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April 29, 2021

ADB advises Pakistan to address private sector’s challenges

Business

April 29, 2021

ISLAMABAD: The Asian Development Bank (ADB) on Wednesday advised Pakistan to address the challenges confronted by its private sector particularly small and medium enterprises (SMEs) that operate informally.

“Policy challenge—strengthening smaller enterprises to spur private sector development stronger small and medium-sized enterprises (SMEs) could collectively become an important pillar of the economy in Pakistan, able to absorb the significant numbers of youth entering the labor market,” ADB said in its flagship publication of Asian Development Outlook. “During recovery from COVID-19, the priority should be to restore economic health by jumpstarting SMEs’ operations and improving their access to financial services. The pandemic has highlighted that Pakistan needs to address the challenges of its private sector, in particular, the prevalence of SMEs that operate informally. “

An estimated 3.3 million SMEs in Pakistan engage some 40 million households in entrepreneurial activity. SMEs operate across the economy, including agriculture and livestock, trade and manufacturing, and services. SMEs provide at least 30 percent of GDP, employ 80 percent of nonfarm labor, and produce a significant percentage of exports. However, their contribution to GDP is smaller than in other low-income countries, where it reaches up to 60 percent. The low economic share of SMEs reflects their low-value addition in a challenging macroeconomic environment with scarce credit, high inflation, an unstable currency, and inadequate infrastructure. These constraints hamper SME efforts to take full advantage of Pakistan’s open economy and increasingly accessible world markets. In general, SMEs lack a supportive public sector, skilled labor, trade capacity, and access to finance.

Only 21 percent of adults and 7 percent of women have bank accounts, well below Pakistan’s regional peers. In Bangladesh, for example, 50 percent of adults and 36 percent of women have bank accounts. Credit is a crucial challenge as commercial banks do not prioritize lending. In any case, SMEs can typically offer little collateral or other indications that they are creditworthy. Most lack proper documents such as audited accounts, and they avoid cumbersome tax and formalization regimes. SMEs have been particularly vulnerable to insolvency or downsizing under the pandemic and measures to contain it.

In terms of employment, smaller firms and informal workers have been the hardest hit, with SMEs unable to maintain payrolls when their operations were disrupted or completely closed. Other challenges have been supply chain disruption and interrupted access to supplies for manufacturers and retailers, particularly under extended COVID-19 restrictions.

For SMEs to realize their potential benefits to the economy, a holistic approach is needed to support the development of the private sector value chain. Necessary business development services would facilitate market access, advocate effective policy, provide legal and financial consulting, supply inputs, offer training and technical assistance, and help develop appropriate technology and products.

With most SMEs operating informally, bottlenecks to formalization need to be identified toward simplifying licensing and registration processes.

To help informal SMEs move into the formal sector, licencing and registration processes should be simplified. Stakeholders should improve coordination to align the policies of the Federal Board of Revenue, Securities and Exchange Commission of Pakistan, and central bank with the needs of the private sector.

The government is pursuing several measures to support SMEs. The central bank adopted its Policy for SME Finance in 2017, targeting growth in SME finance; National Financial Inclusion Strategy, aiming to fund at least 700,000 SMEs to create 3 million jobs; and Kamyab Jawan Program, to benefit the growing number of young people entering the labor market. The government’s latest SME policy, drafted in 2019, addresses supply and demand issues to enhance the contribution of SMEs to the economy. Following the onset of the pandemic, expanded energy subsidies have helped to prop up SMEs.