Small is beautiful: revitalizing the SME sector of Pakistan

Dr. Hassnain Javed

January 25, 2019



In many countries around the globe, and in particular the developing economies like Pakistan, the governments are facing low growth in foreign investment, trade deficits and unemployment. With the increase in economic disparity, citizens are in a state of dissatisfaction with the current affairs of the state. Most importantly, there is a lack in the extent of globalisation and technology as compared to developed nations. Against this backdrop, the digital transformation and restructuring of industries in Pakistan is essential for promoting economic growth and providing a more inclusive globalisation. One such opportunity lies in developing the cottage industry or Small Medium and Enterprises (SMEs), in Pakistan.

Many industries ( like the cotton weaving, textiles, surgical instruments, carpets, leatherwear industries etc) rely on SMEs for the generation of new ideas or value addition in the current product lines. Pro-poor governments in the growing economies have introduced subcontracting policies to integrate the industries along their size and scope. One such example is of the automobile industry that has integrated almost 60-70 percent of its component part supply from SMEs. This is perhaps one of the best examples of efficient collaboration of large corporations with SMEs. Forward integration, with showrooms and repair shops are further examples of how large firms can cover the vast geography of the countries by the extensive network of small enterprises. Likewise, Pakistan can develop its own petrochemicals and mineral industries by collaborating to ensure that the benefits are not only reaped by Punjab or Sindh but also to underdeveloped regions of Balochistan and Khyber pakhtunkhwa. Such a move would provide inclusive growth opportunities, through interdependencies of the region.

The growth of cottage industries is imperative for the sustainable growth and development of the economy of Pakistan. Firstly, the cottage industry boosts economy by creating jobs in the market. Generally small firms are more labor intensive than larger firms that rely more on automation for reaching economies of scale. According to Pakistan Poverty Reduction Strategy Paper, SMEs have a huge potential for the alleviation of poverty in Pakistan after agriculture and construction of housing schemes. Secondly, SMEs have the potential for participating and creating previously unsought benefits of a globalised and digital economy. As inferred from the success stories around the globe major breakthroughs in technology are mostly brought about by innovative ideas put forward by SMEs. For instance, in China Small-medium sized enterprises (SMEs) contribute 60 percent of China’s industrial output and create 80 percent of its jobs. Breaking down the statistics, China’s Bureau of Statistics (CBS)’s 2013 report, revealed that approximately 97.9 percent of all registered companies are SMEs, that contributes to 53.4 percent of all assets in China and 62 percent of all it profits, building this amount to a whopping 4.26 billion Yuan. Moreover, the economic surveys show that SMEs also contribute to nearly 58 percent of the GDP and 68 percent of exports. According to the listing of SMEs in the National Equities Exchange and Quotations (NEEQ) system net profits have increased from about 26.29 percent in 2016. Additionally, their annual reports presented an increase over 25 percent of the annual business revenue.

Despite of the discovery of the scope of SMEs in Pakistan, the sector faces many constraints hindering its growth to the full extent. Some of these impediments include lack of skilled labor, energy crisis, poor marketing and management especially regarding exports and most importantly lack of financial capital. According to the World Business Environment survey conducted on a sample from 54 countries and 4000 SMEs, one of the major problems cited by the businesses was the lack of capital. Due to the small size of these businesses, the management lack economies of scope and therefore an information asymmetry which consequently increases the search and processing costs. Moreover, in some situations these costs may often exceed profitability of the business thus further creating panic in the investor’s mind. Mostly, banks also avoid extending small venture firms to avoid the risk of default hence further increasing the costs of credit searching for SMEs. The inability of these firms to provide a collateral renders the banks unable to identify the earning potential of the SME.

Recently, SMEs have also been seen contributing rapidly towards a green economy because small firms transition more quickly to more sustainable patterns of production and consumption. Following the examples of the Malaysia around 98.5 percent of business establishments in Malaysia are all SMEs. This totals to an amount of 907,065 establishments of SMEs in Malaysia which contributed to 36.6 percent of Malaysia’s GDP in 2016. In terms of geographical locations, Malaysia has set up most of its cottage industries of apparel and textiles, along the previously underdeveloped West Coast in Johor, due to the availability of cheap lodgings. Similarly in the case of China Pakistan Economic Corridor, the initiative intends to develop the west of China’s for an inclusive economic development of the country. These trends from developed economies may serve as blueprints for expanding Gwadar as a hub for sustainable growth of the often overlooked treasure that is Balochistan.

Once the scope of the cottage industry in Pakistan is realised the next challenge for the government lies in the need to fill the gap in the demand and supply of skilled labor in Pakistan. This can only be achieved through relevant industry experience to the new working class by providing them with internship opportunities and apprenticeship programs. Moreover, educational institutions and polytechnics should be advised to implement a revised curriculum which is relevant to business today and hire professionals from the industry.

Conclusively, Pakistan is recovering from a growth which was fueled by short term debt and declining investments. The economy is in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy. Unemployment and poverty challenges to Pakistan are major setbacks for its vision of development in future. Especially the situation in Balochistan has always been of political and economic exclusivity with post-9/11 issues in Afghanistan. With the beginning of 2019, Pakistan would be entering into the the second phase of China Pakistan Economic Corridor which promises the start of an era of development for the province. However, in Balochistan doubts have started to ebb, with a cautious optimism. The government should focus on trade policies and industry development moving on from infrastructure that is inclusive of all the provinces in Pakistan. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, but in order to truly tap the undiscovered potential of the people of Pakistan, promotion of SMEs would be integral. A well-targeted government action plan should be set in motion provided such interventions do not intervene with the private sector.

