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Industrialization through SMEs – must do for economic comeback

Pakistan is facing numerous challenges, which is not new for this country. The economic situation in Pakistan today is indeed worrying, even last Economic Survey of Pakistan also painted a dismal picture of the domestic economy. Almost all financial indicators have seen a downward trend. The growth rate fell by more than 50 percent from almost 6 percent to less than 3 percent. It is expected to go down even further to 2.4 percent next year, which will be the country’s lowest in the past 10 years. The Pakistani rupee has lost a fifth of its value against the dollar since the beginning of this fiscal year. State Bank of Pakistan (SBP) is continuously projecting high inflation in next two years and thereafter it is expecting drop in inflation. Then there is a mega issue of the ever-increasing debt, which eats up more than 30 percent of government’s resource every year. Once again, Pakistan has approached International Monetary Fund (IMF) for a bailout package. The recent IMF package is getting mixed views in Pakistan and so far government is struggling to make a balance between IMF restrictions and the expectations of business community.

Industrial production in Pakistan decreased 3.25 percent in July of 2019 over the same month in the previous year. Industrial production in Pakistan averaged 5.01 percent from 1990 until 2019, reaching an all time high of 35.15 percent in April of 1991 and a record low of -21.82 percent in April of 2000.

In current economic environment, large scale investment on big or mega projects seem difficult therefore, government should focus on Small and Medium-sized Enterprises (SMEs). The SME share in manufacturing value added can be much higher and can go up to 70 percent of totaling value-added generated by the manufacturing industries sector. Further as important sources of new business creation and developing new entrepreneurial talents, these industries can provide the much needed dynamism and vitality to the national economy.

There are some people who are favorite of media and we find them on every channel since 2011. They are continuously raising concerns on debt taken by the last two governments. The biggest concern is where state had spent all the taken debt, which projects had been developed by that money and why Pakistan is under debt of around US$100 billion. I wouldn’t say there is no corruption in the country but the debt taken by the state of Pakistan was from multilaterals, various governments and large local and international financial institutions. A committee has been formed to scrutinize the details of debt taken in last ten years and where that had been spent. It would be interesting to see the details and report of this committee. But the matter of fact is that corruption is never documented and is done differently, that’s why white collar crimes are always investigated by the specialized firms but in Pakistan audit firms are asked to verify the books of accounts. That is why most of times audit firms only identify procedural lapses, highlight insufficient supporting documents, and missing of signature from the vouchers or invoices.

Anyhow, Pakistan’s biggest problems are low sources of revenues and high non-development expenditures. Low tax collection, where Pakistan’s tax to GDP ratio is lowest in the world, is making it difficult for the government to generate enough funds to fund its development schemes. Various governments tried their best to improve tax collection and we also saw improvements as well but that is not sufficient.

In this situation, the only solution is to industrialize the country, and making made in Pakistan a national policy. Now the big question is how? It is difficult but it is not impossible. Government should incentivize Small and Medium-sized Enterprises (SMEs) and should make policies to facilitate the investors. SMEs can be the backbone of the national economy of Pakistan. This sector can play an important role in developing the economy of our country. The role of SMEs sector would be immense to alleviate the poverty from the country as well. It is said that small and medium enterprises are particularly suitable for populated countries like Pakistan where SME sector can provide huge employment opportunity with much lower investment. They are expected to create jobs, reduce poverty, and drive a resilient national economy. SMEs in Pakistan can account for more than 80 percent private sector industrial establishments and can create job opportunities for 70–80 percent of the nonagricultural labor force.

 

In almost every part of the world, limited access to finance is considered a key constraint to private sector growth. This is especially true for SMEs of our country as they are facing different types of problems for availing institutional finance though SMEs can play dominantly important role in the national economy of Pakistan by making up over 90 percent of industrial enterprises, providing employment to 4 out of 5 industrial workers and contributing to over one-third of industrial value-added to gross domestic product (GDP).

Most of the SMEs in Pakistan do not have access to formal source of finance. Less than 30 percent of SMEs enjoy unrestricted access to the formal credit. The rest of them have restricted access to the formal credit. Bank credit is used by small percentage of entrepreneurs and provides financing of generally less than 20 percent of their total outlay. Majority of the SMEs seek finance for their working capital needs from banks, although only a half-of them get loan from banks. Due to lack of national quality policy and adequate support system, and also due to the lack of credibility of the quality certification authority, SMEs of Pakistan have failed to ensure the quality of products and services both in domestic and international markets. Access to finance possess as one of the most important problems for the SMEs in Pakistan.

Banks usually do not express interest towards SME financing. The reason behind this conservativeness is higher operational cost, less return and high risk associated with the SME financing. Due to small loan size the operational cost is higher and they require intensive monitoring and supervision. The main reason for higher risk is that the small and medium entrepreneurs are highly unlikely to comply with the collateral requirements as typically they do not have immovable properties. With the excuse of collateral sometimes banks and non-bank financial institutions are reluctant to finance SMEs.

The key reasons behind the SMEs are not entering into manufacturing but are financial constrains, dismal state of utilities, technology and policy discriminations. On the other hand, banks and others financial institutions generally prefer large enterprise clients because of lower transition costs, and greater availability of collateral. The SMEs also fall outside the reach of micro finance schemes, and thus are compelled to depend on formal sources of funds at much higher interest rates.

Other interrelated problems like shortage of short and long term finance, lack of modern technology and lack of promotional support services are major obstacles in the way of development of the SMEs sector. Higher growth of the small and medium enterprises can help cut poverty to a satisfactory level by eliminating various prejudices against labor intensive and creating jobs for the skilled manpower in the SME sector.

In developing economy like Pakistan, SMEs can play a significant role in the development of the economy by creating employment opportunities and producing useful machine substitutes and machinery parts saving huge amount of foreign currency for our country. Lack of investment or operating funds remains as one of the most prominent complains of the SMEs in Pakistan.

SMEs suffer from common constraints such as lack of capital, difficulties in procuring raw materials, lack of access to relevant business information, low technological capabilities, problems caused by cumbersome and costly bureaucratic procedures, and policies and regulations that generate market distortions. However, with proper domestic policy support from the government, and an eye towards global market trends, SMEs can build capacity and reap the rewards of globalization. This sector can help Pakistan industrialize the country. Government should start working on establishing special funds for SMEs and identify areas where SMEs can help reducing the imports.

The writer is a consultant and can be contacted on twitter (@aroojasghar)

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