ISLAMABAD: Amid impr­oving fiscal space, the Inter­national Monetary Fund (IMF) has projected a declining Public Sector Deve­lopment Programme (PSDP), rising defence spending and generally stabilising interest payments from the current year onwards through the fiscal year 2030. IMF projections show that interest payments for the last fiscal year (FY25) were originally estimated at 7.7 per cent of GDP but ended at 7.8pc. For the current year, the Fund has revised its estimate to 6.5pc of GDP from 6.7pc in view of lower policy rates. For the next fiscal year (FY27), markup payments are estimated to drop further to 5.9pc of GDP, to be followed by 5.2pc of GDP in FY28, 5.1pc in FY29 and finally settling at 4.8pc in FY30 amid falling policy rates and resultant lower debt payments. In absolute numbers, interest payments are estimated to slightly decline to Rs8.225 trillion during the current year, down from Rs8.88tr at the close of FY25. This would remain almost static around Rs8.2tr in FY27 and FY28 and then increase to Rs8.8tr and Rs9.3tr in FY29 and FY30. Lender projects interest payments to ease through FY30 as policy rates fall The national economy, measured by nominal GDP, has been estimated at Rs126tr for the current year, Rs140.7tr next year, Rs156.5tr in FY27, Rs174tr in FY29 and then Rs194tr in FY30. But despite these improving debt servicing-to-GDP indicators, PSDP would continue to struggle both in absolute numbers and as a share of GDP. Based on detailed interactions with the government as part of the second review of its $7 billion Extended Fund Facility, the IMF said the PSDP expenditure, originally estimated at 0.9pc of GDP in FY25, had been contained to 0.7pc to make up for the revenue shortfalls. The PSDP has been estimated to stay uncha­nged at 0.7pc for the current year. Alarmingly, the PSDP has been projected to fall further to 0.6pc of GDP next year and then stay unchanged through FY30. Even in absolute terms, the IMF has worked out PSDP spending for the current year at Rs873bn for the current year against its original estimate of Rs1.065tr. It would remain around the same level, ie Rs885bn, in FY27 and slightly improve to Rs984bn in FY28, Rs1.1tr in FY29 and Rs1.2tr in FY30. Conversely, the size of defence expenditure would make a comeback both in absolute terms and as a share of the national economy. The IMF said the defence budget had declined from 2.4pc of GDP in FY21 to 1.8pc in FY24 and then slightly recovered to 1.9pc last year. For the current fiscal year, the defence expenditure has been projected to increase further to 2pc of GDP this year and then maintain this share all along until FY30. In absolute numbers, the defence budget has been on an upward journey — rising from Rs1.3tr in FY21 to Rs2.2tr in FY25, showing a cumulative increase of 67pc in four years. This will keep growing to Rs2.57tr during the current year, followed by Rs2.87tr next year and Rs3.2tr in FY28. The defence expenditure would further go up to Rs3.56tr in FY29 and then Rs3.96tr in FY30, showing a cumulative increase of more than 80pc against FY25 spending. The government has been restructuring the PSDP portfolio on the IMF prodding to improve project selection, but even the Fund has been unable to restrict allocations for parliamentarians’ constituency schemes under the so-called Sustainable Develop­ment Goals (SDGs) Achie­vement Programme (SAP) that has claimed Rs70bn for the current year. The government has given a commitment to the IMF to continue to improve project selection criteria and streamline the project pipeline to “better focus PSDP on long-term capital spending”. “With careful reprioritisation, we have streamlined the PSDP pipeline by Rs2.5tr (around 25pc of the total). We will cap new project allocations to 10pc of the total in the FY27 budget,” the finance minister said in a written undertaking. He also pledged further improvements to a scorecard-based system for project selection, including reducing overlapping criteria, introducing negative marking for projects with negative externalities and increasing the weight for climate-related criteria. The IMF also noted that the government would reduce or postpone spending in response to lower revenues linked to the implementation of the National Tariff Policy. “As in the past, contingent and development spending are most likely to be affected,” it said. This, it added, explained low development spending in the first five months of the current fiscal year (July-November), with utilisation at 9.2pc of the Rs1tr annual allocation amid fiscal rationing to meet IMF contingency measures against growing revenue shortfalls. Development spending of Rs92bn in the current year was 20pc lower than last year’s Rs115bn for the same five-month period. “PSDP utilisation in the current year remained low due to a significant reduction in expenditure by provinces, special areas and the Ministry of Railways,” the Planning Ministry said last week. “Development spending remained modest, with Rs92bn utilised against Rs196bn sanctioned, led mainly by infrastructure,” it added. Published in Dawn, December 27th, 2025