The federal government has decided to gradually eliminate provincial projects from the Public Sector Development Programme (PSDP) as part of a broader fiscal strategy being discussed with the International Monetary Fund (IMF).
The move has triggered serious reservations from the governments of Sindh and Khyber Pakhtunkhwa, while negotiations with the IMF over revenue targets, tax collection and expenditure cuts continue.
According to sources, the government has adopted a new strategy regarding development programs and tax matters ahead of the 2026-27 budget.
The plan includes the gradual removal of provincial projects from the PSDP and a greater focus on aligning development spending with national priorities.
Officials say the strategy is being pursued alongside ongoing discussions with the IMF on fiscal reforms and revenue generation.
Provinces asked to contribute to security-related spending
Under the new framework, the federation has asked provinces to contribute financially to social security, defense and national security-related expenditures.
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The federal government has also urged provinces to align large portions of their development spending with national priorities.
Sources said the proposal is part of efforts to improve fiscal discipline and meet commitments linked to the IMF program.
Sindh, KP oppose proposal
The provincial governments of Sindh and Khyber Pakhtunkhwa have reportedly opposed the federal initiative. According to sources, both provinces have expressed serious reservations about gradually removing provincial projects from the PSDP.
The federal government is facing difficulties in convincing the provinces to support the proposal while simultaneously negotiating fiscal targets with the IMF.
IMF pushes for higher revenue, lower spending
Sources said the IMF has urged the federal government to reduce expenditures and increase revenue collection in the upcoming fiscal year. The lender has reportedly asked Pakistan to collect Rs15,264 billion in taxes.
Discussions between the Ministry of Finance and the IMF regarding tax collection measures and expenditure reductions are still ongoing.
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The provinces have also been assigned a role in strengthening the country’s fiscal position. According to sources, provincial governments have been tasked with generating an additional Rs430 billion in revenue.
The federation has further demanded that provinces achieve a primary surplus equivalent to 2 percent of GDP, estimated at around Rs2,900 billion.
Gap widens between federal, provincial budgets
Budget documents show a significant difference between federal and provincial development spending. The federal development budget stands at Rs1,126 billion, while provincial development budgets have collectively reached Rs3,138 billion.
Officials believe this imbalance is one of the reasons behind the push to redefine development responsibilities between the federation and provinces.
Provincial project allocations reduced
According to budget documents, Rs100 billion has been allocated for provincial projects in the new budget.
Sources said that out of a total of 786 projects included in the development portfolio, only Rs1.2 billion has been proposed for six projects in Khyber Pakhtunkhwa.
At the same time, Rs8.6 billion has been earmarked for road construction projects in the province.
The Khyber Pakhtunkhwa government has expressed concern that its share in the PSDP could gradually disappear over the next few years.
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Sources said provincial officials fear the new policy could significantly reduce federal funding for development projects in the province in the future.
The concern has become one of the key sticking points in ongoing discussions between the federation and provinces.
The government continues to face challenges in finalizing fiscal targets and securing consensus among stakeholders. According to sources, further discussions will be held with the Sindh government and the IMF in an effort to resolve outstanding issues.
Officials hope that continued consultations will help bridge differences over development spending, revenue targets and fiscal responsibilities before the new budget is finalized.
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