The federal government is in a catch-22 after foreign loans for the federal Public Sector Development Programme exceeded the budgetary limit by Rs112 billion, limiting its option to either cut spending of locally funded projects or let the deficit slip to Rs1.6 trillion.Foreign aid for PSDP exceeded the budgetary limit in the recently-concluded fiscal year 2016-17 due to increased Chinese lending for China-Pakistan Economic Corridor (CPEC) projects, according to officials of the Finance Ministry and Ministry of Planning.After the Rs112 billion excess, total foreign funding for PSDP would touch Rs255 billion - over one third of the now downward revised PSDP of Rs715 billion. At the time of approval of the budget in June last year, the federal government had anticipated Rs143 billion foreign loans to finance the federal PSDP, which was 17.8% of the Rs800 billion PSDP.The unparallel foreign financing for PSDP projects has now created severe problems for the federal government to manage its books, according to officials of the Finance Ministry. Due to an increase in the share of foreign loans in the overall PSDP budget of Rs800 billion, the government had to squeeze development spending for projects it was financing from its own resources -known as the rupee component of the PSDP.This has been done to ensure that the budget deficit does not explode, although it has already crossed the parliament-approved limit of 3.8% of the GDP or Rs1.210 trillion.The officials said that the provisional results showed the foreign loan component has already increased to Rs255 billion, which has now created serious problems for the government to keep development spending at the downward revised target of Rs715 billion.The federal government has decided to cut the PSDP by Rs85 billion due to its uncontrollable current expenditures and steep shortfall in both tax and non-tax revenues. The Finance Ministry was pushing the FBR to collect over Rs3.4 trillion so that it may neutralise the adverse impacts of excess in the foreign-aid component of the PSDP.The officials said that the Finance Ministry could not anticipate Rs112 billion excess development spending against the foreign aid component. Now, they are squeezing expenditures of Temporarily Displaced Persons, the security establishment, Gas Infrastructure Development Cess and federally-funded Special Development Programme. Against Rs100 billion TDPs allocations, only Rs61.3 billion were sanctioned till June 16, 2017.The development expenditures of Higher Education Commission are also facing a cut, officials confirmed.They said that the other option was that the government should let the overall budget deficit slip to 5% of Gross Domestic Product or roughly Rs1.6 trillion.The government has been trying to keep the budget deficit at 4.5% of the GDP for FY17 just to make sure that it was not higher than preceding fiscal year’s deficit of 4.6%.The federal government also took a hit of about Rs250 billion or 0.8% of the GDP after missing the annual tax collection target of the FBR.The Planning Ministry officials said that the federal government did not have control over releases made by the foreign lenders against CPEC-funded infrastructure projects. The rupee component releases for the federal development projects were under control of the finance ministry.Out of $55 billion CPEC financing, $15 billion were far infrastructure projects including Railways.The foreign financing component of the PSDP exceeded budgetary limits despite the Finance Ministry’s move to shift many mega projects from the PSDP purview. It has already excluded the Karachi Nuclear Power Plant project having total cost of Rs1 trillion from PSDP’s scope. These nuclear power plants are also funded by China with over Rs600 billion as foreign loans.For the new fiscal year 2017-18 that began on Saturday the federal government has shown foreign financing of the PSDP projects at Rs162 billion or 16% of the total size of Rs1.001 trillion.Published in The Express Tribune, July 2, 2017.Like Business on Facebook , follow @TribuneBiz on Twitter to stay informed and join in the conversation.