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EDITORIAL: This government is rightly lending focus to the promotion of Small and Medium Enterprises (SMEs) in the country. These enterprises are supposed to be the backbone of any economy. Unfortunately, however, SMEs in Pakistan are largely financially excluded from formal financing channels and suffer from high taxation as well as the burden of regulatory over-compliance which remain prominent reasons why SMEs continue to operate in the shadows of informality. These snags also restrict the ability of SMEs to grow into companies.

The State Bank of Pakistan (SBP) has designed a financing and guarantee scheme for SMEs while the government also has an extensive Kamyab Pakistan programme with a view to targeting SMEs. Apart from these schemes where there are mark-up subsidies and loan coverage guarantees, the government is giving tax incentives and electricity subsidies on incremental use to these enterprises.

All these interventions will help SMEs grow and contribute to growth of overall economy as the current number of SMEs runs into the millions and any financing or guarantee scheme targeting them will have a bigger economic multiplier. However, despite all these government efforts, without keeping provinces on board, not all the impediments faced by SMEs can be removed. There are labour laws and other shenanigans which add to the effective taxation and compliance costs. SMEs have to evaluate the benefit of entering the formal sector in terms of getting affordable bank finance and other government support against the cost of compliance with provincial laws such as the Industrial Relations Ordinance, the Factories Act and Standing Orders Ordinance; as also provincial levies like EOBI, Social Security, Workers Welfare Fund and Workers participation in profits fund, (including harassment) from various government departments other than FBR (Federal Board of Revenue).

Nonetheless, the support to SMEs financing and taxation is imperative and its efficacy must not be underestimated. SME financing was prospering during the Musharraf era as in 2006 SMEs share in private lending was around 15 percent (4 percent of GDP). But the sector never gained similar popularity amongst banks after the global financial crisis in 2007-2008. Now the loans to SMEs are around 5 percent of private sector loans (1 percent of GDP).

Furthermore, the efforts to document the economy through aggressive methods in the past 5 to 6 years have further pushed SMEs away from formalization. Now the government is offering 'swaps' in the form of loan schemes and easing of tax measures to lure SMEs in and move them towards the growth trajectory. However, the fear of provincial and federal agencies may serve as a deterrent and not attract all the SMEs.

The bigger issue is in manufacturing SMEs. Here, compliance is much higher than those operating in the services sector. That is why manufacturing SMEs are getting thinner as most of the new SMEs in the past ten years have joined the services sector where the compliance requirement is relatively low. The country needs to have a larger number of manufacturing SMEs to create the much-needed value chains in various sectors. Without developing those, the reliance on imports is hard to reduce.

The country's exports cannot grow without becoming part of the global value chains, and for that to happen, value chains at home must be built. These value chains have SMEs operating at the tail end. These SMEs become suppliers to the big companies and those who are efficient have the potential to become part of the global value chains. One example is automobiles where there is immense export potential amongst parts manufacturers. In the automotive policy under formulation, the greater focus is on supporting the auto parts industry.

There are numerous other examples. These SMEs have limited advantage and capital to innovate and become efficient and gain scale. They need support from the government and ease of mind to focus on their respective core business. Smaller players usually do not have a battery of accountants and other teams to deal with taxmen and other government agencies. For these, the owner is usually a one-man show. A large portion of their time is spent on dealing with compliance issues, taking them away from the time and focus required for innovation and efficiency.

Both the SBP and government are doing a good job to throw a lifeline to SMEs, and these efforts may not yield optimal results without revisiting the labour laws and other compliance issues. It is, in our view, necessary to work on these impediments to have the much-needed growth in SMEs.

Copyright Business Recorder, 2021

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