EDITORIAL: The government has no doubt put a lot of thought into the Small and Medium Enterprises (SMEs) Policy 2021-25, which includes big incentives for both men and women entrepreneurs, especially generous tax reductions, and rules out regressive audits (considering their size and scope) and also harassment. Banks would also have to fix a Rs 60 billion credit line under the SME Asaan Finance Scheme (SAAF) to extend collateral-free lending, enabling all enterprises to get loans up to Rs 10 million for three years, a likely game-changer. There is also a very impressive provision for policy implementation and now an SME Development Fund is going to be established, which will extend grants for market access, training, business development, and all that.
Nobody needs to be reminded, especially not the government, that SMEs are crucial both economically and socially because they have the widest reach among all societies, which explains why they are the biggest employers in most progressive economies. Incentivising them is also a very good policy prescription for countries like Pakistan with high poverty and explosive population growth levels because they keep unemployment as well as money circulation in check. And while all the measures incorporated in the SME policy are essential and therefore welcome, perhaps more can be done to overcome legal and procedural problems that limit their financing at times because they are still an unorganised and undocumented sector. Banks are required to extend substantial credit to them now, but because they are not on the radar, so to speak, they tend to run into serious problems with the banking industry’s risk-management requirements.
The biggest hurdle in the way of SMEs becoming a documented sector is the country’s labour laws; EOBI, social security, etc. There is, therefore, a very urgent need to redefine thresholds regarding the number of people employed for being subject to these rules. It would, for example, be a very good idea to exempt small enterprises from labour laws as a start. The State Bank of Pakistan (SBP) defines such enterprises as business entities which do not employ more than 50 persons, including contract employees, with annual sales turnover of up to Rs 150 million. If this number is increased to 100 and this group is excused from said laws, it would enable regulation of the smallest enterprises, with obvious spillover effects for their turnover, employees, and outreach.
Times have changed since Pakistan’s first National SME Policy was formulated in 2007. The business environment has been overwhelmed by technological and digital innovations that have breathed new life into the global economy and attracted record venture capital into startups and SMEs. The way the Pakistani startup sector has attracted foreign venture capital over the last two years has kept it in front-page headlines all over the business world. It is now essential to encourage and facilitate a deep technological overhaul of the entire SME sector. But to be able to leverage latest advances in digital and financial technology, and train their staff for it, SMEs are going to need a lot more financing than the Rs 10 million per outlet that the SME Policy allows them.
Such a transformation would have to be lubricated by the banking sector in a far more comprehensive way. And banks are already flush with money; so that is not a problem. The only thing that really needs to be done is tweaking the labour laws in a manner that will get the most benefit from the SME sector. The new SME Policy was clearly influenced by engagement workshops that were organised a few months ago as part of the EU-funded International Trade Centre’s (ITC’s) Growth for Rural Advancement and Sustainable Programme (GRASP). At that time, too, this space suggested working on labour laws because that is the one sure way of opening the floodgates of bank credit into this sector.
Pakistan’s economy boasts very few large firms, so it is left to SMEs and the like to provide coverage, especially in terms of income and employment, to far-off areas. If that can be done alongside improving margins of small firms then the country would be able to reap economic as well as social benefits.
Now that the government has finally pushed the SME sector so far up the priority list, the matter of problematic labour laws is required to get some attention as well.
Copyright Business Recorder, 2021