SMEs: the engine of growth

Women working in a garment factory. Photo:

Pakistan’s economic policies have traditionally favored large-scale manufacturing (LSM). LSM by nature is less job-creating and, in the case of Pakistan, relies on imported industrial raw materials, thus worsening the import bill. SMEs have remained unloved in terms of government distributions, tax breaks or even a team of cheerleaders. Funding remains oriented towards large industries or multinationals. At the end of June 2021, SME financing stood at a paltry 437.57 billion rupees, barely 6.57% of total private sector credit in the country with only 172,893 SME borrowers. The statistics paint a grim picture.

The ingenious lobbies with 78,000 large industrial units versus 5.2 million little guys continue to have the ear of policymakers, political leaders, financiers and international industrial partners. The Small and Medium-Sized Enterprise Development Authority (SMEDA), the leading SME development support body in the country, even after 23 years of existence, has failed to convince at a credible level the type of impact SMEs have had in turning countries into real growth stories in Japan, South Korea, Italy, United States and Malaysia, to name a few. SMEDA continues to be a rather low voice with little to no credible research publications or success stories to showcase the integration of SMEs into global value chains. Sometimes run by bureaucrats to mid-level professionals, the organization leaves a lot to be desired.

Imagine a little welder trying to settle down with meager capital, himself or borrowed from relatives or friends. The company is inundated with a regulatory regime that relies on interacting with government agencies for licensing and compliance, deterring SMEs from operating in the formal sector. Credible estimates of Pakistan’s informal economy date back to 2010, when a study by the State Bank of Pakistan estimated the informal economy to be 30 percent of the formal sector. Informality is one of the main reasons for: i) a weak tax base; ii) a low tax / GDP rate of 10%; and (iii) the inability of SMEs to provide documents for borrowing from banks. The above is a difficult picture. Any meaningful change requires a Herculean effort.

The first SME policy to support the growth of SMEs in the country was approved in 2007 by the government, but hardly implemented in form and substance. The monitoring and evaluation mechanism of the 2007 policy remained weak and the necessary resources remained insufficient. Lack of ownership also contributed to weak implementation. It is a welcome step that after three and a half years, the current government has implemented a new SME policy. It is hoped that the new policy will take into account the new global atmosphere of digital e-commerce platforms, online payment gateways and the Internet of Things.

Today, commerce and transactions, information and the nature of products and services are completely disrupted by new technologies. The new political prescriptions envisaged must convince of a commitment to support a transition of SMEs based on these new realities. The Organization for Economic Co-operation and Development has developed several benchmarking tools, including the SME Policy Index, to assess and monitor SME policy frameworks in developing countries. It would be useful to assess the newly developed policy against this index of adoption of good practice.

It is not difficult to rate the doable. Start with a census. Obtaining evidence is the key to informed decision making. We need a mechanism to assess the growth of SMEs on a periodic basis to give us insight into key statistics on SMEs. This is the first step: capturing the data to get it right. Two, with both the federal apparatus, the SMEDA, the four provinces and Gilgit-Baltistan, with the kind of commitment as is the case in the case of big industry, will be necessary for SMEs to have a real voice. This commitment requires daily efforts.

Third, a comprehensive and well-coordinated institutional effort will lead to a transformational change in the SME landscape in the country; guiding principles include correcting market failures resulting from externalities and information asymmetries, with existing government institutional infrastructure coming together through support programs in their specific areas of expertise. Likewise, focus interventions on improving the national productivity of SMEs through access to various business development services, testing services, export readiness programs, certifications to international standards and technical skills can enable SMEs to grow and integrate into global value chains. It is hoped that the new policy will make a considerable effort in this regard.

Fourth, it is crucial to support the creation of new companies and companies reaching higher levels of growth, in terms of size and scale. For Pakistan to truly take the plunge, it is imperative to create an entrepreneurial ecosystem and support innovative businesses. Growth companies must be at the center of the country’s concerns. Pakistan’s start-up ecosystem has become increasingly active over the past decade. There is a substantial increase in awareness, interest and investment of international and national stakeholders, with institutional actors including government organizations, academic institutions, venture capital funds, incubations and accelerators actively engaging with innovative start-ups.

Sectors based on technology / process automation offer a better value proposition for venture capitalists – and therefore sectors such as agricultural technologies, health technologies, e-commerce, logistics and more. transport, and FinTech are attracting increasing interest from international investors. Venture capital (VC) funding has seen some growth, from $ 80.9 million in 2015 to almost $ 300 million in 2021. However, funding has mostly been done through private equity funds. -risk constituted abroad. This indicates the need to develop a regulatory regime where local venture capital funds can be set up to leverage domestic investment.

It takes bravery for a broad reform program aimed at transforming millions of SMEs to become the engine of growth in the country. It’s time to continue developing SMEs with tunnel vision precision for real impact.

The writer is a former advisor to the Ministry of Finance. He tweets @KhaqanNajeeb. E-mail: [email protected]

Originally posted in The News

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