity, e-Pakistan, and environment (5Es) — in the next year’s Public Sector Development Programme (PSDP).
According to a senior government official, the planning and development ministry has written a summary to the prime minister seeking his approval to cap the provincial development projects in the PSDP 2023-24, which will be presented to parliament as part of the following year’s budget, and to limit the PSDP to 5Es.
The decision was made at a recent meeting presided over by Planning and Development Minister Ahsan Iqbal, with the goal of moving forward with clarity in concluding the next year’s development budget after the prime minister’s approval.
PM Sharif has been advised that only projects of strategic importance should be included in the PSDP and that no provincial project of devolved responsibilities should be included in the PSDP, except for projects of compelling significance, which should be funded 50:50 by the Centre and provinces.
“The federal PSDP provincial development projects should be permanently capped,” the meeting concluded.
The prime minister was briefed on the dropping of federal PSDP, which fell from around Rs1 trillion in fiscal year 2017-18 (FY18) to approximately Rs480 billion in FY22 and less than Rs600 billion in FY23 due to resource constraints. This was further hampered by allocating around 16 responsibilities and ministries to the provinces more than a decade ago.
“The provincial governments should now take responsibility for their subjects in their provincial annual development plans (ADPs),” said the official, paraphrasing the summary submitted to the prime minister.
The meeting also agreed that the Central Development Working Party (CDWP) would only consider initiatives related to the 5Es.
The official stated that the planning minister would personally take up the matter with the prime minister this week and take him into confidence, given the coalition partners’ increasing demands for development priorities of their constituencies and strategic projects of national importance.
Another official believed that a representative government of major political parties would be better positioned to reach a consensus on a national challenge because it had made a series of difficult political and economic decisions in the larger national interest in the past, albeit at a significant political cost.
The PSDP 2021-22 includes around 331 provincial projects worth Rs1.151 trillion (among 1,190 PSDP projects), and the Centre had already spent approximately Rs345 billion on these projects with an allocation of Rs330 billion. The Planning Commission prefers that the provinces fund these initiatives. It argues that the federal mega projects of national importance were suffering from cost overruns and delays as a result of the provincial burden.
Federal funding
In FY22, federal financing for provincial projects was approximately Rs310 billion, which grew to approximately Rs330 billion in the current fiscal year. Following the 18th Constitution Amendment and the removal of the Concurrent List, 16 federal ministries and development projects were devolved to the various provinces.
Until 2017, the PSDP opposed the financing of provincial initiatives, with the exception of critical vertical health and demographic projects. Despite the fact that its fiscal share in the divisible pool declined from over 57 per cent to over 45 per cent under the 7th National Finance Commission (NFC) award directly simultaneously, the financial strain on the federal budget continued to rise. Provincial initiatives have recently crept back into the PSDP, leaving only a limited funding capacity for national-importance projects.
The plan to limit federal money for provincial projects comes just weeks after the World Bank recommended to the government that it rationalise its spending by over Rs2.5 trillion, beginning with the redirection of approximately Rs710 billion in provincial project financing to federal priority sectors.
Debt servicing
The government’s debt payment costs have risen dramatically over the years, surpassing Rs3.5 trillion in just the first nine months of the current fiscal year, compared to around Rs2.1 trillion during the same period last year. As fiscal headroom shrinks due to limited growth in income collection, the axe is always wielded against development investment.
