Small and Medium Enterprises (SMEs) play a pivotal role in most economies, particularly in developing countries. They constitute the majority of businesses worldwide and significantly contribute to job creation and global economic development. Representing about 90 percent of businesses and over 50 percent of global employment, formal SMEs contribute up to 40 percent of national income (GDP) in emerging economies, a figure that rises even higher when considering informal SMEs. The World Bank's report on SMEs emphasizes the urgency, estimating that by 2030, 600 million jobs will be required to accommodate the expanding global workforce, underscoring the high priority of SME development for governments worldwide, especially in emerging markets where 7 out of 10 jobs are generated by SMEs. However, access to finance remains a critical constraint, ranking as the second most cited obstacle hindering SME growth in these markets and developing countries.
In the context of Pakistan, with a population exceeding 231 million, promoting the SME sector becomes crucial amid the escalating challenges of poverty and unemployment. According to the International Labour Organisation (ILO) estimates as of September 2023, Pakistan's employment-to-population ratio for the year fell significantly below its pre-crisis trend line at 47.6 percent, with the number of unemployed persons projected to reach 5.6 million—an increase of 1.5 million since 2021. The current unemployment rate is estimated at 8.5 percent, according to the International Monetary Fund's World Economic Outlook for 2023, compared to 6.42 percent in 2022 and 6.34 percent in 2021. The poverty level in 2023 rose to 39.4 percent, according to the World Bank, up from 34 percent the previous year, with the number of poor people reaching 95 million, an increase of about 12.5 million since 2022 due to the challenging economic conditions in the country.
The SME sector serves as the backbone of the national economy in Pakistan, with more than 5.2 million SMEs operating across the country in both formal and informal sectors, engaging in diverse activities from manufacturing and trade to services. Comprising about 90 percent of exclusive private businesses, the sector provides employment to 30 percent of the total workforce, contributing 40 percent to the annual GDP. Despite playing a vital role in economic growth and poverty reduction, the SME sector faces numerous constraints that impede its optimal potential. These challenges include policy issues, with varying definitions of SMEs at the national level, creating regulatory hurdles with different institutions and organizations regulating and facilitating these enterprises.
Major categories of the SMEs are (i) sale, maintenance and repair of motor vehicles and motorcycles, (ii) land transport (logistics & passenger traffic), (iii) education- private sector schools and colleges, (iv)health and social work (private sector hospitals), (v) textile fabric, (vi) glass and ceramics industry, (vii) bakery and other confectionery products, (viii) motor vehicles and trailers - auto parts manufacturing, (ix) meat, fruit, vegetables, oils and fats, (x) manufacturing segment- grain mill products and animal feeds, (xi) fan industry, (xii) beauty parlours and spas, (xiii) cotton ginning, (xiv) dry-cleaning and laundry services, (xv) gem and jewellery, (xvi) hand-made carpet manufacturing, (xvii) leather products, (xviii) marble and marble products, (xix) plastic products, (xx) printing press, (xxi) super markets and retail shops, (xxii) IT (Information Technology) and ITeS (Information Technology enabled Services), and (xxiii) renewable energy (wind and solar power projects up to one-megawatt capacity).
The National SME Policy 2021 aims to sustain a growth rate of 9 percent to 10 percent per annum, increase average employment by 5 percent annually, and achieve a 10 percent per annum growth in exports. The policy focuses on reforming the regulatory environment and addressing market constraints, both in terms of demand and supply, with objectives such as promoting entrepreneurship, developing industrial infrastructure, and providing access to finances. However, despite these goals, the policy's targets remain unmet, primarily due to a lack of political will and serious government support.
Another significant challenge faced by SMEs in Pakistan is the complex and convoluted tax regime, creating a nightmare for entrepreneurs. There is a need for a special focus on simplifying the tax system. Additionally, in spite of the State Bank of Pakistan introducing various schemes and credit facilities for SME financing, the role of monetary policy is not supportive, as access to finance remains a barrier for the sustenance, expansion, and modernization of SMEs. Although there are policy measures in place to increase SME financing to 17 percent, the sector only receives 6 percent-7 percent of private sector financing, and a dedicated SME banking network is lacking, with the SME Bank Ltd in the process of winding up after being non-functional for a long.
Furthermore, manufacturing SMEs in Pakistan struggle with outdated technology for process and production, coupled with a lack of adequate skills and training for their workforce. Facilitation and incentives are needed for the modernization of plant machinery, adoption of advanced technology, increased productivity, and training of manpower in marketing, management, and international business. Other challenges, such as high production and sales costs, add to the sector's woes. The SME sector eagerly awaits effective solutions to address these constraints and challenges in the near future.
The writer is retired chairman of the State Engineering Corporation