Small and Medium Enterprises in Pakistan

Iqbal Mustafa and Farrukh M. Khan

One of the defining characteristics of a prosperous and growing economy is a flourishing

small and medium enterprise (SME) sector. SMEs contribute to economic development in
multiple ways, creating employment for expanding rural and urban workforce and
providing much needed flexibility and innovation in the economy as a whole. Their ability
to diversify economic activity makes a significant contribution to exports and alleviates
poverty. Such benefits, however, have not been fully realised in Pakistan as yet.

Development of small businesses has long been debated at public and private forums in
Pakistan, but until recently the motivation behind these efforts was more socio-political
than economic. The main focus of economic policies, budgetary measures and regulatory
regime was large scale industry. As a result, structural imbalances were created in
Pakistan's business environment, which got skewed unhealthily towards promoting large
scale industry.

Coined by economists during the 1990s, SME is a relatively new term in Pakistan's
development jargon. In 1998, the government of former prime minister Nawaz Sharif,
becoming cognizant of SMEs' economic importance, formed Small & Medium Enterprise
Development Authority (SMEDA) as the flagship organisation meant to provide support
to SMEs in Pakistan through:

1. the creation of a conducive and enabling regulatory environment;

2. development of industrial clusters;
3. and the provision of Business Development Services to SMEs in all areas of business
management

The present government also regards the SME sector as the future conduit for growth
and investment in the country.

SMEs
There is no uniform definition of SMEs applicable across the board in Pakistan, which is
an indication of the absence of concerted efforts to promote SMEs in the country.
Different departments and organisations define SMEs in accordance with their functional
ease rather than market situation. For example, the SME Bank defines an SME as that
which has total assets up to Rs. 20 million whereas a medium scale enterprise may have
total assets equaling Rs. 100 million. On the other hand, SMEDA defines SMEs according
to the dual criterion of productive assets and number of employees. This disparity in
definitions adopted by various SME support departments (Table 1), in itself acts as an
impediment for the growth of these businesses.

Table 1: Various Institutional Definitions of SMEs in Pakistan

Institution Small Medium

Small and Medium 10-35 Employees or 36-99Employees or
EnterpriseDevelopment Productive Assets of Rs 2- Productiveassets of Rs. 20-40
Authority(SMEDA 20 million million
Total Assets of Rs. 20 Total Assets of Rs. 100
SME Bank
million million
Federal Bureau of Statistics Less than 10 employees N/A
State Bank of Pakistan An entity , ideally not being a public limited company,
(SMEPrudential which does not employee more than 250 persons

Regulationseffective since
January 2004)
Punjab Industries Department
Sindh Industries Department
Punjab Small Industries
Corporation
( manufacturing) and 50 persons (trade / services)2and
also fulfills one of the following criteria:
(i)A trade / services concern with total assets at cost
excluding land and buildings up to Rs 50 million.
(ii)A manufacturing concern with total assets at cost
excluding land and building up to Rs 100 million.
(iii)Any concern (trade, services or manufacturing)
withnet sales not exceeding Rs 300 million as per latest
financial statements.
Fixed assets with Rs. 10
million excluding cost of
land
Entity engaged in handicrafts or manufacturing of
consumer or producer goods with fixed capital
investment up to Rs.10 million Including land & building
Fixed investment. up to
Rs. 20 million excluding N/A
land and building

Global SME Scenario

SMEs play a vital role in the growth and development of leading economies of the world
such as USA, Japan, South Korea, Thailand, Malaysia and many others. SMEs in these
countries make major contributions to employment creation as well as GDP growth (see
charts below).

Economic Importance of SMEs in Pakistan

SMEs constitute more than 90 per cent of businesses in Pakistan, all of which function
within the private sector and mostly operate in the undocumented informal part of the
economy. They represent a significant component of Pakistan's economy in terms of
both value addition and employment generation. As they predominantly provide
employment to lower income groups, they are also considered an important vehicle for
poverty reduction. SMEs, in particular, play a key role in the manufacturing sector by
providing 80 per cent of the total employment, contributing over 30 per cent to GDP,
and generating one-fourth of the sector's export earnings.

Table 2: Contribution of SMEs in Manufacturing Sector

Employment GDP Value Added Export Earnings
80% 30% 30% 25%

Source: Economic Survey of Pakistan, 2003-04

The ILOSMEDA study titled: Creating a Conducive Business Environment for MSMEs in
Pakistan, estimates the share of SMEs in the total employment of labour force of
Pakistan to be about 35 per cent3. Approximately, half of the total SMEs activity is
concentrated in five sub-sectors; grain milling, cotton weaving, wood and furniture,
metal products and art silk. For the past three decades, the fastest growing export
industries have been dominated by the SMEs. Export contribution from SMEs emanates
from sub-sectors, cotton weaving and other textiles and, surgical equipment4.

