The federal government has decided to gradually phase out provincial development projects from the Public Sector Development Program (PSDP), marking a significant policy shift aimed at prioritizing national-level infrastructure and development initiatives amid growing fiscal constraints.
According to the Planning Commission’s Annual Plan Coordination Committee (APCC) working paper, the move is part of the proposed PSDP strategy for FY2026-27 and is intended to channel limited federal resources toward high-impact projects of national importance.
Official documents reveal that federal ministries and divisions submitted development funding demands exceeding Rs. 4.1 trillion, while the Finance Division provided an indicative budget ceiling of only Rs. 1.126 trillion for the upcoming fiscal year.
The Planning Commission identified the increasing inclusion of provincial and small-scale projects within the federal development portfolio as a major challenge affecting the effectiveness of PSDP allocations.
Under the proposed policy, projects of a provincial nature will generally be discouraged, except in least-developed and underserved regions. The recommendation is expected to be presented before the National Economic Council (NEC) for approval.
For FY2026-27, approximately Rs. 99 billion has been allocated for provincial projects under the Provinces and Special Areas Division, compared to the overall federal PSDP allocation of Rs. 1.126 trillion.
In contrast, provincial Annual Development Programmes (ADPs) are projected to reach Rs. 3.138 trillion next year, highlighting the increasing role of provincial governments in financing local development initiatives following fiscal decentralization.
The proposed shift has reportedly sparked concerns among the governments of Sindh and Khyber Pakhtunkhwa, which fear a reduction in federal support for ongoing and future development schemes. Planning documents indicate that Khyber Pakhtunkhwa’s proposed ADP for FY2026-27 stands at Rs. 564 billion, while Sindh’s development program is estimated at Rs. 816 billion.
The policy change comes as Pakistan continues efforts to meet fiscal consolidation targets under its economic reform agenda. The government is seeking to control expenditures, improve budget efficiency, and meet revenue and primary surplus objectives.
Planning Commission data also shows that the federal PSDP faced cuts of nearly Rs. 173 billion during the current fiscal year due to economic pressures, energy sector challenges, and resource limitations.
Officials believe the revised development strategy will help concentrate federal spending on strategic national projects while encouraging provinces to take greater responsibility for financing local and regional development initiatives.
