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Preparing for growth


May 4, 2021

To create more jobs and tax rupees, Pakistan needs a new approach for reindustrialization. Whereas the bulk of the debate focuses on large-scale manufacturing, both research and developmental experience points to an overwhelming role of Small and Medium Enterprises (SMEs) worldwide, as drivers of socio-economic development. SMEs have a crucial role in GDP growth, new job creation and reduction of poverty. Pakistan’s case is no different.

The need to reconstruct the SME sector of Pakistan has been elevated due to the ramifications of the ongoing pandemic. A global multi-speed economic recovery is in progress, displaying cross-country differences in containing Covid-19 and getting hold of and administering vaccines. However, notwithstanding a difference in timings, it is expected that there will soon be a rapid upturn around the globe. Business sectors that faced forced closures as they could not function without safe human-to-human proximity will soon be up and running. Pent-up demand will push rapid expansion in some sectors. Growth rates are likely to be higher – albeit for a limited period of time, before moving to normal levels. Barring any untoward happenings, a more normal world should be on the horizon by mid-2022.

It is not easy to ascertain a complete shape of the post-recovery economy, but some industries seem set in place for a period of rapid growth. Recovery is likely to be sharper in sectors with a blend of technological happenings, available financing, and demand for creative solutions. In this setting, digital adoption by SMEs is particularly important. In Pakistan, part of the digital transformation involves equipping millions of small retail businesses and the related supply chains with technological solutions. Key is to attempt that the digital transformation may be broad enough to raise overall productivity growth substantially.

A look at the last Economic Census 2005 in Pakistan indicates 3.25 million economic establishments in the country – a growth of 61 percent as compared to the census of 1988. A crude extrapolation of this data projects approximately 5.2 million economic establishments in the country in 2020 contributing an estimated 40 percent to GDP and 25 percent to exports. Considering the definition of SMEs as per the SME Policy 2007 (economic establishments with an employment size up to 250; annual sales up to 250 million; paid up capital up to 25 million), 99 percent of the 5.2 million economic establishments fall in the category of SMEs. Such is the importance of the SME sector in preparing for growth in Pakistan.

The key to Pakistan’s SME transformation is to not get lost in another long-drawn SME policy, but rather identify the necessary doables and accomplish them within a stipulated time. An archaic 16-year-old database is a primary constraint for improving the plight of the SME sector in Pakistan. A lack of basic statistics restricts information for targeting of any public sector support programme. A good starting point is to conduct a new census of economic establishments to establish baseline indicators. This will form an evidence-based framework for subsequent monitoring and estimation of incentives.

SMEs perceive government departments – including tax, labour and regulatory bodies – to be non-facilitative. Consequently, SMEs prefer to stay small to remain off the radar of government departments. Improving government interface can be a key booster for upscaling SMEs and their productivity. In this regard, a regulatory makeover by reviewing and streamlining the existing large volume of rules and regulations is essential. A complete stocktake can help remove redundant regulations as well as simplification of the remaining regulations. The idea is to create a legal registry of rules and regulations, simple and effective, with curtailed authorization of government departments for compliance.

Lack of information and access to domestic and international markets, high logistical costs, paucity of funds for marketing, packaging, standardization and weak certifications are all key constraints impeding the ability of SMEs to export and for some to sell locally. E-commerce is the next game-changer for multiplying exports in Asia. Digital platforms are expanding the reach of micro, small and medium-sized enterprises, and opening up opportunities for those in second- and third-tier cities and rural areas. These digital consumers represent a whole new market for Pakistan.

The world is undergoing the largest technological transformation in history – disrupting old ways of doing things, reducing costs, and increasing productivity. Pakistan’s economy needs to do the same with its 5.2 million SMEs. Some approaches in this area include a cluster-based marketing strategy and online marketplaces for both domestic and international market access. An appropriate regulatory environment is required for local payment gateways and fintechs to be established. Enhancing subcontracting relationships with locally based multinational corporations can help SMEs become part of global value chains.

By adopting Industry 4.0 and automation technologies, and investing in analytics, reskilling, and upskilling, Pakistani SMEs can accelerate the capture of many industries post-Covid, including companies that make high-tech goods including computers, electronic and telecommunications equipment. Skilling for the 21st century SMEs requires greater use of industry partnerships to design specific and relevant training programmes. Access to finance will be the defining policy for strengthening SMEs. A fully operational credit guarantee company, developing framework for crowdfunding, establishing credit scoring bureaus are just some of the recommendations which can help.

The Covid-19 pandemic has exposed the fragility of the world’s supply chains for health products, food, energy, vehicles, and many other products. Many international firms are rethinking their sourcing and location of manufacturing hubs for more dependability. Pakistan must take advantage of these shifts.

Developing globally competitive SMEs as manufacturing hubs is a huge opportunity for Pakistan to spur economic growth and job creation this decade.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

Email: [email protected]

Twitter: @KhaqanNajeeb