Table 3: Share of Key SME Sub sectors in Pakistan

Sub-sectors Percentage Share

Cotton Weaving 13%
Other Textiles 6%
Metal Products 7%
Carpets 4%
Art Silk 5%
Grain Milling 16%
Jewelry 4%
Wood & Furniture 10%
Others 35%

Source: Economic Survey of Pakistan, 2003-04

There are a number of factors responsible for the importance of SMEs in Pakistan. First,
SMEs foster an entrepreneurial culture and provide resilience in the economy. Second,
SMEs dominate the fastest growing export sub-sectors, such as cotton weaving and
surgical instruments. Third, they are an important vehicle for poverty reduction. Finally,
SMEs are significant contributors to the Pakistani economy in terms of both value-
addition (30 per cent) and employment (80 per cent)5.

One of the strongest arguments advanced for favouring SMEs in Pakistan is that their
efficiency in resource allocation is higher from a social viewpoint in that they provide
more employment at lesser capital costs compared to large enterprises. For instance, the
Ministry of Labour, Government of Pakistan, estimates that between 2003-2008, there
will be an addition of 16 million persons to the labour force. To put these new entrants to
work would take an investment of Rs. 5.2 trillion in large scale sector while only Rs. 8
billion in the small/micro scale sector. In the medium scale sector the cost would be Rs.
0.8 trillion. These figures are based on SMEDA estimates assuming that in a textile
spinning unit (large scale) Rs. 330,000, in a Stitching Unit (medium scale) Rs. 50,000
and in a hand-knotted carpet factory (small/micro scale) Rs. 500 is required to create
one job.

Table 4: Investment Estimates for Job Creation

Investment Required to Create Jobs (Rs)

Year Labour Large Scale Medium Scale Small/Micro
Sector Sector Sector
New Labour Injected 16
5.2 Trillion 0.8 Trillion 8 Billion
2003-2008 Million
New Labour Injected 14
4.6 Trillion 0.7 Trillion 7 Billion
2008-2013 Million
Source: SMEDA estimates based on approximated number of future entrants in the job
 market.

Employment Statistics
Wide differences exist between various data sources on total labour force estimates for
Pakistan. Nevertheless, the figure below maps the sectoral distribution of employment
based on 1997-98 Labour Force Survey (LFS) data.

Source: Labour Force Survey 1997-98 figures quoted in

Creating a Conducive Policy Environment for Micro, Small &
Medium-Sized Enterprises in Pakistan. ILO/SMEDA, SEED
Working Paper No.29. (Geneva, 2002).

Employment Distribution in Pakistan

The share of non-agricultural sector in total employment is 53 per cent. Further
classification of data is done on the basis of formal and informal sector. 'Informal' is
defined as those establishments that are not registered with any government
department or agency. All establishments of less than 10 workers fall under this
definition, given that they are not required to register under labour laws. Almost 68 per
cent of non-agricultural employment is estimated to be in the informal sector, indicating
that the majority of establishments in the non-agricultural sector are micro enterprises.

According to the Census of Manufacturing Industries (CMI) 1995-966, total employment

in the formal manufacturing sector is 0.6 million (or 10 per cent of the total formal non-
agricultural sector employment) The remaining employment in the formal non-
agricultural sector is absorbed by the trade and services sectors.

Employment in the informal manufacturing sector is estimated at 3 million persons7,

with a share of 23 per cent of the total employment in the informal non-agricultural
sector. Thus, 77 per cent of non-agricultural informal employment is being generated by
micro enterprises in the services and trade sectors.

MSMEs' Share in GDP

Micro, Small and Medium Enterprises (MSMEs) contribute around 7 per cent of the GDP,
and 9 per cent of agricultural GDP. This low share is due to the dominant presence of
micro-enterprises in the three sub-sectors services, manufacturing and trade & hotels.
Although the contribution of MSMEs to total GDP is not very high, it still represents
almost 13 per cent for the manufacturing sector and 11 per cent for the trade and
services sector.

Table 5: Distribution of Estimated MSME GDP by Sector

 Sector Share in GDP
1. Services 17%
2. Manufacturing 30%
3. Trade & Hotels 53%

Source: Creating a Conducive Policy Environment for Micro, Small & Medium-Sized
Enterprises in Pakistan.ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002).

