Many small to medium enterprises in the manufacturing sector may be facing a serious threat of closures, layoffs and sizeable production cuts because of a steep rise in their cost of doing business and a substantial reduction in their sales.

“The survival of the SMEs, especially small manufacturers, struggling in an unfavourable regulatory and business environment, has become more difficult due to the sharp rise in their cost of doing business,” says Hashim Raza, a Lahore-based business consultant who has done extensive work on the Small and Medium Enterprises (SMEs) in recent years.

The government agencies estimate that SMEs constitute around 90 per cent of 3.2 million private enterprises in the industrial, services and trade sectors, and employ around 78 per cent of non-agriculture labour force. The SMEs also contribute over 30 per cent to the GDP and 25 per cent to the total export earnings. Their share in the manufacturing value addition is estimated at 35 per cent.

Pakistan Leather Garments Manufacturers and Exporters Association chairman and Sialkot-based businessman Hasan Bhatti told Dawn that the production cost of the SMEs in the manufacturing sector had gone up by 30 to 35 per cent due to rising fuel prices, skyrocketing inflation, etc.

”We are no longer in position to survive. Most small to medium sized units are already in poor health,” he said.

“It is ridiculous to expect the small and medium enterprises to absorb the recent sharp jump in the fuel prices, input costs and minimum wages when even large corporate sector is finding it difficult to adjust itself with the soaring costs of doing business,” Hashim said.

“The escalation in the production cost of small and medium businesses means that their margins would squeeze further. You can’t immediately pass on the increase in the inputs, fuel and energy costs to your buyers - whether industrial, commercial or individual consumer. Thus the possibility of industrial closures, or at least layoffs, cannot be ruled out if the current trend of increase in the prices continues,” he said.

The hiking cost of production is not the only problem facing the small and medium enterprises. Their sales, especially of those supplying to the domestic large industry, are also declining in proportion to the decrease in the sales of their customers.

“The sales of auto parts have dropped by 30 per cent - in proportion to reduction in the car sales. Our margins are also going down,” said Almas Haider, a Lahore-based auto vendor.

Hashim said the large industry often squeezes its suppliers by pressing it to reduce its prices, or at least refrain from passing on the increase in their input prices.

“The large industry may raise its prices but rarely transfers the benefit to its suppliers. That means the SMEs get squeezed from both the sides.” Hasan said foreign buyers too were not prepared to take the hit.

”If we insist that they should compensate us for the increased manufacturing costs, the foreign buyers would switch to India and China - our main competitors - who can still offer better prices. If we raise our prices we will not be able to compete with our rivals in the international market,” he said.

He said this was the time when the government must step forward and help the SMEs.

”We, the leather garments sector, were already battered by the high inflation, energy crunch, political instability and expensive banking credit. The exorbitant hike in fuel and energy prices would prove the proverbial nail in our coffin unless the government decides to help us reduce the burden of rising input and energy costs,” Hasan maintained.

“At a time when we need and are actually looking for an affectionate treatment from the government for resolving problems facing us on account of energy shortages and double-digit inflation, it has decided to transfer to us all the burden of oil price escalation and also raised gas and power tariffs,” said Amir Riaz Bhinder, manufacturer and exporter of surgical instruments.

”Our units are closing down under the burden of fuel and energy prices and power cuts,” he said.

”If the government doesn’t help us now to share our cost burden, we will be forced to shut down our manufacturing operations and go home sooner than later.”

Almas said the actual impact of hiking input costs, inflation, energy crunch, and fuel prices on the small to medium manufactures would become visible over a longer period of time rather than in the immediate future as many would have us believe.

”Most small and medium businesses will not crumble very soon. They would continue to operate at break-even levels or even at a loss to survive through the tough times. But if the difficult times persist for a longer period, you’d find a number of them going out of business,” Almas warned.

The small and medium sized manufacturers are feeling greater pain due fuel price escalation because they were already facing multiple problems for far too long.

The SMEs are struggling with issues like lack of access to banking finance and modern technology, over-regulation, unfriendly tax regime, poor quality production, absence of infrastructur, untrained or inadequately trained human resource, unavailability of raw materials locally, lack of marketing skills and information, etc, which hampering their progess as vibrant and competitive sector by breeding inefficiencies and lower productivity, and raising their production costs.

In addition, the owners are still reluctant to hire professionals to run the business to cut costs and to maintain their full control over the enterprise. Little wonder then that the SMEs remain one of the most vulnerable sector of the economy.

Some 90 per cent SMEs are very small in terms of investment and workforce both and most remain outside the documented economy. These factors are mainly responsible for most problems facing the SMEs.

The absence of a favourable and friendly regulatory and fiscal regime and conducive business environment is the main obstacle in the way of development of the small sector, which, being much more labour intensive than large industry, is considered to be a major employer around the world.

None of the existing industrial and fiscal prioritise the small sector or respond to its specific requirements. In spite of ‘strong commitment to the develoment of the SME sector’ expressed by successive governments and formation of the Small and Medium Enterprise Develoment Authority (Smeda) for this purpose 10 years ago, little has changed for the small sector.

Even the formulation of the SME policy to “support the smaller and medium enterprises in the manufacturing, services, and trade sectors by removing all irritants and snags holding back their growth into a vibrant and globally competitive sector of the economy” has created little difference to their conditions because of slow movement on implementation of its recommendations. The SMEs continue to function without access to credit in a highly regulated business environment as ever.

In fact, the diminished role of the provincial small industries corporations whose financial supprt had encouraged proliferation of small industries in various sectors over 30 years ago has deprived them of the only source of cheaper, subsidised credit.

”The SMEs remain inefficient and underdeveloped because our policy makers don’t understand them and their needs,” said Almas.

He said the government should evolve some effective mechanism and dedicate funds to allow SMEs access to finance, improve technology, train human resource, provide modern infrastructure with all facilities and create backward and forward linkages with large industry and super markets in and out of the country.

Moreover, he said, the domestic capital goods industry on the pattern of India and China needed to be encouraged to make machinery available at low price. Hashim said the major factor behind official neglect of the SME sector was its inability and weakness to lobby with the government agencies for resolution of their longstanding issues.

”Unlike the large sector they are not organised enough to influence government policies and decision making processes. Therefore, we see very slow or no movement at all on the resolution of our issues,” argued Hashim.

A former Smeda official who asked not to be named, warned that the inability of the SMEs to cope with the global rise in energy prices evidently showed that time was running out for the small sector unless the government helped it overcome its deficiencies and inefficiencies and improve productivity.