The government of Pakistan has officially commenced the rationalization of the Public Sector Development Programme (PSDP) in response to directives from the International Monetary Fund (IMF). This initiative aims to establish matrix-based principles for identifying and financing future development projects, ensuring that all projects demonstrate robust economic and financial rationales, especially given the current balance of payments challenges.
Planning Minister Ahsan Iqbal chaired a meeting of a special committee formed by the prime minister, where the government outlined its policy direction. The key takeaway from the meeting was the emphasis on reducing financial burdens and ensuring practical implementation of projects. The committee was instructed to prepare plans that address the “minimum essential requirements” of ministries to facilitate timely disbursement of funds.
As part of the $7 billion Extended Fund Facility (EFF) approved last month, the IMF has set a structural benchmark for January 2025. This benchmark requires the government to develop and publish criteria for project selection, which includes an annual limit on the total size of new projects entering the PSDP portfolio.
Minister Iqbal highlighted the importance of executing all PSDP projects, including foreign-funded initiatives, within specified timelines and with clear ownership to avoid cost and time overruns. He also stressed the need to manage economic and financial risks carefully, especially for foreign-funded projects, as exchange rate fluctuations could increase loan repayment burdens on the government’s finances.
To improve budgetary discipline and transparency, the IMF has instructed the government to implement serious public financial management reforms. These reforms include producing and publishing quarterly reports that compare budget projections with actual execution. The IMF further suggested enhancing PSDP portfolio management by conducting a one-time review to prioritize and rationalize ongoing and approved projects.
Additionally, the IMF recommended improved liquidity management to reduce borrowing costs and strengthen overall debt management. This includes consolidating the treasury single account and better utilizing cash balances accumulating in commercial banks.
In a commitment to rationalize the size of the PSDP, the government acknowledged the need to analyze which current projects align with government priorities and which can be delayed or capped to reduce the throw-forward. Finance Minister Muhammad Aurangzeb stated that a report detailing the outcomes of the review of all investment projects in the PSDP would be produced by December 2024. This review aims to streamline the PSDP pipeline by developing a prioritization mechanism for existing projects and identifying those suitable for capping or cancellation.
The government also plans to enhance its project selection framework by publishing criteria for project selection on its website, which will include a scorecard detailing the weight assigned to each criterion and the methodology for calculating the score. This will be done in consultation with the IMF to ensure alignment with best international practices.
The committee, which discussed the planning and execution of foreign-funded projects, highlighted the challenges faced in the current financial year due to scarce resources and high demand for development projects. While ministries requested Rs2.9 billion in funding, the approved development budget stood at Rs1.1 billion, with Rs220 billion allocated in foreign funding as a rupee cover.
The Ministry of Planning acknowledged that financial constraints had resulted in a tenfold increase in the project backlog, alongside administrative and implementation challenges. The committee on foreign-funded projects included the finance and economic affairs ministers, as well as the secretaries of these ministries and the chairman of the National Highway Authority. Finance Minister Aurangzeb could not attend the meeting due to his visit to the United States.
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