Some studies have estimated the share of MSMEs in GDP at a much higher level. In this
context, it is interesting to note that it has been estimated that the ‘undocumented
economy’ accounts for 55 per cent of the GDP of Pakistan. Depending on the
methodology, the size of enterprises covered and the varying results obtained in
surveys, figures about the share of MSMEs in GDP may be either under or
overestimated.

SME Development: Potential and Opportunities

There is considerable evidence to show that sectors dominated by SMEs are better able
to exploit 'dynamic' gains through widely dispersed learning, both geographically and in
terms of the number of firms. Sectors dominated by SMEs tend to generate higher levels
of competition and mobility, which in turn forces higher levels of

learning among firms. This occurs through two mechanisms. First, the discipline imposed
by competition forces firms to innovate at a faster rate in order to survive. Second,
liberal entry into the population of firms allows greater experimentation, which increases
the probability of a firm developing or adapting better organisational and technological
traits.

Aggregate data reveals a very small role played by SMEs, i.e., firms employing between
9 to 99 workers, in Pakistan's existing manufacturing structure. This suggests that the
potential of these enterprises remains largely untapped in the Pakistani

economy8. Second, the structure of value-added in both the SME and the large scale
manufacturing (LSM) sectors has not changed significantly. Table 6 compares the two in
terms of their relative advantage in value addition and potential to serve as engine for
future growth. The comparison shows that the performance of SMEs in Pakistan is
currently below potential. It further establishes that being a low-income economy
Pakistan can effectively exploit the potential that is inherent in this sector. The
subsequent portion of this article deals with the factors responsible for constraining the
growth of SMEs in Pakistan.
Table 6: Contribution of the Dominant Sub-sectors in Manufacturing Value-Added
(As a percentage of value-added)
Large-Scale
SMEs
Manufacturing
1995-96 1987-88 1996-97 1987-88
All Industries 100 100 All Industries 100 100
Textiles 22.31% 17.35% Cotton Weaving 11.16% 13.19%
Food & Beverages 15.19% 15.95% Silk and Art Silk 6.96% 5.11%
Electrical Machinery
7.67% 3.27% Jewellery Products 5.95% 7.65%
& Supplies
Industrial Chemicals 8.53% 6.98% Wooden Furniture 6.18% 5.96%
Non-Metallic 7.15% 7.69% Leather Footwear 3.65% 4.11%
Tobacco 6.18% 10.08% Structural Products 5.08% 3.26%
Total contribution of Total contribution of
67.03% 61.32% 38.98% 39.00%
dominant sectors dominant sectors

Source: Bari, F., Cheema, A. & Ehsan-ul-Haque. Barriers to SME Growth in Pakistan: An
Analysis of
Constraints,June 2003.

Impediments To SME Development in Pakistan

Despite their economic importance, SMEs in Pakistan suffer from a variety of
weaknesses, which have constrained their ability to adjust to the economic liberalisation
measures introduced by the Government of Pakistan and to take full advantage of
rapidly expanding markets of the world. These weaknesses include a relatively narrow
base of the formal SME sector and its focus on low value-added products; the absence of
an effective business information infrastructure; the inadequacy of the existing support
services for entrepreneurship development and

promotion; and a relatively low level of integration in global value chains. In what follows
we will discuss some of the major issues that are hampering the establishment of a
flourishing SME sector in Pakistan.

Definition
It is extremely important to have a uniform definition for SMEs in order for the support
institutions to implement assistance programs for all enterprises in lieu of resource
constraints. Such a clarification is not to be found in Pakistan. Despite the fact that it is
understood that being an SME refers to a state of disadvantage as a business entity
within our economy, as a direct result of its relative size and the ensuing characteristics.
The issue of SME definition therefore requires careful consideration, taking into account
the position of SMEs in the national economy, the level of economic development,
industrial structure, level of technology, the character of labour market and more
importantly, the value which society attributes to the concept of public policy. Until there
is an acceptable definition of SMEs, applicable across all institutions, their development
will remain subject to the whims of the organisations they have to deal with.

Access to finance
Access to equity and finance has repeatedly been identified as a recurring constraint to
SME growth and development. Commercial banks apply conservative policies while
lending to SMEs. More importantly, the exiting structure of financial sector was
developed to serve medium to large enterprises that are organised as formal businesses.
Most banks consider lending to SMEs an unattractive venture due to a range of objective
and subjective factors. These include high transaction costs, SMEs' inability to comply
with tangible collateral requirement, no linkage of financial products with SME sector
needs, etc. the banks have also been unable to structure/offer and manage, SME specific
medium to long term financing options. As one should expect, the SME sector is not
homogeneous, therefore, the attractiveness of an enterprise to financial institutions
varies with SME size, structure of organisation, maturity, industrial sector, etc.

