SMALL & MEDIUM ENTERPRISES
S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
June 18 - 24, 2012
As globalization proceeds, developing and transition countries and their enterprises face major challenges of strengthening their human and institutional capacities to take advantages of trade and investment opportunities. While governments make policies in trade and investment areas, it is enterprises that trade and invest. Therefore, supply side bottlenecks in the trade and investment areas and how governments, development partners, and the private sector address these constraints have direct implications on the economic growth potential of developing and transition countries.
LOANS TO PRIVATE SECTOR BUSINESSES JUL-DEC
(RS IN BILLION)
SECTOR FY11 FY12 Business Sector Advance 190.2 86.1 Working Capital 131.3 99.5 Seasonal Financing 73.0 1.0 Rice 21.9 12.1 Sugar -15.9 -40.2 Cotton 67.0 27.3 Fixed Investment 8.1 -8.5 Trade Financing 50.8 -5.1 Consumer Financing -17.4 -7.9
Small and medium enterprises (SMEs) play a key role in developing and transition countries. These firms typically account for more than 90 per cent of all firms outside the agricultural sector, constitute a major source of employment, and generate significant domestic and export earnings. As such, SME development emerges as a key instrument in poverty reduction efforts.
Globalization and trade liberalization have ushered in new opportunities as well as challenges for SMEs. Presently, only a small part of the SME sector is able to identify and exploit these opportunities and deal with the challenges. The majority of SMEs in developing and transition countries, however, have been less able or unable to exploit the benefits of globalization and are frequently under pressure on the local or domestic markets from cheaper imports and foreign competition.
A major objective of work to promote the development of SME sector is therefore to change the balance between these two groups of SMEs and to equip SMEs to better meet the challenges of globalization and benefit from its opportunities.
SMEs, due to their size, are particularly constrained by noncompetitive real exchange rates, limited access to finance, cumbersome bureaucratic procedures in setting up, operating and growing a business, poor state of infrastructure, and lack of effective institutional structures. The removal of these constraints is a daunting task calling for holistic SME support, i.e. an enabling environment for SME development consisting of functioning macro and micro level institutions.
SMEs are the backbone of Pakistan's economy contributing significantly towards GDP, employment generation, and export development. The SMEs face numerous problems including lack of access to finance, which affects the overall productivity of the sector thus making them uncompetitive across the global value chain.
In the country, nearly 99 per cent of economic establishments are SMEs, absorbing 80 per cent of unskilled labor. These SMEs are collectively providing undeniable support to economic growth by contributing 40 per cent to GDP and 30 per cent to the exports from the manufacturing sector.
To further boost its significance in the economic development process, the government has introduced various initiatives to promote SME-led economic growth with the dual aim to accelerate industrial development and export diversification. Most important of these initiatives include approval of the first SME Policy of Pakistan and Infrastructural Development through public sector development program. In addition to these, small and medium enterprise development authority (Smeda) as a government agency for SME development has been involved in various activities such as providing over the counter services to SMEs, helpdesk facilitation, human resource development, technological up gradation and infrastructural support.
Parallel to infrastructural support, SMEDA, in collaboration with international agencies like Japan International Cooperation Agency (JICA), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), Senior Experts Services (SES, Germany), Asian Productivity Organization (APO), and local experts, is providing technical assistance to SMEs in the relevant industrial units to upgrade their skills and improve systems.
During July-March 2011-12, 27 industrial units have been the direct beneficiaries of this programme whereas 16 technical training workshops, seminars and awareness sessions were conducted. Major sectors facilitated under the industry support programme are textiles (spinning, weaving processing, garments, sportswear and apparel), auto parts, electric fans sector and furniture sector across the country.
The state bank of Pakistan (SBP) has stressed on the banks to give top most priority to SMEs with a view to ensure uninterrupted flow of financial access to SME sector. The role of banks, especially of mid-tier banks, is crucial to ensure unhindered flow of financial resources to the SME sector. SBP advised banks to study international examples of successful SME banking models, which include retail-based model for mass SME, relationship-based banking, advisory-based lending services, segment-based model, and supply-chain linked model.
SME sector in Pakistan remains largely financially excluded. The current level of financing facilities to this sector stand at Rs253 billion, constituting only seven per cent of the banks' total advances.
Furthermore, the recent SME business development conference 2012 passed a resolution urging the government to give peaceful environment, provide affordable funds, and facilitate SMEs to help them modernize and compete in the fast changing world. First and foremost, the government needs to resolve energy crisis and address poor law and order situation.