In an exercise of self-congratulations, the central bank announced this week that SME financing by Pakistani banks crossed the milestone of Rs500 billion for the first time ever……“due to continued focus of State Bank for facilitating SMEs access to formal sources of finance”.
If the purpose of this announcement was to showcase SBP’s performance, they should have given it a second thought for SME finance in relative terms is still a long way from recovering back to even pre-2008-crisis levels, let alone desirable levels.
SME credit as percentage of total bank lending looks like perfect slope to ski on, whereas SME credit in relation to total GDP still stands poor at around 1.2 percent. The ideal metric of evaluation would have been ‘SME credit as percentage of SME GDP’; only that such a number is not periodically reported or analysed – neither by the central bank or SMEDA nor by so many other champions of SMEs such as USAID, DFID or Karandaaz Pakistan.
A review of journal articles, policy documents and speeches (made by government or central bank officials) suggest that SMEs’ share in Pakistan’s GDP is either 30 percent or 40 percent, depending on whose estimates one would like to ascribe to.
Background discussions with economists’ community initially led to a cul-de-sac. Most economists started their discussion very confidently by saying that SME share in Pakistan GDP is 30 percent or 40 percent, depending on whose reports they have read. But it took no further than second or third degree of inquiry to find that their confidence was on shaky grounds; somebody told someone, and someone wrote somewhere, and someone cited it in an ‘academic journal using proper Harvard reference style’, and viola it becomes a reality.
As it turns out, SMEDA’s Assistant Manager Policy & Planning Division, Maryam Anas, had first estimated SME share in GDP (30%) about ten years ago based on the national accounts for the fiscal year 2000. She concluded that “none of the data reporting agencies report data on SMEs”, and that lack of credible and reliable SME data is one of the major constraints in coherent policy development.
But let’s not digress! The fact of the matter is that these two estimates of SMEs’ share in Pakistan’s GDP have been blindly cited by SME ‘experts’ since 2010. As if SMEs share in total GDP hasn’t changed since then! But whether one takes the baseline share as 30 percent or 40 percent, and whether one assumes modest growth or modest decline in SME’s share in GDP from that baseline share, ‘SME finance as percentage of SME GDP’ remains dismal.
It could be argued that the central bank’s definition of SME is different from that used for the preparation of national accounts by Pakistan Bureau of Statistics (PBS).
For the central bank, a small enterprise employs 1-50 people and has a turnover of up to Rs150 million, whereas a medium enterprise employs 50-250 people and has a turnover of Rs150-Rs800 million. In stark contrast, according to the PBS, any establishment that employs 20 or more workers on any working day during the year and use power in their manufacturing operation is classified under ‘large scale manufacturing’.
Because of this definitional difference, it may be inaccurate to contextualise ‘SME credit’ as reported by the central bank, with SME GDP as first calculated for the fiscal year 2000, albeit statistically speaking definitional differences doesn’t dispute the downward trend of SME credit in relation to SME GDP.
BR Research understands that GDP is always an exercise in estimation which is based on several assumptions, and so is the calculation of SME GDP. But such calculations ought to have reliable basis as well, the feed data which is revised at a standard frequency.
Yet, the whole lot of those involved in championing SME finance through research reports, conferences, funding programmes and so forth, is relying on an estimate based on an economic profile that existed 19 years ago. If this is not a classic example of policy wanting of strong evidence-backed basis, then what is?
To fully solve Pakistan’s SME credit problem, it is critical to get the basics right, address demand-side problems and other ancillary aspects such as intellectual property rights. Equally critical, however, is to look at SME credit in the right context such as SME GDP, which ought to be calculated anew. Or, at least present the growth in the number of SME borrowers and depositors, which is a better indicator of SME financial inclusion.
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