Small businesses, big challenges

SMEs require a special enabling environment for them to grow into a strong sector

Small businesses, big challenges


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aced with a large trade deficit, energy crises and high unemployment rates, Pakistan’s economy needs a new direction for economic growth. Economic contraction is disastrous for any country as a full recovery can take decades. However, the process can be expedited by choosing the right direction and ensuring political stability.

Small and medium enterprises (SMEs) have a crucial role in revitalising a contracted economy.

According to the Small and Medium Enterprise Development Authority, SMEs contribute nearly 40 percent of the GDP and employ nearly 80 percent of the workforce in Pakistan. The sector, therefore, is the engine of economic growth, particularly in semi-urban and rural areas. However, their potential to contribute to import substitution and export enhancement remains largely untapped.

Successful SMEs in various sectors, such as textiles and light engineering, have shown their ability to compete internationally and provide for domestic needs. State Bank has reported that Pakistan is home to more than 5.2 million SMEs), accounting for approximately 90 percent of private businesses and employing around 30 percent of the country’s workforce.

However, SMEs face huge challenges. One of the major issues facing the SMEs in Pakistan is access to financing. Many traditional banks consider SMEs to be high-risk. This view leads to demanding collateral requirements and steep interest rates. Currently, SME financing constitutes less than 7 percent of private sector credit. This ratio is significantly below the regional average. This lack of access to liquidity at reasonable costs restricts the SMEs’ ability to expand their operations and create jobs.

The SMEs also face significant operational hurdles mainly attributed to power outages. Amidst prolonged power outages and skyrocketing energy prices, the SMEs struggle to maintain seamless operations. Many restrict their production due to high energy costs. Obsolete technology has greatly hampered the ability of many to meet international quality standards. This failing has resulted in limited international trade.

SMEs require a special enabling environment for them to grow into a strong sector. This includes an improved regulatory framework and tax regime, along with other factors. Pakistan’s SME regulatory framework is quite complicated as several jurisdictions take effect in the formalisation of SMEs and there are some highly complex compliance requirements.

Dearth of skilled and certified labour force is another hurdle to our SMEs becoming more competitive. Despite the existence of technical training institutions like the SMEDA, the NAVTTC and the TEVTA, there is a significant mismatch between industry requirements and available skills. This gap affects productivity and limits the sector’s ability to adapt to modern technologies.

Small businesses, big challenges


SMEs face huge challenges. One of the major issues facing the SMEs in Pakistan is their access to financing. Many traditional banks consider SMEs to be high-risk. This view leads to demanding collateral requirements and steep interest rates.

To put things on the right track vis a vis the SMEs, the government can initiate a turn-around by learning the lessons of Turkey’s successful SME development programme, KOSGEB. The Turkish approach towards SMEs combines financial support, technical assistance and market access facilitation. This programme ensures effectiveness via a strong support system for SMEs and enhanced coordination between stakeholders.

Another programme worthy of attention is Malaysia’s SME Masterplan. This programme provides an excellent framework for comprehensive SME sector development. In this programme, an enhanced focus on technology enablement and bridging the gap between international partners has helped the Malaysian economy. The country’s success in Islamic banking for SMEs also holds relevant lessons for Pakistan.

Both the Turkish and Malaysian SME interventions have done phenomenally well. According to data published by EuroSTAT, the KOSGEB has been successful in enhancing SME exports revenue contribution in Turkey from 15 percent in 2015 to 55 percent in 2023. This represents staggering revenue growth of $112 billion. Similarly, according to data published by the Malaysian government, their SME Masterplan has resulted in an increase in the share in GDP of SMEs from 29 percent in 2000 to 38.30 percent in 2023— an addition $126 billion.

Pakistan too can unlock the full potential of its SME sector by giving it the due attention and resources. The success of these initiatives will not only cement economic foundations but also create sustainable employment opportunities thereby reducing dependence on imports and closing the gap in the trade deficit that the country currently struggles with.

Through collective efforts and strategic implementation of proposed solutions, Pakistan can build a resilient SME sector driving the economic growth. This can be instrumental in achieving the five year goal of $60 billion export growth.

This can be accomplished by crafting an enabling environment geared towards SME incubation and growth. In addition to promoting small businesses, the government should empower and steer the business chambers in all economic hubs in the country to engage in international business development and effective business matchmaking for Pakistan’s SMEs.

In this regard, the role of TDAP must also be enhanced. Our trade sections at international consulates should focus on building lucrative international linkages with a specific focus on fashion industry and international relationship management. Pakistan’s SMEs should scale up their participation in international trade shows to enhance their contribution to national export revenue.


The writer, an entrepreneur, can be reached at asmat@amami.io

Small businesses, big challenges