The Asian Development Bank (ADB) resident mission in Pakistan has said that lack of access to credit, threshold burden of compliance and corruption costs associated with the fiscal and regulatory framework hinder not only the growth potential of Small and Medium Enterprises (SMEs), but also their risk-taking.
The third paper of the ADB's country resident mission's working paper series on the SME Development in Pakistan released here said of the sample firms, only 6 percent have access to commercial finance, which is a binding constraint that inhibits growth potential and risk-taking of enterprises.
The paper also shows that management spends approximately 17 percent of its working time dealing with the regulatory and administrative burdens.
The paper was written by Dr Faisal Bari, Dr Ali Cheema and Dr Ehsan-ul-Haque, which examines key constraints faced by the SME sector in Pakistan.
It focuses on the role played by the SMEs in stimulating structural transformation in the industrial sector and looks at why the recovery in the small- and medium-scale industry did not correspond to the rapid growth in the large-scale manufacturing (LSM) sector.
The government of Pakistan has committed to liberalisation and structural adjustment policies in order to target sustainable, robust and widespread revival of investment and output growth. The SMEs play a pivotal role in the economy as they contribute 30 percent in terms of value-added and account for 80 percent of the employment in the industrial sector.
"Within the private sector, the support for SMEs is crucial not only to promote growth in manufacturing, but also to generate more employment which, in turn, can have a significant impact on poverty reduction," said Fedon, Country Director of the ADB resident mission.
The study recommends measures, including improvement in creditor rights, revisiting of collateral requirements, and a reduction in the cost of finance, which will improve access of the SMEs to credit.
Other key recommendations in the study include reform of fiscal and regulatory procedures and dispute resolution mechanisms, which would also reduce constraints to the growth of the SME sector in Pakistan.
The study also revealed that while the economic environment created structural problems for the SMEs, this rigorous analysis of the constraints on firm-level growth would help in designing policies and institutional interventions aimed at creating an economic environment that is conducive to private sector enterprise growth, both at the macro- and micro-levels.-PR