Small businesses, big challenges | Political Economy

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Due to huge trade deficit, energy crisis and high unemployment rate, Pakistan’s economy needs a new direction for economic growth. Economic contraction is devastating for any country as a full recovery can take decades. However, this process can be accelerated by choosing the right direction and ensuring political stability.

Small and Medium Enterprises (SMEs) have an important role to play in reviving the contracted economy.

According to the Small and Medium Enterprise Development Authority, SMEs contribute about 40 percent to the GDP and employ about 80 percent of the workforce in Pakistan. The sector is therefore an engine of economic growth, especially in semi-urban and rural areas. However, their potential to contribute to import substitution and export enhancement remains largely untapped.

Successful SMEs in various sectors such as textiles and light engineering have demonstrated their ability to compete internationally and meet domestic needs. The State Bank reports that Pakistan is home to more than 5.2 million SMEs, which account for nearly 90 percent of private businesses and employ nearly 30 percent of the country’s workforce.

However, SMEs face enormous challenges. One of the main problems faced by SMEs in Pakistan is access to financing. Many traditional banks consider SMEs to be high risk. This approach leads to demanding collateral requirements and higher interest rates. Currently, SME financing accounts for less than 7 percent of private sector credit. This ratio is significantly lower than the regional average. This lack of access to liquidity at reasonable prices limits the ability of SMEs to expand their operations and create jobs.

SMEs also face significant operational constraints mainly attributed to power outages. Amid prolonged power outages and skyrocketing energy prices, SMEs are struggling to maintain uninterrupted operations. Many limit their production due to high energy costs. Outdated technology has greatly affected the ability of many to meet international quality standards. This failure has resulted in limited international trade.

SMEs require a specific enabling environment to develop into a strong sector. This includes a better regulatory framework and tax system, among other factors. Pakistan’s SME regulatory framework is quite complex as many jurisdictions influence the formalization of SMEs and some have very complex compliance requirements.

Lack of skilled and certified labor force is another obstacle for our SMEs to become more competitive. Despite the existence of technical training institutes like SMEDA, NAVTTC and TEVTA, there is a significant mismatch between industry requirements and available skills. This gap affects productivity and limits the sector’s ability to adapt to modern technology.

SMEs face major challenges. One of the main problems faced by SMEs in Pakistan is their access to financing. Many traditional banks consider SMEs to be high risk. This approach leads to demanding collateral requirements and higher interest rates.

To get things on the right track vis-à-vis SMEs, the government can initiate a turnaround by learning from Turkey’s successful SME development program, KOSGEB. Turkey’s approach to SMEs combines financial support, technical assistance and market access facilitation. The program ensures effectiveness through a strong support system for SMEs and better coordination among stakeholders.

Another noteworthy program is Malaysia’s SME Master Plan. This program provides an excellent framework for the holistic development of the SME sector. In this program, focusing on enabling technology and bridging the gap between international partners has helped the Malaysian economy. The country’s success in Islamic banking for SMEs also holds relevant lessons for Pakistan.

Both Turkish and Malaysian SME interventions have worked exceptionally well. According to data published by EuroSTAT, KOSGEB has been able to increase SME export earnings in Turkey from 15 percent in 2015 to 55 percent in 2023. Similarly, according to data published by the Malaysian government, their SME Master Plan has resulted in the contribution of SMEs to GDP increasing from 29 percent in 2000 to 38.30 percent in 2023—which That’s an increase of $126 billion.

Pakistan can also unlock its full potential by giving adequate attention and resources to its SME sector. The success of these initiatives will not only strengthen the economic base but also create sustainable employment opportunities that will reduce dependence on imports and close the trade deficit gap that the country is currently struggling with.

Through collective efforts and strategic implementation of proposed solutions, Pakistan can build a resilient SME sector driving economic growth. This could help in achieving the five-year export growth target of $60 billion.

This can be accomplished by creating an enabling environment for SME incubation and growth. In addition to promoting small businesses, the government should empower and guide business chambers in all economic centers of the country to engage in international business development and effective business matchmaking for Pakistan’s SMEs. .

In this regard, the role of TDAP must also be enhanced. Our commercial sections in international consulates should focus on building profitable international connections with a special focus on fashion industry and international relationship management. Pakistan’s SMEs should contribute to national export revenue by increasing their participation in international trade shows.

The author, an entrepreneur, can be contacted at asmat@amami.io.