Money Matters

The crisis and SMEs

Money Matters
By Engr. Hussain Ahmad Siddiqui
Mon, 11, 20

World over the performance of the SME (Small and Medium Enterprises) Sector has been severely impacted amidst the outbreak of COVID-19 pandemic and subsequent lockdowns. Pakistan is no exception.

World over the performance of the SME (Small and Medium Enterprises) Sector has been severely impacted amidst the outbreak of COVID-19 pandemic and subsequent lockdowns. Pakistan is no exception.

There are over five million SMEs across the country. These represent about 90 percent of Pakistan’s businesses, and contribute 35 percent to GDP with over 30 percent to export earnings. In fact, it is a key pillar of national economy, employing about 40 percent of the workforce for different abilities---skilled, semiskilled and unskilled. These diversified enterprises are engaged in a variety of industrial, commercial and services activities. The long list of businesses include textiles, leather, plastic, sports goods, handicraft, IT, construction, materials, consumer goods, horticulture, fisheries, gems, healthcare, agricultural produce, and energy.

The SMEs are vulnerable to financial strains, increased cost of production, supply chain disruption, and drastic decrease in demand, due to limited financial resources and weaker access to financing and management. Resultantly, there has been gross decline in their sales and profitability in recent months, which has caused deterioration in business conditions; some SMEs going out of business and others facing numerous problems. The crisis continues as the second wave of the Coronavirus pandemic has endangered the sustainability of these enterprises. Lockdowns are imminent.

To ease the adverse effect of the COVID-19 and lockdowns, the government has introduced an economic stimulus package, with focus on the SMEs. State Bank of Pakistan (SBP), supported by the Asian Development Bank (ADB), will provide Rs1.3 trillion through new financial schemes aiming to extend the much-needed relief to the industries and the SMEs. SBP has already introduced a special scheme that allows any small or medium enterprise to avail loan of Rs5 million at reduced (3 percent) mark-up through any bank. This temporary scheme, under which SBP provides interest-free funds to the commercial banks, is aimed at reducing the impact of COVID-19 pandemic impact.

Prime Minister Imran Khan has committed on October 24 to provide all possible facilities to the SMEs, strengthening of which is the government’s top priority. In compliance with these instructions, the SMEs will get 25 percent discount in electricity bills effective November 1; the scheme to be valid until June 2021 and likely to be extended for a longer period, whereas the peak-hour tariff has been abolished for commercial consumers. Also, electric power tariff on incremental consumption of electricity by the small and medium industrial units has been reduced by 50 percent for the next three years. The electricity tariff relief is to be financed under the Covid-19 Relief Fund, expected to be supported by the International Monetary Fund (IMF). But then, besides electricity issues, the SMEs are constrained with other challenges too that need to be addressed.

Different types of loans and credits are available for the SMEs under subsidised rates, such as refinance scheme to meet working capital required, credit guarantee scheme for small and rural enterprises, export finance scheme, refinance facility for modernisation of SMEs, long-term financing facility for plant machinery, agriculture credit scheme, financing for storage of agricultural produce, and recently introduced financing for renewable energy (wind and solar power projects up to one megawatt capacity). Especially for women entrepreneurs the SBP has recently announced a refinance and credit guarantee scheme. Under this scheme, SBP will provide interest-free funds to the commercial banks, whereas women entrepreneur can get loan up to Rs5 million that will be payable within five years. The Prime Minister’s Youth Loan Scheme is available for businesses to be established by the youth. The loan is interest-free.

Also, subsidised credits are being provided under the Sindh Enterprise Development Fund for priority clusters including livestock, dairy, poultry and agriculture produces. Technical assistance for setting up new projects in Sindh is extended by the USAID (United States Agency for International Development) through the Fund. Meanwhile, the International Trade Centre, the joint agency of the United Nations (UN) and the World Trade Organization (WTO), has launched a project to uplift small and medium agribusiness in rural areas, funded by the European Union (EU). The EU has allocated Euro 48 million, in the first instance, to be utilised till 2024. The project, known as the ‘Growth for Rural Advances and Sustainable Progress (GRASP)’ will focus on the SMEs in Sindh and Balochistan. It will help enterprises in the horticulture and livestock sectors to be more competitive by supporting improvements at all levels of the value chain.

The SMEs have great potential for growth, which should be exploited optimally. To give an impetus to the economic activities it is imperative to adopt special measures to strengthen and promote the SMEs in real earnest. Firstly, the government needs to improve the institutional and policy envision for the SMEs. It is ironical that the SME Policy, which was formulated almost a year back, has not yet been announced. Also, the Small and Medium Enterprises Development Authority (SMEDA), currently almost dormant, should be made an effective and proactive organisation. Sadly, the S.M.E. Bank Limited, on privatisation list, is non-operational since long.

Secondly, access to the finance to the SMEs be improved. The various financing schemes introduced by the SBP are not duly and effectively publicised by the commercial banks and other financing institutions. There are reports that the commercial banks even discourage the SMEs, existing or upcoming, particularly in rural areas, to avail financing schemes. To ensure increased flow of credits there has to be some kind of monitoring mechanism by the SBP to achieve its set target for each bank of providing loan to 1,000 account holders in every city, say, on a quarterly basis.

Thirdly, the SMEs be provided facilitation and incentives for modernisation of plant machinery, advanced technology, innovations, enhanced productivity, and training of manpower in marketing and management, and internationalisation of business. The government needs to develop the requisite infrastructure, and create enabling business environments, with special focus on simplification of tax system, as the prime minister has already indicated to abolish withholding tax for the SME sector. Lastly, but importantly, learning from the development of the SMEs in other developing countries, the sector needs to be digitalised though it offers numerous challenges initially.

The writer is former chairman of State    Engineering Corporation