Growth stunts

LAHORE: State’s inability to facilitate Small and Medium Enterprises (SMEs) has kept the meaningful growth a dream. The government does come up with several sector-specific growth strategies but none exclusively focuses on SMEs.

The SMEs play a key role in reshaping national growth strategies, employment generation and social cohesion by improving the standard of living of the most vulnerable of the society. In Pakistan, around 99 percent of economic establishments according to the Small and Medium Enterprises Development Authority (SMEDA) are SMEs that collectively contribute 40 percent to GDP and 26 percent to the exports from the manufacturing sector. Those contributing to exports in fact are mostly medium-sized enterprises that hardly account for one percent of the total SMEs operating in the country.

There is either something wrong with SMEDA, established over two decades back as the sole authority to streamline the SMEs operating in the country, or the government does not take the authority seriously and fails implement its recommendations. The authority in fact sends its budget proposals every year that rarely get the attention of the planners.

It is universally established the SMEs contribute to development in multiple ways; creating employment for an expanding labour force, providing much needed flexibility and innovation in the economy and contributing to value addition in GDP.

Access to finance, state of the art infrastructure technology, and skill upgrade and limited integration in global value chain are some issues faced by the industrial sector in Pakistan particularly the SMEs. Services sector contributes around 58 percent to GDP. Around 52.96 percent of total SMEs operate in wholesale & retail trade and Restaurants & hotels. There is a dire need to pay attention towards improving advanced technical skills and education of workers to cope with global requirements and more absorption of labour in sophisticated industries, financial, trade, transport and communication services.

Factors that keep SMEs in Dairy & Livestock, fisheries, fruits and vegetables, and forestry to scale up include, lack of credit, technological upgradation, implementation of biotechnology and food standards, use of pesticides and state of the art infrastructure.

The SMEs hold great potential to change the economic landscape of the country. Unfortunately, these SMEs suffer from a variety of weaknesses, which have constrained their ability to take full advantage of the rapidly changing global business environment. Trading across borders, getting electricity, paying taxes and contract enforcement are the most problematic factors influencing the business environment of the country. The SMEs have few resources and cannot afford to cross these hurdles that mostly require graft and influence.

Building upon Pakistan’s natural endowments, has somehow remained a challenge. Despite having a coastal line of 1,120 kilometre and favourable conditions for shrimp farming, our exports of fish products are dismal. This is mostly due to use of banned nets, poor compliance to SPS & HACCAP, absence of adequate fishing boats and poor facilities at fish harbour. A potential opportunity for capitalizing on the potential of the fisheries sector is lost.

Similarly, shifting to mechanisation from hand-stitched footballs and use of composite material in sports goods has stopped growth of sports goods. Sectors like carpets, footwear, furniture, marble, handicrafts etc. are not too encouraging. The high-priority SME sectors that can enhance Pakistan’s exports through interventions across the value chain include logistics, ICT and Allied Services, gems and jewellery, horticulture, construction, fisheries, energy, dairy and livestock, engineering, leather, and tourism.

Official statistics reveal that 91.3 percent of SMEs operate as sole proprietorships and are not registered, and therefore it is difficult to monitor their performance and devise policies for their long-term uplift. This also makes the estimated yearly growth rates of SMEs doubtful as these estimates are based on guesswork. Almost 94.5 percent of the economic establishments have an employment size of 1-5. Most of these SMEs operate on subsistence businesses unable to scale up.

Given the self-limiting constraints of the informal sector, one can easily fathom why our industrial sector has lagged behind compared to other developing countries over the years.

Encouraging documentation through voluntary/incentivised schemes needs to be considered seriously by the policymakers, so as to encourage graduation from informal to formal.

Most of the small enterprises remain at the rudimentary stage of development and thus fail to graduate as medium enterprises due to low productivity and competitiveness. Among other constraints, informality of the SME sector limits its growth and development; as most Pakistani firms operate on the fringes of the corporate sector. Among the many challenges that SMEs face, integrating into global supply chains, and achieving competitiveness requires gearing up and continuously introducing and implementing changes in controls, systems and procedures.