SMALL and medium enterprises (SMEs) play a pivotal role in most economies, particularly in developing countries. They constitute the majority of businesses worldwide, and significantly contribute to job-creation and global economic development.

Representing about 90 per cent of businesses and over 50pc of global employment, formal SMEs contribute up to 40pc of national income, measured in terms of gross domestic product (GDP), in emerging economies, a figure that rises even higher when considering informal SMEs.

The World Bank’s report on SMEs emphasises the urgency, estimating that by 2030, around 600 million jobs will be required to accommodate the expanding global population, underscoring the high priority of SME development for govern- ments worldwide, especially in emerging markets where seven out of 10 jobs are generated by SMEs. However, access to finance remains a critical constraint, ranking as the second most cited obstacle hindering SME growth in these markets and developing countries.

In the context of Pakistan, which has a population exceeding 230 million, promoting the SME sector becomes crucial amid the escalating challenges of poverty and unemployment.

According to the International Labour Organisation (ILO) estimates as of Sep- tember 2023, Pakistan’s employment-to-population ratio for the year fell significantly below its pre-crisis trend line at 47.6pc, with the number of unemployed persons projected to reach 5.6 million; an increase of 1.5 million since 2021. The current unemployment rate is estimated at 8.5pc, according to the International Monetary Fund (IMF), compared to 6.42pc in 2022 and 6.34pc in 2021.

The SME sector practically serves as the backbone of the national economy in Pakistan, with more than 5.2 million SMEs operating across the country in both formal and informal sectors, engaging in diverse activities from manufactu-ring and trade to services. Comprising about 90pc of exclusive private businesses, the sector provides employment to 30pc of the total workforce, contributing 40pc to the annual GDP. Despite playing a vital role in economic growth and poverty reduction, the SME sector faces numerous constraints that impede its optimal potential. These challenges include policy issues, with varying definitions of SMEs at the national level, creating regulatory hurdles with different institutions regulating and facilitating these enterprises.

Another significant challenge faced by SMEs in Pakistan is the complex and convoluted tax regime, creating a nightmare for entrepreneurs. Particular focus is needed on simplifying the tax system. Additionally, in spite of the State Bank of Pakistan (SBP) introducing various schemes and credit facilities for SME financing, the role of monetary policy is not supportive, as access to finance remains a barrier for the sustenance, expansion and modernisation of SMEs. The sector only receives 6-7pc of private sector financing, and a dedicated SME banking network is lacking.

Furthermore, manufacturing SMEs in Pakistan struggle with outdated technology for processing and production, coupled with a lack of adequate skill and training facilities for their workforce. Facilitation and incentives are needed for the modernisation of plant machinery, adoption of advanced technology, increased productivity, and training of manpower in marketing, management and international business practices.

Other challenges, such as high production and sales costs, add to the sector’s woes. The SME sector eagerly awaits effective solutions to address these constraints and challenges in the near future.

Hussain Ahmad Siddiqui
Islamabad

Published in Dawn, April 15th, 2024