Within the Investment Climate Survey9 sample, it was observed that 57 per cent of new
investment for Small and Medium Enterprises and 67 per cent of working capital finance
comes from internal finance or retained earnings; only about 7 per cent of funds for
investment or working capital come from banks or other financial institutions.
 Table 7: Firms Access to Formal Finance(as percentage of total in the category)
Firm Size Age of Firm (years)
No of Employees 0-5 6-10 11-20 21 and more All Firms
0-10 0% 0% 0% 0% 0%
11-49 0% 35% 0% 0% 29%
50-99 100% 67% 75% 15% 50%
100 or more 100% 75% 75% 83% 80%
All Sizes 50% 67% 64% 50% 59%

Source: Bari, F., Cheema, A. & Ehsan-ul-Haque.Barriers to SME Growth in Pakistan:An

Analysis of Constraints,June 2003

• Ministry of Law, Justice and Human Rights

• Ministry of Education
• Ministry of Science & Technology
• Export Promotion Bureau
• Board of Investment
• Federal Bureau of Statistics
• Provincial & Local Governments
• Small & Medium Enterprise Development Authority
• Provincial Small Business Promotion Agencies
• Private Sector Chambers & Associations
• PCSIR, Federal and Provincial Technical Institutes, (which will facilitate SMEs'
access to modern technology and related training).

Government's socio-economic strategies and SMEs

The Government of Pakistan has developed a number of strategies for socio-economic
development of the country. The following programs define government goals and
priorities with respect to development:

• Poverty Reduction Strategy Paper (PRSP)22

• Micro Finance Sector Development Program
• SME Sector Development Program
• Education Sector Reforms 2001-05
• Reform of Financial Sector
• Reforms in Tax Administration

Most of the activities mentioned above include assistance in the creation of a network of
institutions stimulating the growth of SMEs. These institutions cover Regional
Development Agencies, Business Support Centres, Chambers of Commerce and a
number of other organisations which are established as an initiative of local
communities. For coordination among all these institutions, an SME Task Force has been
established in the Ministry of Industry & Production with SMEDA as its secretariat. But
greater coordination and similarity of approach in needed to turn these initiatives into a
focused and orchestrated effort.

Requisites of SME-led economic growth

Sustained development of SME sector in any country requires clear and transparent
commitment of the government for the development of indigenous SME sector that is
able to adapt to changing conditions and compete internationally. In order to achieve
this following measures are recommended:

Improve SME competitiveness and regulatory environment

Establish simple business registration to facilitate entry into the formal economy it has
been proposed to assist the Government in undertaking measures of awareness building
and to support the development of simple, cheap, and easy registration processes and
business friendly one-stop-shop arrangements to improve the coverage of registration.
Improve quality standards for industry and labour. This can be achieved by reducing the
abuse of power by inspectors through a non-invasive inspection policy and promotion of
self-inspection by the private sector.
Enhance export readiness of SMEs through enabling policy measures and an action plan.
For this purpose, effective collaboration among SMEDA, Export

Labour issues
Labour laws and regulations in Pakistan14 are considered to be one of the most
complicated areas with which a business enterprise deals. Based on concerns related to
the rights of labour, there are 56 labour laws complying to which is literally impossible
for SMEs. Not only are these laws inherently inconsistent but also entail numerous labour
inspections that further impede the growth of small and medium enterprises.

Other issues are related to reforms of local labour offices and active measures of labour
market policy still remain outside the scope of the reform agenda being undertaken by the
government. Limited training options for middle management, low skills of work force,
inadequate vocational training facilities are weaknesses that need immediate attention.

Market constraints
A typical SME in Pakistan caters to the domestic private sector and their activities are
mostly concentrated in specific regions. Only 8 per cent SMEs are exporters15 and fewer
than 4 per cent are suppliers to the government sector. Some of the issues are related
to the inability of SMEs to enter export markets are: tough bargaining price (36%) and
supplies on credit (34%) and other are related to absence of public sector programs
aiming at internationalisation of SMEs and binding public sector for procurements from
SMEs.

High market transaction costs, inefficient contract repudiation and distorted competition
are some of the key retardants in the growth of manufacturing and retail firms in
Pakistan. Competition from smuggled goods and unregistered companies is also acting
as a severe constraint on firm-level SME growth, especially for small and medium scale
manufacturing sector.

