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smes in pakistan

Written by Misha Karim 8:47 pm Articles, Current Affairs, Pakistan, Published Content

Small Business, Big Impact: How Government Policies Can Boost Economic Growth in Pakistan

Misha Karim suggests that Pakistan’s economic crisis can be resolved by promoting entrepreneurship through government policies such as streamlined regulations and tax reforms. The International Monetary Fund (IMF) has been providing financial support to Pakistan to address its economic crisis. However, IMF loans come with conditions such as reducing government spending and increasing taxes, which can negatively impact the economy and the people. It is important for Pakistan to implement structural reforms such as streamlining regulations and taxes for small and medium-sized enterprises (SMEs) to promote growth and job creation. Supporting small businesses can play a key role in shaping the national growth strategy.
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About the Author(s)
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Ms Misha Karim is pursuing an MS in IT from NUST University, Islamabad. 

Introduction

In Pakistan, small and medium-sized enterprises (SMEs) play a significant role in driving the country’s economic growth. However, policymakers and the government must prioritize policies that support their development. This can include initiatives such as providing financial assistance, tax incentives, and regulatory support that enable small businesses to thrive and expand their operations.

By adopting forward-thinking policies tailored to the digital era, the Pakistani government can stimulate innovation, increase economic activity, and support the growth of small businesses in today’s economic crises. Pakistan is a developing nation whose economy is supported by various business sectors, contributing to both its GDP and employment opportunities for the labor force.

With a lack of support in terms of tax breaks, finances, and advocacy, SMEs have been largely neglected by the government and financial institutions. 

Submissions 2023
  • According to the Small and Medium Enterprises Development Authority (SMEDA) of Pakistan, SMEs contribute approximately 40% to the country’s GDP and employ around 80% of the non-agricultural workforce.
  • SMEs in Pakistan face significant challenges in accessing finance. As such, only 7% of SMEs in Pakistan have access to formal finance, compared to an average of 20% in other South Asian countries.
  • Currently, it takes an average of 16 procedures and 48 days to start a business in Pakistan, compared to an average of 10 procedures and 27 days in other South Asian countries.

Only 172,893 borrowers have been financed, indicating a significant gap between the potential for growth in this sector and the available financial resources.

Challenges

The difficulties of conducting business in Pakistan are numerous such as the lack of knowledge and political instability. Additionally, high operational expenses can disrupt small businesses as they rely on limited budgets.

  1. Poor infrastructure: It is a major challenge for SMEs in Pakistan as it considers inadequate transportation networks, unreliable power supply, and poor access to high-speed internet. 
  2. Lack of access to modern technology: It is yet another crucial challenge for the SMEs in Pakistan as they still rely on outdated technology. This ultimately led to a limited ability to compete with larger organizations.
  3. Shortage of skilled workers: Many SMEs struggle to find employees with the necessary skillset and experience to support their system. 

Gaps

The efforts made by SMEDA to support businesses are commendable, but the value proposition for possible global value chains in terms of financiers is still limited. The limited value proposition for possible global value chains in terms of financiers further highlights the need for increased advocacy and support from the government and financial institutions to help SMEs in Pakistan succeed.

To support the financial structure of SMEs in Pakistan, a comprehensive approach is required that incorporates regular consensuses and well-coordinated federal efforts to support new enterprise creation and growth. While larger companies still have control of the stock market, small businesses and enterprises also have the potential to bring fresh competition while boosting economic diversity.

Remote Work

SMEs must bring in meticulous preparation and deliberate action in order to remain creative and competitive, they need to bring more reliable opportunities such as hiring on a remote basis and working with internationals. OpenAI CEO Sam Altman claims that the experiment with remote work was a mistake and has now come to an end. Although startup businesses tend to experience natural growth, they may not be suitable for remote work, he adds.

Nevertheless, it is projected that by 2025, approximately 36.2 million US employees will be employed in remote positions. It is worth mentioning that in the US, 16% of companies operate fully remotely. It has been the most popular trend in recent years and it is worth mentioning that the remote work policy adoption rate has increased from 30% to 58% globally. Remote work can save employers up to $11,000 per year per remote worker, due to reduced office space, supplies, and other expenses.

