In Pakistan the small and medium enterprises (SME) sector has acted neither as a significant engine of growth, nor as an important conduit for structural change due to number of constraints that prevents the country from exploiting the potential of SMEs. 'Punjab Economic Report-2005, Towards a Medium-Term Development Strategy' observed this in its report, which was jointly compiled by the Punjab government, World Bank, Department of International Development UK and Asian Development Bank. The report noted that the private sector in Punjab provides close to nine-tenths of total employment. Hence, poverty reduction was linked closely with improving the productivity of the informal sector, it added.
According to the report, SMEs, that in many cases were informal units, were financially constrained, turn out much of the country's private output, and account for most of its private jobs. Yet the country's policies, for import protection, for taxation, for technology transfer, for access to finance, for infrastructure, for dealing with labour, etc, were all devised with the larger enterprises in mind. Similarly, access to policymakers and opportunities to influence the policymaking process were far easier for large enterprises than the SMEs, hence the latter generally were unable to affect policymaking at all.
It was suggested in the report that a strategy for dealing with the SME sector must be devised. Interventions to support the sector incur a cost, and particularly in the case of a resource-constrained economy such as Pakistan, the costs and benefits of providing such support must be carefully weighed, it cautioned.
The report further observed that information on such a vital sector was quite inadequate, which includes the absence of a uniform official definition. "There were two different definition of SMEs, one defined by Smeda and the other by the State Bank of Pakistan (SBP) and this leads to very different estimates of the number of SMEs. The ADB reckons that if an internationally more common definition were applied, the total number of SMEs could come to more than 250,000. Such wide divergences could lead to rather large errors in policy," it added.
According to the report, surveys on SMEs have consistently shown that credit-related problems act as binding constraints to SME growth in Pakistan, particularly in the manufacturing sector. Most SMEs operate through self-financing or retained earnings. The access difficulties result from cumbersome procedures and excessive requirements of collateral. The Punjab government might not be able to resolve these matters in the short-run, because many of the solutions lie outside its writ. However, the importance of SMEs in the economic structure of the province and the financing difficulties faced by them must constantly be brought to the attention of financial institutions and the central financial authorities, and a strategy developed for dealing with the problems.
Moreover, since the growth of SMEs was strongly tied to fluctuations in retained earnings, which, in turn, was linked with macroeconomic fluctuations. The best macroeconomic environment for small firms was one of sustained high growth. Thus, policies of the Punjab government to increase incomes would play a major role, because this was likely to enlarge the demand for the products and services of SMEs, hence stimulate an expansion of the output from and employment in these enterprises.
The report observed that the system of trade protection also works against SMEs. "Moreover, SMEs generally have to buy imported raw materials, machinery and equipment from commercial importers, which increases their costs compared with larger enterprises that benefit from exemptions and investment promotion privileges," it added.
Studies have also found that in Pakistan the linkages between SMEs and larger enterprises were not very important, and the subcontracting system was poorly developed. "One way of encouraging these inter-links would be to promote clusters of enterprises of different sizes, and to reserve space for smaller units in all industrial estates," it added.
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