Pakistan’s development financing framework is increasingly evolving into a fresh form of circular debt crisis, as limited fiscal space, rising project liabilities, long-term financial commitments, and a continuously expanding “throw-forward” burden are converging into a deep structural policy challenge. According to official sources and budget preparation inputs from relevant ministries and provincial governments, the widening gap between development needs and available resources has reached a level where the space for new development schemes is nearly exhausted, placing the entire Public Sector Development Programme (PSDP) under severe financial strain.
Available data shows that over the past 13 to 14 years, the size of the PSDP has increased from Rs 360 billion in 2012-13 to Rs 1,100 billion in 2024-25, while it has been reduced to Rs 820 billion in 2025-26 after successive cuts. Despite this nominal increase over the years, official assessments indicate that development expenditures have not kept pace with the expanding size of the economy and rising infrastructure needs, creating a persistent imbalance between development demand and fiscal capacity.
According to figures, the most critical challenge facing the PSDP is the rapidly rising “throw-forward” liability, which has reached Rs 10.818 trillion by 2025-26. This represents the total future funding required to complete ongoing projects, which is several times higher than the current development budget. In addition, cost escalations in major water sector projects have further increased the burden by an estimated Rs 1.355 trillion, significantly widening the overall financing gap.
Federal and provincial data further indicate a growing imbalance in development allocations, with provincially aligned projects accounting for Rs 196 billion across 251 schemes in 2025-26, representing nearly 13 percent of the PSDP. Meanwhile, provincial Annual Development Programs (ADPs) have expanded to Rs 2.869 trillion, substantially exceeding the federal development outlay, highlighting a structural divergence in development financing responsibilities between federal and provincial tiers.
Official planning ministry inputs show that the PSDP allocation process for 2025-26 underwent multiple downward revisions, starting from a demand of Rs 3.271 trillion, reduced first to Rs 1.650 trillion, then to Rs 1.227 trillion, and finally settled at Rs 820 billion. These successive reductions have resulted in significant cuts across multiple sectors, including national highways, Balochistan projects, coalition-supported schemes, Azad Jammu & Kashmir, Gilgit-Baltistan, and SDG-related blocks, leaving limited fiscal space for new initiatives.
For the upcoming fiscal year 2026-27, official planning inputs suggest a total development requirement of PKR 4.097 trillion against an initial indicative budget ceiling of Rs 1.126 trillion. A major portion of this allocation is already pre-committed to ongoing projects, leaving negligible room for new development schemes. Sectoral requirements alone highlight the scale of the challenge: national highways demand Rs 1.44 trillion, water sector projects Rs 969 billion, railways Rs 180 billion, and the power sector Rs 239 billion, all significantly exceeding available fiscal space.
The situation is particularly acute in the National Highway Authority sector, where key projects such as N-25, M-6, M-8, and the Karakoram Highway realignment collectively require Rs 1.44 trillion. In the water sector, the Diamer-Bhasha Dam alone has seen its cost escalate to Rs 1.36 trillion, while combined liabilities across major hydropower projects have pushed the total requirement to Rs 969 billion. Railways’ flagship projects, including ML-1, are also facing persistent delays due to funding constraints.
Out of 786 ongoing development schemes, official figures indicate that 243 projects are facing cost overruns, while 598 are experiencing delays, with only 203 projects progressing on schedule. Moreover, costs of 40 major projects have surged from Rs 1.13 trillion to Rs 2.81 trillion, reflecting an increase of 149 percent, excluding additional escalations in other large-scale infrastructure schemes.
Development expenditure distribution also shows significant concentration, with a small number of large-scale projects consuming a major share of available funds, while hundreds of medium and small projects operate under severe resource constraints. Despite a revised classification of projects into large, medium, and small categories, fiscal space remains highly constrained, particularly for high-priority national projects.
According to available reports, the requirement for local currency financing (rupee cover) for foreign-funded projects has also emerged as a major fiscal pressure point, further restricting available space within the development budget.
Sources within the Planning Ministry indicate that social sector initiatives, including the Danish Schools programme, health interventions, youth skills development, and other welfare-oriented schemes, are also being affected due to limited allocations, with several projects receiving significantly lower funding than required.
Concerns have been raised in official circles that if current trends persist, the development programme itself may transform into a new fiscal crisis, adding further pressure on the broader economy and public finances.
Overall, Pakistan’s development model is currently operating under severe fiscal stress, constrained resources, and expanding obligations, where without a fundamental reordering of development priorities, managing the growing imbalance between demand and funding appears increasingly difficult. Official data further indicates that 31 major development projects have remained delayed for more than a decade, while the gap between annual development demand and allocations continues to widen each year. Sources also suggest that international financial institutions have recommended excluding non-essential projects from the PSDP and shifting provincially oriented schemes entirely to provincial financing frameworks.