While remote work may not be suitable for all businesses, it can offer many benefits, such as increased productivity, cost savings, and access to a wider pool of talent. It is important to consider the unique needs and circumstances of each business when making decisions about remote work, rather than adopting a one-size-fits-all approach. Furthermore, the projected increase in remote work suggests that it is a trend that is here to stay, and businesses that do not adapt may be at a disadvantage. 

However, it is also important to consider the potential downsides of remote work, such as isolation, difficulty with work-life balance, and reduced collaboration. A survey found that 20% of remote workers struggle with loneliness, and 17% have difficulty unplugging from work.

Digital Policies for SMEs

  • Automated tasks, tracking inventory, and managing finances online can result in improved efficiency and productivity.
  • Better quality products at cheaper rates can bring competitiveness. 
  • R&D centers and tech parks provide access to equipment, expertise, and funding. This leads to new products and drives economic growth.
  • Innovation and technical adoption attract foreign investment.

Kodak was once the dominant player in the photography industry, but it was eventually overtaken by smaller companies like Fujifilm and Canon that were more responsive to the changing needs of consumers. However, it is important to note that not all large companies are slow to innovate. There are many large companies that are constantly investing in research and development.

It is worth noting that certain emerging technologies can be taken into consideration. Pakistan can potentially access the lucrative market where employees can earn and spend virtual assets and currencies by embracing the metaverse technology. This may widen the roads for several small businesses to connect with other employees or customers outside their usual geographic markets and may even create new sectors.

Monetary Policy

The IMF and market participants expect the State Bank of Pakistan (SBP) to increase the policy rate by at least 200 basis points from the current rate of 17%. Market participants in a recent treasury bill auction also expect a rate hike. SBP employs a monetary policy that aims to maintain low and stable inflation rates to foster sustainable economic growth and employment.

Its flexible inflation targeting framework allows it to respond to economic changes while remaining committed to long-term inflation goals. Recent improvements have been made to the monetary policy:

  • The formation of an independent Monetary Policy Committee (MPC)
  • The adoption of a forward-looking monetary policy based on inflation forecasts
  • Improved communication of monetary policy decisions

A strategic plan like SBP’s can envisage the implementation of Flexible Inflation Targeting (FIT) as a key policy to ensure price stability while pursuing higher sustainable economic growth. To accomplish this, it is important for small businesses to:

  • Promote collaboration among such startups and provide support such as tax incentives.
  • Share mutual resources, such as office space and employees working jointly. 
  • Form partnerships, especially on research and development projects.
  • Actively participate in social activities and events, such as industry events and conferences. 
  • Create online communities and forums where they can share and discuss ideas.

Additionally, transparent communication with stakeholders, including small businesses, can help build trust and support for the policy. Finally, complementing monetary policy with supportive fiscal policies, such as targeted investment in infrastructure and education, can help ensure sustainable economic growth and minimize the risks associated with relying solely on monetary policy.

Policy Recommendations

  • Providing access to finance: The government can launch a credit guarantee scheme for SMEs to increase their access to finance. It can also establish an SME bank to provide affordable credit to these businesses.
  • Simplifying regulations and procedures: The government can simplify business registration procedures, streamline licensing requirements, and reduce the cost of compliance for SMEs. This will make it easier for these businesses to operate and expand.
  • Offering tax incentives: The government can offer tax incentives such as tax exemptions, tax credits, and reduced tax rates to SMEs. This will help these businesses to reduce their operating costs and invest more in their growth.
  • Promoting innovation and technology adoption: The government can establish research and development centers, incubators, and technology parks to promote innovation and technology adoption among SMEs. It can also provide financial support to SMEs to help them adopt new technologies and improve their productivity.
  • Facilitating access to markets: The government can create export promotion agencies to help SMEs identify and access international markets. It can also negotiate trade agreements that benefit SMEs and provide them with greater access to global markets.

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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.

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