Uplift Spending Down to Rs115 Billion: Government Prioritizes Provincial Projects Despite Fiscal Challenges
Introduction
ISLAMABAD: The federal development spending has decelerated to Rs115 billion in the initial five months of this fiscal year due to fiscal constraints. Despite these limitations, the government continues to allocate funds to provincial projects, further straining the limited resources.
Fiscal Constraints and Development Spending
Slowdown in Spending
The development expenditure remained at Rs115 billion from July to November of this fiscal year. This figure starkly contrasts with the Rs376 billion that the Ministry of Planning had authorized for spending during this period under the Public Sector Development Programme (PSDP) 2024-25.
Gap Between Authorization and Actual Expenditure
The significant gap between authorized and actual expenditures highlights several challenges, including issues in the fund release process, scarcity of resources, slow progress on projects, and the ability to utilize allocated funds effectively. The Rs115 billion spent represents only 10% of the annual revised development budget, leading to delays in crucial projects while offsetting fiscal slippages in other areas. The Federal Board of Revenue (FBR) missed its tax target for the first five months by Rs341 billion.
Impact on Primary Budget Surplus Target
To achieve the primary budget surplus target agreed upon with the International Monetary Fund (IMF), the federal government often cuts development spending. Despite its inability to fully fund ongoing projects, the government recently approved 15 development projects worth Rs422.7 billion. Some of these projects will be funded by the financially robust provinces, but many have been added to the cash-strapped federal development portfolio.
Prioritization of Provincial Projects
Breach of IMF Agreement
In violation of its commitment under the IMF-guided National Fiscal Pact, the federal government also approved projects that fall within the provincial domain. For instance, the cost of extending the KLM Start point to Saggian road and main Ravi Bridge worth Rs12.1 billion was revised. This project, serving Punjab, does not hold national significance.
National Fiscal Pact Conditions
Under the $7 billion bailout package, the federal and provincial governments signed the National Fiscal Pact. A major condition of this pact is that the federal government will reduce its involvement in projects as per the 18th Amendment, with provincial governments taking responsibility for projects within their geographical domains. The Ravi Bridge project is a clear example of a provincial project.
Government’s Response
The planning ministry’s response was awaited at the time of this report regarding the reasons for adding provincial projects, breaching the fiscal pact.
Recent Approvals and Budget Constraints
Mangi Dam Project
The government recently approved the construction of the Mangi Dam and water conveyance system at an upward-revised cost of Rs19 billion. This project will be jointly funded by the federal and provincial governments.
IMF’s Assessment of PSDP
Last year, the IMF deemed Pakistan’s PSDP “unaffordable” due to limited fiscal space, noting a total cost of Rs12 trillion to complete approved projects, which would take over 14 years to finish.
Development Spending Trends and Future Outlook
Mid-Month Spending Increase
By December 10, 2024, total development spending had increased to Rs130 billion, still down by Rs20 billion or over 13% compared to the previous fiscal year.
Proposed Development Budget
For this fiscal year, the government initially proposed a Rs1.4 trillion development budget, later slashed to Rs1.1 trillion due to limited fiscal space. There is another proposal to further reduce the PSDP to fund electricity price reductions by waiving applicable taxes.
Impact on Foreign Exchange Reserves
Foreign Lending and Development Schemes
Low releases have adversely impacted the country’s foreign exchange reserves due to less-than-anticipated foreign lending for development schemes. For the current fiscal year, the government estimated receiving Rs220 billion in foreign loans, but foreign funding utilization was only Rs5.2 billion in almost five and a half months.
Development Budget Allocations for Provinces and Special Areas
Development budget allocations for provinces, special areas, Azad Jammu & Kashmir, and Gilgit-Baltistan were also affected. Against the annual allocation of Rs223 billion, only Rs42 billion was spent, the highest development spending head so far.
Sector-wise Development Spending
Spending on Azad Kashmir and Gilgit Baltistan
A total of Rs17.7 billion was spent on projects in Azad Kashmir and Gilgit Baltistan, Rs15.8 billion on the merged districts of Khyber-Pakhtunkhwa, and Rs8.7 billion on projects in other provinces.
Pakistan Atomic Energy Commission Projects
The Pakistan Atomic Energy Commission projects received Rs6.7 billion against an annual allocation of Rs25 billion. The National Transmission and Dispatch Company and PEPCO spent Rs3.8 billion on their projects against an annual allocation of Rs33 billion.
Conclusion
The federal development spending has slowed down significantly due to fiscal constraints and IMF conditions. Despite these challenges, the government continues to prioritize provincial projects, straining already scarce resources. The gap between authorized and actual expenditures, coupled with the impact on foreign exchange reserves and sector-wise spending, underscores the need for a balanced approach to development spending in Pakistan.
FAQs
1. Why has federal development spending slowed down to Rs115 billion? Federal development spending has slowed down due to fiscal constraints and the need to meet IMF conditions, which have impacted the availability of funds for development projects.
2. What is the Public Sector Development Programme (PSDP)? The Public Sector Development Programme (PSDP) is a government initiative to fund development projects across various sectors in Pakistan, aiming to enhance infrastructure and economic growth.
3. How does the IMF agreement affect Pakistan’s development spending? The IMF agreement requires Pakistan to maintain a primary budget surplus, often leading to cuts in development spending to meet fiscal targets. This affects the funding and progress of development projects.
4. Why are provincial projects being prioritized despite fiscal constraints? Provincial projects are being prioritized due to political considerations and the need to address local development needs. However, this has led to the allocation of already scarce resources to these projects.
5. What impact does low development spending have on Pakistan’s foreign exchange reserves? Low development spending has led to lower-than-expected foreign lending for development schemes, adversely impacting Pakistan’s foreign exchange reserves and limiting the country’s ability to fund future projects.
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