For growth-oriented exporting firms, sourcing of quality inputs is a major problem due to
the lack of a network of reliable suppliers, which adds to the transaction costs. SME firms
are not large enough to furnish sufficient demand to be an incentive for high quality
input suppliers. Second, in the absence of diverse sources of credit, SMEs have to rely on
suppliers' credit to procure high quality raw materials, which prevents them from
investing in manufacturing high quality products.

Law and order

The law and order situation in Pakistan has always been regarded as worrisome.
According to a survey conducted by Gallup, Pakistan, in 2002, one in five businesses
interviewed had been a target of at least one crime during the survey year. Firms in
NWFP spend 4.5 per cent, in Sindh and Punjab 1 to 2 per cent of their revenue on
security. One in four SMEs consider law and order to be a severe problem16.

Law and order problems weaken property rights and as a result weaken the investors'
decision to invest. These problems are clearly linked to the manner in which the law
enforcement and criminal justice system functions.
Human resource development

One of the major challenges that SMEs have to face is the emergence of the knowledge-
based economy. In order to maintain their competitive advantage these days, nations
must continue to innovate, change and upgrade, by nurturing a burgeoning
entrepreneurial spirit and skill development of human resources.

Competitive advantage is determined by the productivity with which a country, region or

cluster uses its human, capital and natural resources. Pakistan's international
competitiveness markedly declined over the past few years17. Part of the blame is
shared by lower productivity of the workers. Evidence reveals that median labour
productivity, as measured by annual value added per worker, is 25 per cent lower in
Pakistan than in India and 35 per cent lower than in China. Labour productivity,
however, in Pakistan is 46 per cent higher than Bangladesh18.

Infrastructure
Basic physical infrastructure is a prerequisite to growth and development. According to
the Investment Climate Assessment of Pakistan conducted by the World Bank, issues
related to power supply, i.e., unscheduled power shut downs and access to connections
are irritants which significantly affect the productivity of firms in Pakistan. The survey
estimated that a typical business in Pakistan loses 5.6 per cent in annual sales revenue
due to just this single factor. Differences associated with firm size recognize that smaller
firms are relatively hard hit in comparison to the larger ones because of their inability to
arrange alternate power source in the form of private power generators. Regarding
power supply, high rates of power, poor quality of delivery and unreliability are serious
concerns for SMEs in Pakistan.

Similarly, lack of access to telecommunication facilities and transport also prove

detrimental to smooth growth and transition of smaller firms to larger ones. The
Investment Climate Assessment notes that the chief problem in the provision of telecom
services is the shortage of new fixed line connections, which stand at a mere 0.50.6
million a year for the whole country. A review19 of trade in selected commodities
estimates that Pakistan could save up to 16.5 per cent of the value of exports by
improving its trade and transport logistics systems. Inefficiency in transport alone is
estimated to cost the economy Rs. 320 billion a year.

Globalisation
Of the many impacts of globalisation, the following two are of particular interest to
SMEs:

• Acceleration in the pace of growth of world trade

• High levels of competition in the global market place

With the coming of WTO regime, SMEs have to manage growth and change in an
environment where the pace, patterns and organization of production will need to be
transformed fundamentally. Trade liberalisation at the global and regional levels, the
new Information & Communication Technology (ICT) tools have combined to create rich
opportunities as well as formidable challenges to all interdependent countries and
enterprises. Competition has become increasingly fierce among the global and regional
economies and enterprises. Consumer preferences and market standards have become
more sophisticated and exacting. Competitive advantage is now determined by several
non-price parameters such as quality, health and safety

social equity in employment and production and ecological compatibility of products and
processes20. Therefore, to meet the globalisation challenge, there is a growing need for
an information repository and dissemination mechanism to sensitise SMEs on global
technology trends, rules and compliance cost including facilitation services regarding
global issues.

