No credit for MSMEs

Pakistan has had a longstanding relationship with the IMF, to the point where it has availed a total of 21 IMF bailout programmes. The IMF provides loans to countries as a stop-gap measure to implement fiscal and monetary policies needed to restore conditions for a stable economy and sustainable growth as compared to any abrupt shift in policies. But historically, these programmes have proven to hurt Pakistan’s economy in the long term rather than doing otherwise. While the terms of the IMF agreements result in a considerable reduction in subsidies, contraction in the Public Sector Development Programs and public-sector employment bans, it is the MSME sector that is hit worst by the programmes’ unwelcome effects. The same is to be expected now as Pakistan has resorted to yet another IMF programme.

Almost nine out of every ten enterprises in Pakistan are classified as micro, small and medium enterprises which contribute about a 40 percent share to the GDP, and employ more than 80 percent of non-farm labour. Still, the sector faces substantial challenges in securing credit from local financial institutions mainly due to the lack of collateral, poor governance and documentation practices, and the reluctance of financial institutions to extend credit to SMEs. Moreover, the devaluation of the rupee, sharp hike in utility tariffs, and overall inflation that IMF programmes typically come with tend to cause major drops in MSME profits. These are some key impacts that Pakistan’s MSME sector has already begun to feel. In addition to banks, the general economic slowdown is also impacting the lending scenario of Non-Banking Financial Institutions. Moreover, due to their high discount rates, government bonds are becoming a more lucrative investment options for banks where they earn a decent return on a risk-free profile rather than extending credits to the MSME sector. Therefore, the supply of credit to micro, small and medium enterprises is likely to decline further impacting the lives and livelihoods of millions of associated with the sector.

Sheikh M Riaz

Rawalpindi