SME sector in Pakistan - A perspective

Updated: Jul 16

Small & Medium Enterprises contribute to over 55% of GDP and over 65% of total employment in high-income countries. SME 's and informal enterprises, account for over 60% of GDP and over 70% of total employment in low-income countries, while they contribute over 95% of total employment and about 70% of GDP in middle-income countries. Small and medium-sized enterprises (SMEs) are supporting and autonomous firms which employ less than 250 number of workers in Pakistan or having paid-up capital up to Rs.25 million & sales up to Rs.250 million per annum. Moreover, SME segment is the foundation of Pakistan's economy as far as its commitment towards GDP growth is concerned in addition to the large scale industrial growth. SMEs constitute about 90% of the considerable number of ventures in Pakistan; utilize 80% of the non-rural work constrain; and their contribution in the yearly GDP is upto 40%, roughly it has proportion of 30% in Pakistan's all exports. SMEs are spread in all areas of Pakistan with a noteworthy fixation in Punjab (65.4%). The contribution of Sindh and Khyber-Pakhtunkhwa are 18% and 14.3%, separately. Baluchistan has the smallest percentage of Pakistan SMEs representing 2.3% of the total.


Despite the significant contribution of SMEs to the economic growth of Pakistan, according to a survey more than 90% young people in the biggest city i.e. Karachi, believe they do not have enough economic opportunities for their professional growth. The studies reveal that, SMEs not only impacts GDP but it also helps to enhance the livelihood of people of the country by creating more economic opportunities. According to a survey almost 30 percent of Pakistan’s exports come through SME sector. Nearly 3.2 million people are employed in SME sector. Thus it’s a major employment generation sector in Pakistan. Compared to Pakistan the SME sector in India produces 40 percent of its GDP whereas in china the number stands at 60 percent.


Government of Pakistan needs to introduce more entrepreneurship friendly policies to encourage the growth of small business. Pakistan lags behind in the list of top 100 countries in the ease of doing business index. This clearly reflects that it is not easy to start a new business venture in Pakistan.

The territories of imperatives are typically distinguished as work, taxation, trade capacity, finance and credit availability. Pakistan is facing continuous decline in the yearly ranking of ease of doing business.



Since 2011, when Pakistan was ranked 96 out of 183 affected by various factor and now in 2017 ranked on 144 out of 190 countries of the world. Pakistan had fall of 48 ranks in ranking. It is become more difficult to start business in Pakistan as the years passed. People were more likely

to feel ease to start business in Pakistan in 2011 but now they are feeling Pakistan is not suitable country for investment. Only 9.3% young people are engaged in running their own business in the Karachi that is megacity of Pakistan. Study reveals lack of proper education about running business and lack economic opportunities are the most significant causes for low growth of young entrepreneurs in Pakistan. People in Pakistan are more likely to invest on Education as believe getting the education is only way to The issues hampering the growth of SMEs include regulations, taxation, trade capacity, finance and credit availability. According to latest international business survey reports Pakistan lags far behind neighboring countries like china, India and Iran. Investors from the world are therefore much likely to invest in these countries as compared to Pakistan. Governments over the period have used SMEDA (Small & Medium Enterprise Development Authority) as the regulatory body to support and develop SME sector in Pakistan. However the interventions by SMEDA have created limited impact in the growth of SME sector efforts due to the following reasons.


LIMITATIONS OF SMEDA TO IMPACT GROWTH OF BUSINESS:


· SMEDA was designed originally to focus only on SME Sector and support businesses involved in the SME sector however it wasn’t involved to develop a framework for SMEs which limited the mushroom growth of the sector.

· SMEDA whereas mandated to focus on small and medium sector development could not channelize its focus on the growth of SME sector only. Moreover it was originally mandated to only facilitate the establishment and growth of business sector rather than execute projects to lead and catalyze SME Sector growth.

· Growth of business can only be established through development and implementation of a sustainable economic policy and putting in place a coherent mechanism to establish and regulate industries. The impact therefore of any single department to catalyze economic growth will be limited in the absence of a long term sustainable policy.

· SMEDA was mandated to facilitate SME sector development it was not incorporated with working on the facilitating the ease of doing business the focus on which needs to be prioritized to catalyze SME & MSE sector development and entrepreneurship.

· SMEDA has been able to survey and analyze various sectors for potential investment however these surveys and researches have not been updated with changing economic environment and input costs involved. Academia has not been taken on board to undertake and update researches which can facilitate investors.

· SMEDA has been able to develop some broader investment plans for various sectors to facilitate private sector but have not been able to bring on board banks and other DFIs to facilitate investment and provide credit for these sectors.

· SMEDA does facilitate small sector businesses in established sectors such agriculture, trade, small scale manufacturing and services however it has yet to provide facilitate on new ideas of entrepreneurship.


RECOMMEDATIONS:


· Government should initiate specialized programs about how to start a small business involving incubators all over Pakistan.

· Venture capital financing is almost negligible in Pakistan. Government and private sector has undertaken limited initiatives in this regard to provide seed money for entrepreneurship.

· State of Bank Pakistan does encourage banks to provide credit facility to the private sector for business development however the major junk of this goes to finance large scale manufacturing and trading sector. The government needs to ensure that a suitable chunk of the total credit is allocated for SME sector financing catalyze its growth.

· Government should encourage private sector to finance small scale business in Pakistan.

· New policies should be in place to provide relief to young entrepreneur and to develop new modes of financing for startup.

· Entrepreneurship lessons and entrepreneurship sessions need to be held at school, college and university level to encourage entrepreneurship and motivate younger generation to focus on job creation rather than searching for job.

· Special plans need to be launched to facilitate women entrepreneurship.

· A legal structure facilitating SME sector growth needs to be put in place. The government has amended the laws and provided registration under Limited Liability Company and Limited Liability Partnership registration by amending the acts in 2017 however the same needs to be promoted to create awareness among the new startups to register. Moreover steps facilitating registration of a small scale business and establish it during early stage needs to be facilitated through these regulations.

· A one window facility to establish and regulate small businesses need to be established by the government.



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