Technology transfer and upgradation

The effectiveness of technology transfer is essential for SMEs to stand their ground in a
changing global business climate. The major constraints21 to effectiveness today lie in
the high transaction costs associated with the development of capacities and capabilities
to manage and generate technological change. Due to these high costs, enterprises in
developing countries tend to be ineffective in exploit available technology options, as
well as in utilising the transferred technologies. Some of the bottlenecks can be identified
as under:

• Inability to acquire sophisticated testing equipment and R&D facilities. SME's see
it as a financial problem.
• Lack of skills/experience to operate the high technological machinery.
• Insufficient knowledge of possibilities for technological co-operation.
• Inadequate knowledge and resource base for searching for partners and sources
of new technology.
• SME's often lack information on target market quality requirements and
regulations as well as knowledge to
• achieve the quality levels.
• Absence of appropriate testing and other quality control or measuring equipment
and related infrastructure as
• common facility centres

Coordination and institutional support

Given the limitation of SMEs in terms of technical inadequacy, non-availability of cheap
raw materials, inefficient production techniques and limited access to profitable markets,
coordinated business support programs are a cornerstone of any system which strives
for sustainability. This also maximises the potential for cooperation with private sector
organisations to minimise distortions in the market economy.

The Ministry of Industries and Production, through SMEDA, is primarily responsible for
the coordination of development efforts for SMEs. Cross-departmental consultations and
formulation of programmes and policies are required for an orchestrated SME
development initiative. However, SME development to date has been uncoordinated and
ineffective. Hence, it requires precisely defined tasks on the part of following institutions:

• Ministry of Industries and Production

• Ministry of Finance
• Ministry of Law, Justice and Human Rights
• Ministry of Education
• Ministry of Science & Technology
• Export Promotion Bureau
• Board of Investment
• Federal Bureau of Statistics
• Provincial & Local Governments
• Small & Medium Enterprise Development Authority
• Provincial Small Business Promotion Agencies
• Private Sector Chambers & Associations
• PCSIR, Federal and Provincial Technical Institutes, (which will facilitate SMEs'
access to modern technology
• and related training).
Government's socio-economic strategies and SMEs
The Government of Pakistan has developed a number of strategies for socio-economic
development of the country. The following programs define government goals and
priorities with respect to development:

• Poverty Reduction Strategy Paper (PRSP)22

• Micro Finance Sector Development Program
• SME Sector Development Program
• Education Sector Reforms 2001-05
• Reform of Financial Sector
• Reforms in Tax Administration

Most of the activities mentioned above include assistance in the creation of a network of
institutions stimulating the growth of SMEs. These institutions cover Regional
Development Agencies, Business Support Centres, Chambers of Commerce and a
number of other organisations which are established as an initiative of local
communities. For coordination among all these institutions, an SME Task Force has been
established in the Ministry of Industry & Production with SMEDA as its secretariat. But
greater coordination and similarity of approach in needed to turn these initiatives into a
focused and orchestrated effort.

Requisites of SME-led economic growth

Sustained development of SME sector in any country requires clear and transparent
commitment of the government for the development of indigenous SME sector that is
able to adapt to changing conditions and compete internationally. In order to achieve
this following measures are recommended:

Improve SME competitiveness and regulatory environment

Establish simple business registration to facilitate entry into the formal economy it has
been proposed to assist the Government in undertaking measures of awareness building
and to support the development of simple, cheap, and easy registration processes and
business friendly one-stop-shop arrangements to improve the coverage of registration.
Improve quality standards for industry and labour. This can be achieved by reducing the
abuse of power by inspectors through a non-invasive inspection policy and promotion of
self-inspection by the private sector.
Enhance export readiness of SMEs through enabling policy measures and an action plan.
For this purpose, effective collaboration among SMEDA, Export

Promotion Bureau (EPB), and Pakistan Standard and Quality Control Authority (PSQCA)
has been proposed for the development of a policy and action plan to enhance export
readiness of SMEs with the help of these institutions. Therefore, the business plans for
SMEDA & EBP are being developed so that SMEs are facilitated.

Improving SMEs' access to finance

In addition to SME friendly Prudential Regulations, following steps are required for
increasing their access to formal financial sources:
Establishment of support infrastructure to improve coverage of credit information to
facilitate quick and reliable loan processing mechanism
Improve access to risk capital by revising tax regulations for risk capital investors
Deepen supply and marketing channel financing to small clients of corporate entities
through partial credit guarantee.
Support commercial banks to develop SME dedicated financing capabilities, equity
investment products and to invest in capacity building of their staff to deal with the
peculiarities of the SME sector.
Improved access to Business Development Services (BDS)
To develop demand for upgrading technical and management skills of SMEs, subsidized
training facilities need to be developed, preferably through private sector BDS providers.
In addition, cluster specific, demand driven technology common facilities centres should
be established to benefit a large number of enterprises.

SMEDA as a facilitator for SMEs.

