Impediments in development

To achieve higher growth of the small and medium enterprises (SMEs), including micro enterprises, various steps have been taken by the present government. Prime Minister Imran Khan has recently underscored the importance of this sector, promotion of which is declared among the priority areas. He directed, on September 6, to further activate the Small and Medium Enterprises Development Authority (SMEDA), to remove impediments in development of the SMEs, and to initiate inspection-less regime to facilitate advancement of these businesses.

Seemingly, the government has taken upon itself to formulate and implement a coherent and dynamic SME policy, to restructure institutional arrangements, and to undertake support programmes through the SMEDA, the SME Bank and the various commercial banks. Draft of the National SME Policy 2019, which was prepared sometime in May, is currently awaiting necessary improvements and subsequent approvals.

On October 17, the prime minister has launched the “Kaamyab Jawan Program” under which the young entrepreneurs will be provided business loans both for start-ups as well as existing businesses. There are two categories of these subsidised loans—one from Rs100,000 to Rs500,000 without any collateral, and the other from Rs500,000 to Rs5 million with collateral.

These salutary measures, if implemented earnestly, will provide lifeline to the furtherance of the currently stagnant SME sector. The SMEs on one hand help materialise the entrepreneurial efforts of the individual or a small group at a low capital cost, and on the other, help in achieving the overall economic activity throughout the system. Their contribution, especially in employment generation, development of rural areas and increasing national exports, has been of great value.

SMEs can help the government achieve its cherished goals of higher exports, expanding employment, and alleviating poverty. Given the high growth potential and diversity of the sector, the SMEs could generate over three million jobs every year, by merely employing a single person per year, besides encouraging the jobless to run their own small business.

The social and economic impact of this sector has been demonstrated and acknowledged strongly in various industrialised countries like Japan, China, Taiwan, Hong Kong, South Korea, Singapore and India. The SMEs essentially constitute the core of the private sector, and play an important role in the overall economic growth through the creation of backward and forward linkages among trade, industry and agricultural sector.

The total numbers of SMEs in Pakistan are estimated to be 3.8 million and constitute about 90 percent of all businesses. Out of these, there are about 500,000 units related to the manufacturing sector. The SMEs in this category, also known as ‘medium and small industries’ (MSI), are divided in subgroups of textiles, leather, wooden furniture, light engineering, construction material, gems and jewellery, footwear, rice and wheat milling, metallic and non-metallic products, and sports goods.

Textile and related industrial sub-sectors cover cotton-ginning, cotton-spinning, semi-finished and finished garments, bed-wear, bed-linen & table-linen, towel & terry products, curtain & furnishing, blanket, canvas and carpets. Light engineering includes manufacturing of bicycles, electric fans, home appliances, cutlery, surgical instruments, foundries, steel fabrication, automobile parts, agricultural implements and general workshops, whereas construction materials group covers ceramic, marble, granite and other mineral processing. The SMEs in leather industry include units for production of finished leather, leather garments, gloves and other goods.

Other SMEs are operating in the areas of food items like dairy, meat and poultry, bakery products, agriculture produces (such as vegetables, fruits and horticulture), fisheries, cold storage, pottery, tobacco and cigarettes, plastics, chemicals, paper and paperboard, information technology, hospitality and others. These enterprises provide 78-80 percent of industrial employment, contribute 40 percent to gross domestic product (GDP), and indirectly constitute 30 percent of the total export earnings, contributing 28 percent in manufacturing value-addition.

Individually, most of these SMEs are unable to respond to market demands, basically for not having exploited effectively the opportunities that require large production lines, homogeneous inputs and consistent quality standards. In fact, the growth and development of the SMEs is constrained by a number of factors such as: (a) low entrepreneurial, managerial and technical skills; (b) deficient finances, initial as well as working capital; (c) restricted marketing environments; (d) inadequate or improper quality control; (e) poor physical infrastructure; (f) lack of new product development; (g) inadequacies of material management, primarily due to imported materials and unreliable local supply sources, (h) slow digitalisation and going online, and (i) absence of planning, training and corporate strategies.

Today, total bank loans to the SMEs amount to over Rs513 billion, still equity and working capital requirements of the sector have not been met adequately, and the SMEs continue to face problem of access to finance. Because of these reasons, the SMEs have difficulties in attaining economies of scale and, resultantly, are unable to internalise special functions such as training, market intelligence, logistics and technological innovations. Nonetheless, environments are improving now as various industrialised countries and international donor agencies too are supporting the SME programmes, primarily through transfer of technology and provision of funds.

Karandaaz Pakistan, a UK-funded local company, has secured $23.7 million from abroad to invest in the sector during the current fiscal year. The United States Agency for International Development (USAID) has launched two programmes of extending SME Growth Grant and Innovation Grant offering grants from $20,000 to $200,000 to support the SMEs in order to enhance competitiveness, sales, access to market, and adoption of new technologies, and developing innovative solutions, respectively. These programmes at present cover the fields of information technology, hospitality, textiles, light engineering and agribusiness. Also, USAID’s SMEA Challenge Fund provides capital up to Rs7.5 million to the entrepreneurs.

Japan International Cooperation Agency (JICA) is presently providing technical support and scholarships for training for enhancing the skills and competitiveness of the SMEs. Likewise, the United Nations Industrial Development Organization (UNIDO) is helping to overcome the difficulties in supply of support services for the development of entrepreneurship and enhancing the efficiency, competitiveness and sustainability of the sector.

UNIDO has launched establishment of the Business Growth Centre with focus on enhancing ability, mobility and connectivity of women entrepreneurs. Another UNIDO programme aims at trade capacity-building and poverty reduction through productive activities. The Commission on Science and Technology for Sustainable Development in the South (COMSATS) supports promotion of new technologies and markets for the SMEs.

Implementation of the projects under the China-Pakistan Economic Corridor (CPEC) programme may further open opportunities of fast growth for the SMEs. On the other hand, the sector is likely to be threatened by the Chinese SMEs expected to be set up here as part of upstream and downstream industries for the CPEC projects including the Special Economic Zones (SEZs). Obviously, domestic SMEs will face strong competition as the Chinese are equipped with better resources, management skills and advanced technologies. Thus, there is an urgent need to enhance the SMEs networks, improve competitiveness, introduce innovations, and to provide access to international markets for sustainability of the sector.

The writer is retired chairman of the State Engineering Corporation