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SMEs — The engine of economic growth

SMEs — The engine of economic growth

Pakistani economy consists of over 4 million Small and Medium Enterprises (SMEs). These consist of service providers, manufacturing units, and startups. As per an estimate; SMEs make up over 30 percent of Pakistan’s GDP and approximately 25 percent of generating exports. SMEs are generally regarded as the engine of economic growth and equitable development in developing economies. These are labor intensive, capital saving, and capable of helping create new jobs and can be channelized as the key to Pakistan’s economic growth, poverty alleviation, and employment generation in the future.

However; their unimpressive performance in employment generation in recent years has generated a lot of doubts about the effectiveness of the system, challenges, and prospects of SMEs in Pakistan.

Since independence, much of the emphasis was laid on the installation of big industries in Pakistan and somehow small and medium-scale industries were never given due attention as a means to reduce poverty and unemployment in the country. However, ironically, big industries were also not developed in the country as per the needs and plans.

Most of the SMEs in Pakistan operate as family/sole proprietorship businesses and are generally classified into commercial, industrial, and agricultural categories depending on their activities through commercial SMEs.

Despite the presence of many SMEs in Pakistan, the high rate of unemployment and less tax collection suggest that these SMEs are experiencing some major challenges that are hindering their performance. Many factors can be attributed to the slow progress of SMEs; key among them is insufficient capital, irregular power supply, infrastructural inadequacies (water, roads, etc.), lack of focus, inadequate market research, over-concentration on few markets for finished products, lack of proper bookkeeping, lack of proper records or any records at all, inability to separate business and family or personal finances, lack of business strategy, inability to distinguish between revenue and profit, inability to procure the right plant and machinery, or cut-throat competition.

Further; categorizing the problems into external and internal will help in understanding the challenges better; capital shortage, taxation, and regulations, are a few of the external factors whereas inadequate working capital, stiff competition from the larger companies, difficulties in sourcing raw materials, low capacity utilization, lack of management strategies, and source of finances are few of the internal factors.

Development of SMEs’ in Pakistan will enhance the capacity building as they serve as entrepreneurial training avenues; they can create more employment opportunities because of their labor-intensive operations; they can achieve much more relatively high value-added operations because they employ basic economic activities that depend mostly on the locally sourced raw materials; they can also provide opportunities for the development of local skills. Pakistan needs all these factors for its economic survival.

Following are a few of the challenges along with the probable solution:

Financial Problems: Most SMEs’ have poor financing and other associated problems. Both local and foreign banks are reluctant in financing SMEs and have stringent due diligence processes and financing requirements for these SMEs along with the high cost of financing and high level of securities. Accessibility of financing SMEs is one of the main issues which has seriously hampered the growth of SMEs in Pakistan. Banks prefer to give loans to big groups or big projects due to the high possibility of loan default. SMEs should also improve their corporate governance matters so that banks can trust their accounts and process and procedures. However, it wouldn’t be wrong to say that the funding problem of SMEs is primarily due to the behavior of banks and SMEs and the imperfection of the capital markets.

Management Problems: Lack of trained manpower and management skills also constitute a major challenge to the survival of SMEs in Pakistan. Almost 90 percent of all these business failures result from a lack of experience and competence. Inefficiency in overall business management and poor record keeping along with technical problems/competence and lack of essential and required expertise in production, procurement, maintenance, marketing, and finances have led to funds misusage and misappropriation thus leading to wrong and costly decision-making.

Inadequate Basic Infrastructure: Various governments have not done enough to create the best conducive environment for striving SMEs, the problems of infrastructure range from shortage of water supply, inadequate transport systems, and lack of electricity to improper solid waste management. Pakistan’s underdeveloped physical and social infrastructures create a binding constraint to SMEs’ growth since they heavily rely on the inefficiently provided state infrastructure and cannot afford the cost of developing alternatives.

Poor Accounting System: The accounting system of most SMEs lacks standards hence, no proper assessment of their performances. This creates an opportunity for mismanagement and eventually leads to the downfall of a company. This also gives wrong signals to the banks and financial institutions and international investors thus they feel reluctant in funding SMEs.

Multiple taxations: Taxation in Pakistan is not simple and straight forward rather it is quite complex and is being paid at multiple levels. There are inconsistencies in the applicability of the tax laws besides the continuation of policies and tax laws is another big issue that puts a lot of pressure on SMEs.

Instability in government policies has also caused some SMEs to collapse. Political unrest has a cost that every business and individual pay in the end.

Therefore, banks should make special schemes for SMEs so that a lot of SMEs could avail of those financing schemes. Government should evaluate the SMEs and should provide the required guarantees to the banks against the loan on behalf of those SMEs’. Moreover, selective SMEs should be considered for public-private partnership ventures. This will help in generating interest from banks for financing such ventures. Partnering with the private sector in the provision of efficient public utilities (power supply, water supply, good transport/communication facilities, etc.) will help in ensuring an uninterrupted supply of these public utilities. Lastly; the Provision of tax incentives for SMEs should be given along with tax holidays. Government should abolish multiple taxation at various levels of SMEs.

SMEs contribute greatly to the growth of the economy by creating employment opportunities, training entrepreneurs, generating income, and providing a source of livelihood for the majority of low-income households in the country. Hence, the promotion of such enterprises can bring about the great distribution of income and wealth, economic self-dependence, entrepreneurial development, and a host of other positive economic uplifting factors, which Pakistan desperately needs at this moment.

Policymakers in Pakistan always try to do big projects the high capital cost and do not prefer spending time on SMEs. However, two main factors can make SMEs more favorable to innovate than large projects. Firstly, SMEs are flexible enough to make rapid adjustment in their business operations and planning in a short time span and secondly, this requires less financial resources for growth as the SMEs’ organizational structure are less complicated as compared to large firms making them more flexible and possess less bureaucratic regulations and red tapes in the decision-making process. Policymakers should consider that SMEs are one of the main sources of employment generation at low investment cost, development of entrepreneurial capabilities, and indigenous technology. They can also reduce the flow of people from rural to urban areas and can easily be established with minimal skill.

Resultantly, they can contribute substantially to the country’s gross domestic product, export earnings, and development of employment opportunities.

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