SMEDA has so far undertaken significant advocacy work, awareness-building activities,
and prepared a number of important sector strategies, publications and feasibility
studies for SMEs. However, the qualitative fruits of these efforts are yet to reach the
SMEs. Thus in order to achieve a significant outreach to the SMEs and fulfil its mandate
more effectively, SMEDA needs to be empowered in terms of resources and its
autonomous status needs to re-established as the apex body for SME growth
stimulation.

Conclusion
As discussed earlier, a number of developed countries of the world depend on their small
and medium for technological innovation, revenue growth and employment generation.
In fact, SMEs are the foundation upon which the edifice of their large scale sector stands.
A similar potential exists in Pakistan. However, to kick start an economic revolution of
this nature, if not magnitude, would require nothing short of a shift in cultural paradigm
among all the public and private sector stakeholders. The government with its archaic
state machinery in the form of ministerial departments and SMEs with their characteristic
short-term outlook and non-entrepreneurial attitude, will not be able to provide viable
answers to the current and impending challenges that Pakistan economy faces. This
situation leads to a non-conducive business environment for SMEs in the country, i.e.,
low business start-up and survival rates, compounded by the inability of SMEs to
graduate from micro to small to medium to large scales. All the growth impediments
discussed above are symptoms of this basic problem. Given this scenario, SME
development efforts in Pakistan will have to be comprehensive, dynamic and sustainable
over a long period. In contrast to

the piecemeal and sporadic (mostly donor induced and politically hyped) approach of the
past.

(Iqbal Mustafa has been a member of the Central Board of the State Bank of Pakistan
from 1997 to 2001. He was the CEO of Small and Medium Enterprises Development
Authority (SMEDA) from 2001 to May 2003. He can be contacted at:
mustafa@hujra.com)

(Farrukh M. Khan is a marketing professional with an academic background in

development economics. He is currently working as Manager, Marketing Services at
SMEDA, Lahore).

End Notes
1. Government of Pakistan has declared the SME sector to be one of the four major
drivers of growth, along with Oil & Gas, Telecommunications & Housing & Construction
sectors. As the Economic Survey 2003-04, Chapter 3 puts it ‘…the foundation of
industrialization could not be established without an efficient network of SMEs’.
2. Enterprises exporting up to US$2.5 Million a year are considered Small by the State
Bank of Pakistan and Export Promotion Bureau.
3. Creating a Conducive Policy Environment for Micro, Small & Medium-Sized Enterprises
in Pakistan. ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002).
4. Economic Survey of Pakistan, 2003-04
5. Economic Survey of Pakistan, 2003-04
6. The CMI is a census of all manufacturing sector establishments that are registered
under the Factories Act 1934. The data might be underestimated, as not all the
registered establishments report their data in the census whereas they might as well be
in operation at the time of the census. Data from the latest CMI are for 1995-96 while
data from the LFS survey are for 1997-98. However, as there was hardly any growth in
the registered manufacturing employment between 1990-91 and 1995-96, it can be
safely assumed that the growth between 1995-96 and 1997-98 would be minimal and no
extrapolation between these two years is necessary.
7. Obtained by deducting employment in the formal manufacturing enterprises (CMI data
for 1995-96) from that of total employment in manufacturing according to LFS data.
8. However, this inference should treated with caution, as it could well be a consequence
of poorly designed sampling frames employed for both the Census and Survey data-sets
in Pakistan.
9. World Bank Investment Climate Assessment survey was conducted between May and
November 2002 by SMEDA in collaboration with the World Bank covering a random
selection of 965 mainly manufacturing businesses (90% being SMEs), drawn from 12
largest cities of Pakistan. To date it represents the most comprehensive data set.
10. F. Bari, A. Cheema and Ehsan-ul-Haque, Barriers to SME Growth in Pakistan: An
Analysis of Constraints, June 2003.
11. This is also corroborated by recent State Bank of Pakistan Annual Reports (various
issues), which show that loans up to a size of Rs. 5,000,000 represent a very small
proportion of the credit volume. Table 7, however, does not point to a strong correlation
between access to credit and firm-age.
12. The 56% figure is an addition of the three tax related responses: High taxes 28%,
High Sales tax16% and high Income Tax Rate 12%
13. In Japan, after the war in 1949, old taxation system was replaced by new system to
resolve the problem of incomplete bookkeeping and fear of over-taxation of SMEs. The
new system allowed certain tax merits if a tax return is made with a ‘certain formula of
quick bookkeeping.’ This system resulted in not only the improvement of financial
accounting bu

also the strengthening of financing systems for SMEs.

