Much of the accelerated economic growth in the past two fiscal years can perhaps be explained by an accelerated public sector development programme (PSDP) that is also "crowding-in" private investment. Development spending has a multiplier effect.

Given the fiscal space, enhanced development spending can be an effective tool to pull national economies out of slump. An enlarged PSDP has created increased domestic demand and combined with cheap credit stimulated investments.

Yet, the outcomes would have been better but for the lower than targeted growth in developmental expenditures and more efficient and economical utilization of funds.

In the third quarterly report on the state of economy, the State Bank finds Rs5.6 billion shortfall in development spending for fiscal 2004, "a little troubling" and reckons that it reflects, "badly on the government's commitment" to implement the PSDP.

Of the overall Rs202 billion, nearly 75 per cent of the PSDP amounting to Rs148 billion would be managed by the federation and just over 25 per cent amounting to Rs54 billion would be the provincial programmes. Whereas the overall PSDP fixed at Rs202 billion has been increased by 26 per cent, the provincial programme has moved up by nearly 15 per cent.

Apparently, the decision by the National Economic Council to empower the federating units to sanction projects up to Rs1 billion, up five times from Rs200 million, had no visible impact on the PSDP allocation between the federation and the provinces.

For this to happen, the provinces should have more resources at their command under a fresh and long delayed National Finance Commission Award. Some of the federally funded projects are executed by the provinces which creates snags in financial releases, results in cost overruns and holds up timely completion of development programmes.

In not too distant a past, development and growth was significantly fuelled by public sector investment. In a way, the current rising development outlay signals a return to a changing development agenda.

That the welfare state is not workable is widely recognized. It is also acknowledged that it is not the business of government to be in business. The government must shed all fat and trim. And its revenues must increase so that the state can focus on building social and physical capital to facilitate private investment and economic growth.

In an emerging market, where the infrastructural development has been neglected for a decade or more, and where replenishment and renewal of the existing stock is extremely vital, public sector investment assumes added significance.

The development of human skills becomes paramount to produce best quality goods at competitive prices. So much is the shortage of appropriate skills, that a leading industrial house is looking at an opportunity to get the professional and technical personals from neighbouring countries.

In the community of nations, Pakistan is in the category of nations with low human development. Social indicators need to improve and improve fast. Despite the paradigm shift in macro-economic policies, the role of the government in a developing economy cannot be over-emphasised.

In a changing environment, a right balance between the government and the market has to be struck to manage a sustained economic growth. This is borne out by the fact that the pace of economic growth picks as soon as the sagging development spending is increased on a sustainable basis even for a couple of years.

In the past, the absence of right priorities, lack of prudent spending and efficient utilization of funds, the public sector investments became unproductive. Unsustainable fiscal and balance of payments deficits forced continuous cuts in development spending throughout the last decade.

The PSDP financial outlay tumbled down to 1.7 per cent of GDP in fiscal 2001 and the growth rate plummeted to 1.8 per cent. The trend was reversed in fiscal 2002 when the PSDP spending shot up to Rs126 billion from Rs90 billion in 2001 and touched Rs154 billion in fiscal 2004, accounting for 3 per cent of the GDP.

The growth rate touched 6.4 per cent. Credit for the increase goes to an elected government responsible to the domestic constituency. Though the increased development spending cannot be the sole driver of economic growth, its significant contribution to the growth rate for current and last fiscal years' 6.4 per cent and 5.1 per cent receptively, cannot be under-estimated.

Hence the need to improve the capacity as development expenditure suffers from many drawbacks. The performance is judged by financial targets. Cost over-runs often occur because of delays in execution and rising inflation.

Physical performance is loosely linked to financial targets. Some of the funds released in the last quarter of financial year lapse and revalidation takes quite sometime.

The PSDP performance is not judged in terms of social indicators. Funds flow into bricks and mortars much faster than in education and health. Projects are not executed economically and efficiently because of weak monitoring.

Human resources development is still a low priority. Vocational training has been left to the private sector. The State Bank's concerns over delays in execution or lower than targeted growth for developmental spending is understandable.

The third quarterly report says the lower expenditure was not tenable specially when the government itself has made budgetary allocations after examining the feasibility of projects and associated problems.

While conceding that there are quite clearly valid reasons for many of the delays, the quarterly report states that these reasons become increasingly meaningless unless there is clear evidence of efforts to remove these bottlenecks for succeeding years.

It shows lack of commitment for implementation of developmental programmes, which are over-stated in financial terms every year, with provision for an operational shortfall.

The current year's budget estimates of Rs202 thus works out to Rs188 billion. The State Bank observations throw light on the lack of capacity. It attributes lower utilization of funds to (1) weak systems and processes of planning, approval and execution of development of projects, (2) inefficiency in respective departments responsible for project execution, (3) cumbersome procedures of the federal government to release funds (4) and the conflicts between the provincial and district governments.

In the budget formulation, the priority for development spending comes after debt servicing and defence. Though debt servicing is growing slower than in the previous decade, it retains the highest share, Rs292 billion in the budget 2005.

Increasing much faster is the defence budget, up from Rs160 billion last year to Rs194 billion for current fiscal. The figure excludes Rs34 billion provision for pension of defence personnel transferred to the general public services account since 2001, as revealed by economist Dr Shahid Kardar at seminar organized by Dialogue in Karachi recently.

Pakistan's defence spending, as ratio of Gross Domestic Product is among the highest in the world. Security concerns have impacted adversely on development spending and economic development.