Can policy reforms help in development of Pakistan’s SMEs?

Dr. Hassnain Javed

September 18, 2018




As discussed in my previous article, I believe that development of the Small and Medium Enterprises (SMEs) are the solution to many problems that the country is undergoing. There are many hopes attached to the newly formed government in regard to new opportunities, development, financial ease, ease of doing business and most importantly less corrupt society. But, it is important to mention all of this cannot be done overnight it requires tireless efforts, policies, reforms, their rightful implementations and yes patience to get the desired outcomes.

Fiscal and financial credit policies are always the cynosure of not only the regulatory authorities but also other stakeholders involved. Pakistan ranks among the world’s sixth largest population and is globally ranked at number nine in regard to its labourforce. It is best to exploit this potential for nation development. In my opinion the Ministry of Finance (MoF) of Pakistan should increase the inflow of fiscal funds into SMEs and also establish funds for the targeted beneficiaries. These funds will play a major role in the development of our economy. There should be an Innovation Fund for Technology based SMEs to promote and support technological innovations.

The methodology adopted by our neighbouring countries like India and China, should be fllowed. Likewise, Pakistan is an agro based economy, the MoF should also focus and allocate funds for Agricultural Research Findings which will boost commercialization, and exchange, transfers and partnerships of sophisticated and practical technologies in high-tech agricultural enterprises.
The MoF has also established the Fund for International Market Exploitation for SMEs to encourage them to participate in global competition, explore international markets and expand exports. Since 2003, the MoF has increased its budgets in some special funds to support SMEs in their establishment of service system, business specialisation and cooperation with large enterprises. Motivated by the central government, some local governments actively adopt measures to allocate special funds to promote the development of SMEs, by supporting the establishment of a national credit guarantee system, subsidies, interest payment for technology updates, and international market exploitation.

It is important to improve ?nancial services, adjust credit structure and enhance the support given to SMEs. Since 1998, the People’s Bank of China (PBC) has issued series of documents, such as ‘Opinions on further improving ?nancial services for small and medium-sized enterprises’,’Guidance on improving ?nancial services for small and medium-sized enterprises’, ‘Guidance on enhancing credit supports for SMEs with marketability, ef?ciency and credibility’. All these documents have initiated a series of policies and measures to improve ?nancial services, adjust credit structure and provide diversified financial products, thus improving the business environment for SMEs. Moreover, speeding up the development of the SME credit guarantee system and improving its financing environment.

In 1999, the former State Economic and Trade Commission (SETC) issued the ‘Guidance on pilot construction of the SME credit guarantee system’, which called for establishing a system to provide credit guarantee services to SMEs for indirect ?nancing. Credit guarantees have become an effective instrument to tackle the financing difficulties faced by SMEs. In 2001, the MoF issued the ‘Provisional rules on risk management of credit guarantee institutions for SMEs’, which speci?ed the organisation, business coverage, operational principles, premiums, provisions and deposits of the guarantee institutions. This document has promoted active and stable supplies of credit guarantee services. In 2001, the State Administration of Taxation (SAT) issued the ‘Circular on exempting SME credit guarantee institutions and reinsurance institutions from business tax’, which grants a three-year tax exemption to non-pro?t experimenting institutions nationwide that provide credit guarantee and reinsurance to SMEs. Furthermore, in 2004, the National Development and Reform Commission (NDRC) and SAT jointly issued the ‘Circular on issues relating to business tax exemption for SME credit guarantee institutions’, which extends preferential treatment to more bene?ciaries and is expected to stimulate the development guarantee institutions.

In order to promote a healthy development of SMEs, the General Office of the State Council issued the ‘Circular on transmitting and issuing the opinion of the state economic and trade commission on several policies of encouraging and promoting the development of SMEs’, in August 2000. As the first consolidated document about SME promotion, the opinion puts forward 25 policies and measures with focus on eight issues, such as propelling structural adjustment, encouraging technology innovation, enhancing fiscal and taxation support, broadening channels of financing, expediting the construction of credit guarantee system, improving socialised service systems, creating an external environment for fair competition, and strengthening organisation and guidance. These policies and measures have improved the regulatory environment and accelerated the legislation process for SMEs. In 1999, the former SETC issued the ‘Opinion on strengthening trainings for SME managers’ to elevate the quali?cations of proprietors and managerial staff in SMEs. Moreover, in 2000, the former SETC promulgated the ‘Opinion on several issues concerning the development of socialised service system for SMEs’, in order to mobilise every quarter of the society to offer services. In 2001, ten state ministries and commissions including the former SETC jointly issued the ‘Opinions on enhancing credit management of SMEs’, to encourage SMEs to pay higher attention to their credibility and enhance their credit status, and to promote the construction of a credit system.

Also in 2001, the former SETC and the General Administration of Quality Supervision, Inspection and Quarantine jointly issued the ‘Opinions on enhancing SME quality supervision’ to build up quality of products and strengthen quality management of SMEs.

Neither private nor state-owned SMEs can develop without government support. SMEs are often in an unfavourable position in market competition, have difficulties in competing with large enterprises and remain vulnerable to market risks, which result from their nature of business, i.e. small size and weak capacity. Taking into account both the nature and important role of SMEs in the economic and social development, we should transform its functions in line with the requirements of the market economy and improvethe way we support SMEs.

Evidence has proven that the vitality and competitiveness of SMEs and the comprehensive and coordinative social and economic development can be enhanced, only if the government adopts appropriate economic policies. Keeping in mind that the policies are in line with the nature of SMEs, properly handle its relations with enterprises, exercise macro controls of appropriate intensity and timing, and create a more fair, open and enabling external environment for enterprises of varied ownership.

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.