14. A committee on Reforms in Regulatory Legal and Policy Environment was established
in the Ministry of Industries & Production in 2000 with the purpose to coordinate, review,
identify issues of concern and formulate recommendations on various laws effecting
businesses. Some of their efforts have resulted in the consolidation of labour laws as
announced in the Labour Policy 2002 and proposed amendments in the Factories Act
1934, Drug Act 1976, Boiler Act 1923, and Explosives Act 1884, and as such reviewed
101 commercial and labor laws that effect industrial sector.
15. World Bank SME Policy Note 2001. The results of SMEDA-World Bank Investment
Climate Survey 2003 also confirm this finding.
16. The survey was conducted for Investment Climate Survey of Pakistan (2003),
published by the World Bank Group.
17. World Bank Development Policy Review 2002 reveals that the annual manufactured
exports of Pakistan are barely 12 per cent of those of Malaysia, 18 per cent of Thailand's,
and less than a third of Philippines countries whose combined manufacturing exports
were less than Pakistan's in the mid-1960s.
18. Investment Climate Survey of Pakistan (2003), published by the World Bank Group.
19. World Bank Development Policy Review (2002).
20. For instance, in the wake of implementation of WTO rules, tariff barriers have
become an ineffective tool for developing countries to discourage exports which they
deem unfit for imports to their economies. To counter this situation, countries of the
European Union have come up with non-tariff barriers such the ‘Eco-labelling’ of products
with strict environmental and health friendly criteria. For details, visit <
http://europa.eu.int/comm/environment/ecolabel/index_en.htm >
21. According to the World Bank's survey for SME Policy Note 2001, a vast number of
small entrepreneurs are highly interested (42%) or moderately interested (40%) in
acquiring new technology. It further elaborates that SMEs learn their skills from own
family (40%), working for another employer (35%), and educational institutions (25%).
On sources of technical know-how it reveals Books and journals (30%), other companies
working in the same field (23%), internet (13%), and only 4% from formal institutes as
a source of acquiring technical know-how.
22. Under PRSP government is following a five point strategy which includes: 1)
Macroeconomic stability and Fast growth 2) Investment in Human Resources 3)
Government's involvement in particular sectors (including SME) 4) Expansion in social
security system and 5) Good Governance.

parlance with Government and would suggest government the required suggestions with
respect to investments.
g) Do away with the BOI (Board of Investments) and implement a 'Two way system'.
Where it would be:
i. Automatic Approval.
ii. Though Government's Approval.

h) The Investment Commission has to give a statement 'Investment policy' for each year
and at the end of the year the commission should give an 'Action Take Report' on the
progress made and targets achieved during that fiscal.

i) Depending upon the industry, the government should provide tax holidays in order to
woo the potential foreign investors. (India retained the incentives for IT sector for
another six to seven years).

j) The government should take a series of measures in attracting FDI by providing

location specific incentives.

For example, if the foreign company establishes its branch or subsidiary immediately
then the company need not pay 75 per cent of land registration charges. If the company
has signed the Memorandum of setting up its base but will start the actual production
after 6 months or one year then in that case it would get 15-20 per cent reduction in
land registration charges.

Conclusion
In the year 2001 the public debt of Sri Lanka was greater than its GDP (Sri Lanka Budget
report, 2001) and the major reason was heavy expenditure on defence sector. If the
trend continues then Sri Lanka will find itself in a deep economic crisis from which it will
not be able to recover for decades. It is time for the Sri Lankan government to draw a
strategy for attracting FDI perhaps by visiting the Fortune 500 companies personally and
presenting them the investment benefits in Sri Lanka. The government and the LTTE
need to make sure that the peace talks initiated by the support of Norway should not
fail.

(Krishna Chaitanya is Assistant Professor at the Dhruva College of Management,

Hyderabad)

End Notes
N. Arunatilake, S. Jayasuriya, and S. Kelegama, ‘The economic cost of the war in Sri
Lanka’, World Development, 2001, vol. 29, Issue 9, p. 1483-500.
Central Bank of Sri Lanka, Annual Report, various years.
Steve Chan, ‘The Impact of Defense Spending on Economic Performance: A Survey of
Evidence and Problems’, Orbis, vol.. 29, issue 3, 1985, pp. 403-34.
D. Dunham and S. Kelegama, ‘Does leadership Matter in the Economic Reform process?
Liberalization & Governance in Sri Lanka’, World Development, vol. 25, no. 2, 1997.
Goran Lindgren, ‘Measuring the Economic Costs of Internal Armed Conflict A review of
Empirical Estimates’, Paper for the conference: Making Peace Work in Helsinki, (4-5 June
2003) arranged by The United Nations University, World Institute for Development