Pakistan cuts development budget to Rs1 trillion to fund strategic projects; defence spending may rise to Rs3 trillion

The federal government has reduced the proposed Public Sector Development Programme (PSDP) for fiscal year 2026-27 by Rs126 billion to Rs1 trillion, while Punjab, Sindh and Khyber Pakhtunkhwa are expected to limit development spending to current-year levels to create fiscal space for strategic and water-sector projects, The Express Tribune reported, citing Planning Minister Ahsan Iqbal.

Planning minister said that the Finance Ministry had revised the indicative PSDP ceiling from Rs1.126 trillion, previously approved by the Annual Plan Coordination Committee, to Rs1 trillion. The reduction amounts to 11.2% of the proposed federal development programme.

Provincial governments are expected to free more than Rs350 billion by lowering or freezing their annual development programmes. Combined with the Rs126 billion federal cut, the adjustments may create close to Rs500 billion in additional fiscal space.

The agreement was reached during budget discussions between representatives of Pakistan Muslim League-Nawaz and Pakistan Peoples Party, the two main partners in the ruling coalition.

The understanding is expected to allow the government to proceed with the delayed approval process for the FY27 budget.

The National Economic Council, chaired by Prime Minister Shehbaz Sharif, is scheduled to consider the revised development programme today [Wednesday] after its meeting was postponed four times.

Minister for Parliamentary Affairs Tariq Fazal Chaudhry said the summary for convening the budget session had been moved, with the federal budget likely to be presented on Friday, June 12.

Ahsan Iqbal said no new development schemes would be included in the FY27 PSDP, except projects proposed by the Ministry of Defence and the Ministry of Interior.

The proposed Rs1 trillion programme could later be increased to Rs1.4 trillion if the provinces agree to provide additional resources to the Centre, according to a government official.

The federal government had earlier sought Rs1.2 trillion from the provinces to fund additional expenditure and tax relief. However, no agreement was reached on reducing provincial shares under the National Finance Commission Award through a presidential order or obtaining approval through the NEC.

The International Monetary Fund also reportedly expressed reservations about using the NEC mechanism to provide the Centre with additional provincial resources.

Defence spending may reach Rs3 trillion

The government is considering allocating around Rs3 trillion for defence during FY27 because of increased tensions along Pakistan’s eastern and western borders.

The IMF’s budget framework provides Rs2.665 trillion for defence spending, below the amount sought by the government.

The Centre had also planned Rs335 billion for major water-sector projects, including Diamer Basha Dam, Mohmand Dam and Dasu dams.

Another Rs335 billion had been proposed for initiatives classified as strategically important.

Provincial development plans revised

Punjab had initially proposed development expenditure of Rs1.45 trillion for FY27 but is now expected to reduce the allocation by more than Rs150 billion.

Sindh’s proposed Rs816 billion development programme is also likely to be revised downward under the agreement between the coalition partners.

Khyber Pakhtunkhwa had planned development spending of Rs564 billion but may now keep expenditure near the current year’s actual level.

Balochistan is not expected to make a similar reduction because its proposed FY27 development programme of Rs308 billion is already Rs53 billion below the current year’s allocation.

Current-year spending reduced

The federal government has already reduced the PSDP for the current fiscal year to Rs820 billion, of which Rs590 billion has been spent so far.

The proposed FY27 reduction was made before the PSDP was presented to the NEC, departing from the usual sequence in which the council considers the development programme before its finalisation.

The revised budget framework will also require IMF approval. Under the programme conditions, the government is expected to secure the lender’s endorsement before the National Assembly approves the federal budget.