The UN observes June 27 each year as International Micro-, Small and Medium-sized Enterprises Day to highlight SMEs' critical role in job creation, poverty alleviation, and inclusive economic growth -- especially in developing countries. The SME sector is globally recognised as the engine of economic growth.
SMALL BUSINESS DAY
The UN observes June 27 each year as International Micro-, Small and Medium-sized Enterprises Day to highlight SMEs' critical role in job creation, poverty alleviation, and inclusive economic growth -- especially in developing countries. The SME sector is globally recognised as the engine of economic growth.
Pakistan’s 2025–26 federal budget, with a sizable outlay of Rs17.573 trillion, regrettably lacks a dedicated development package for SMEs. It falls short of creating the necessary policy environment and enabling conditions for their growth. While some funding has been earmarked under the Public Sector Development Program (PSDP) for youth entrepreneurship and digital initiatives, no comprehensive financing framework or facilitation mechanism is tailored to SMEs. The existing tax regime continues to disproportionately burden small businesses.
Despite improvements in transparency through the digitalisation of tax filing, the process remains cumbersome for smaller enterprises that often lack the financial and digital literacy to manage compliance effectively. A simplified tax structure and meaningful relief for SME taxpayers should have been prioritized, but were not.
Though the State Bank of Pakistan (SBP) has introduced various credit schemes, monetary policy has not supported SME financing. Despite the recent reduction in the policy rate to 11 per cent -- down from a peak of 22 per cent -- SMEs continue to receive only 6.0–7.0 per cent of total private sector credit, far below the policy target of 17 per cent. Moreover, the SME Bank Limited, originally established to serve this vital segment, is undergoing liquidation, leaving a significant institutional vacuum. While the SBP has recently revised its regulations for SME financing, substantial ground remains to be covered. The World Bank notes that access to finance remains a major bottleneck for SMEs in developing economies, with about half of formal SMEs lacking access to formal credit. Bridging this financing gap is therefore critically important.
Technological backwardness also hampers productivity in Pakistan’s manufacturing SMEs. Most enterprises lack access to modern machinery, digital tools and trained human resources. Deficiencies in management, marketing and production techniques further erode competitiveness. Government-backed programmes for technical upgradation, skills development and market linkage are urgently needed to support SMEs in reaching both domestic and export markets.
Other challenges -- such as high production costs, inadequate infrastructure, erratic utility services and limited market access -- further constrain SME development. While the 2024–25 Economic Survey rightly identifies SMEs as central to economic revival, the fiscal allocations and implementation mechanisms proposed in the 2025–26 Finance Bill fall short of addressing these longstanding structural barriers.
SMEs are the backbone of most economies, especially in the developing world. They constitute the majority of global businesses and significantly contribute to employment and economic output. Representing around 90 per cent of businesses and more than half of global employment, formal SMEs contribute up to 40 per cent of GDP in emerging markets, which rises further when informal enterprises are included. According to the World Bank, nearly 600 million new jobs will be needed globally by 2030 to absorb the growing labour force, underlining the strategic importance of SME development in countries like Pakistan.
Pakistan’s SME sector holds immense potential to drive inclusive economic growth, generate large-scale employment and reduce poverty. But policy commitments must be backed by decisive action to unlock this potential
For Pakistan, with a population exceeding 241 million, promoting SMEs is key to addressing growing poverty and unemployment. The 2024–25 Economic Survey reports a modest GDP growth rate of 2.7 per cent, weak agricultural performance, and stagnant job creation. In 2023, the employment-to-population ratio stood at just 47.6 per cent, one of the lowest in decades. The IMF projects unemployment to rise to 8.0 per cent in 2025.
Alarmingly, the World Bank estimates that Pakistan’s poverty rate has reached 44.7 per cent, with nearly 108 million people now living below the poverty line -- an increase of 1.9 million within a year. These troubling indicators demand bold and targeted interventions, and the SME sector presents the most viable pathway.
Pakistan is home to over 5.2 million SMEs operating across both formal and informal sectors in industries including manufacturing, trade, and services. These enterprises comprise 90 per cent of all private businesses, employ approximately 30 per cent of the labour force (including 80 per cent of the non-agricultural workforce), contribute 40 per cent to GDP, and account for about 25 per cent of total exports. Despite their significance, SMEs face persistent challenges: low productivity, skills gaps, poor working conditions, weak innovation, and fragmented supply chains. One of the critical institutional issues is the inconsistency in SME definitions across different regulatory authorities, which hampers effective policy formulation and support programmes.
Major SME sub-sectors in Pakistan include: (i) light engineering and foundry, (ii) sports goods, (iii) surgical instruments, (iv) fisheries, dairy, and livestock, (v) logistics and land transport, (vi) private educational institutions, (vii) private healthcare services, (viii) textile and apparel production, embroidery and hosiery, (ix) pottery and ceramics, (x) bakery and confectionery, (xi) auto repair and parts manufacturing, (xii) food processing (including oils and meats), (xiii) grain mills and animal feed, (xiv) fans, (xv) beauty salons, (xvi) cotton ginning, (xvii) horticulture and agriculture, (xviii) gems and jewelry, (xix) handmade carpets and handicrafts, (xx) leather goods, (xxi) marble and gypsum processing, (xxii) plastics, (xxiii) printing, (xxiv) retail and supermarkets, (xxv) IT and IT-enabled services, and (xxvi) small-scale renewable energy projects (solar/wind up to 1MW).
The National SME Policy 2021 set ambitious targets: sustaining annual growth of 9.0–10 per cent, creating 5.0 per cent more jobs annually, and increasing exports by 10 per cent each year. Its agenda included regulatory reforms, industrial infrastructure development, entrepreneurship promotion and improving access to finance. However, by mid-2025, these goals remain largely unmet due to poor implementation, weak institutional coordination, and inadequate political commitment.
Pakistan’s SME sector has immense potential to drive inclusive economic growth, generate large-scale employment, and reduce poverty. However, policy commitments must be backed by decisive action to unlock this potential. Simplified taxation, enhanced access to finance, technical and digital modernisation and strong institutional support are not optional but essential.
The writer is retired chairman of State Engineering Corporation.
