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.