Can SMEs be a blessing in disguise for Pakistan?

Dr. Hassnain Javed

September 09, 2018




It is believed that economies with strong Small and Medium-sized businesses (SMEs), are progressive in nature and experience robust economic growth. Likewise, SMEs are also considered as the heroes of contemporary capitalism. Indeed, leading economists and political scientists are also of the opinion that the SME’s structure and network act as a blessing in disguise for the nation and act as one of the main drivers of economic growth and development. Having, this stance Pakistan policymakers need to reform the prevalent SME structure to maximise gains. According to the Small and Medium Enterprises Development Authority (SMEDA), currently SMEs consists of 90 percent of all enterprises in Pakistan.

Pakistan SME structure needs improvement and development in phases. In the first phase, it is required to expand SMEs in number and scale with the government encouragement, in terms of support for the development of enterprise townships, collective and self-employed enterprises. This will contribute to economic development and ultimately improve the people’s living standard. In the second phase, there should be emphasis on the reformation of state-owned SMEs and the development of non-public sectors. At this stage there should be restructuring, merger and acquisitions, joint partnership, leasing, contracting and sell off along with the rapid development of private owned SMEs. Then, in the third phase, there should be focus on the promulgation of SMEs promotion law which symbolises its development. Moreover, the implementation of SMEs promotion law should also focus on improving policies and measures concerning their development, the removal of institutional barriers that hinder its development, with a specific focus on privately-owned ones. Also, the creation of level playing field for SMEs promotion, supporting scientific and technological innovations and upgrading, maximum optimisation of the industrial structure and lastly, enhance the overall quality and its competitiveness.

In the initial phase, the growth will rise but it is projected to accelerate to full boom after the introduction of reforms. The two leading factors which can work most effectively are the rapid development of small and medium-sized township enterprises. The main benefit of establishing township enterprises is to provide solutions for the transfer of rural surplus labour force to non-agricultural sectors which will increase the farmer’s income and will further aid in establishing a solid foundation for the accomplishment of the strategy for gradual reforms and development. Secondly, Pakistan needs to focus on rapid growth of non-public sectors of the economy.

According to the Small and Medium Enterprises Development Authority (SMEDA), SMEs constitute nearly 90 percent of all enterprises in Pakistan, employing nearly 80 percent of the non-agricultural labour force and contributes to approximately 40 percent of the annual GDP. As such, they continue to generate thousands of jobs and new opportunities for the talented Pakistani youth. Based on the current statistics of Pakistan SMEs, the newly formed government need to make policies along with taking initiatives that can further strengthen the economy.

The Pakistani government needs to attach significant value to the development of the SMEs and its structure, which will ultimately result in integrating the issue of small business development and further the overall strategic planning for national economic, technological and social development. Therefore, it is suggested that the new government form legislation and policies, to further process them step by step.

In order to overcome the major difficulties SMEs are facing and the new updates by the World Trade Organization (WTO), the government is encouraged to launch a series of preferential taxation policies. Although these are not specifically for SMEs but they will be the ones benefiting from it the most. The income tax policies for small enterprises in Pakistan should be reduced so that more people can start their own ventures. Likewise, there should be taxation policies that aid in promoting employment. For instance, if a new urban job agency in its first operational year is able to find urban residents job placements for 50 percent of the unemployed workers in the area, then the agency should be eligible for business tax exemption. After three years when the exemption period expires, if the agency is able to find more jobs for unemployed workers that exceed 30 percent of its total jobs, then for two more years, the business should pay 50 percent of the business tax.

Moreover, there should be taxation policies for high-tech enterprises. The enterprises located in the state-level high tech industry development zones are duly recognized as high-tech enterprises by the authority. They should be exempted from enterprise income tax for the two years counting from the year they go into operations. Furthermore, there should be taxation policies for the service industries as well. For instance, new enterprises that engage with transportation, posts and telecommunications, consultation, information industry and technological industry should be exempted from one year of taxation, from the day they start their operations, and for subsequent years they should enjoy a 50 percent discount. In addition to this, preferential taxation policies should also be extended to universities, schools, welfare organisations that employ disabled people in underdeveloped areas recognized by the government.

In conclusion, every successful nation prioritises three primary resources that are material, financial and human. Pakistan is not abundant in all three, but its has comparative advantage over material and human resources and if they are properly utilised and exploited, they would be able to sustain the the drawback we face in the financial sector. The establishment and promotion of SME structure and its policies, is the key to resolving the major socio-economic issue in Pakistan.

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