This Paper begins with an overview of the SME sector. It argues why SMEs’ growth Potential for employment, income generation, and poverty reduction remains largely untapped. It also highlights Government of Pakistan’s policies for SME growth and their effectiveness with specific reference to constraints faced by firms influencing their productivity and competitiveness. A snapshot of present strategies, adopted for SME growth is also a part of this Paper along with a detailed commentary on the possible avenues for intervention in order to achieve common vision of SME development accruing benefits to the National economy.
An overview of SME Sector in Pakistan2
What constitutes the complexion of Pakistan’s economy is the direct reflection of its Small and Medium Enterprise (SME) sector. The Economic Census of Pakistan-2005 lists 3.2 million business enterprises nation-wide and SMEs constitute over 99 percent of all. Their share in industrial employment according to an estimate is 78 percent and in value addition approximately 35 percent. Nearly 53 percent of all SME activity is in retail trade, wholesale, restaurants and the hotel business whereas the contribution of industrial establishments and those involved in service provision is 20 percent and 22 percent respectively.
Among the SMEs involved in retail, wholesale etc. 98 percent employ less than 5 persons and 99 percent less than 10 persons. Even within the manufacturing sector the trend is not different and nearly 87 percent employ less than 5 persons and 98 percent less than 10 persons. Similar pattern of employment distribution can be traced among other sectors except for mining where SMEs tend to employ more people. In the mining sector, it averages around 56 percent employing between 6 to 50 persons. On the whole, the percentage of large firms is very small.
Punjab is home to more than 65 percent or 1.9 million businesses in Pakistan. This is even true at the sub-sector level such as agriculture, mining, manufacturing, construction etc. except for electricity gas and water sector, where NWFP is leading with a share of 87 percent. Punjab is followed by Sindh, NWFP and Balochistan with a share of 18 percent, 14 percent and 2 percent respectively. Unlike large enterprises in the formal sector, small and medium enterprises are constrained by financial and other
This paper has been developed for the Pakistan Development Forum-2006 and can be accessed at www.smeda.org.pk
The information in this section has been compiled from the Economic Census of Pakistan as reported in their preliminary report or the information supplied by FBS. Unleashing the Growth Potential of SMEs in Pakistan through Productivity Enhancement - 2 -
resources. Their capital base remains lean and nearly 100 percent of all reported business investment, excluding land and business, remains less than a million rupees. Sales data for businesses in Pakistan segregated on firm size was not available although according to the most recent economic census report, 84 percent of enterprises have sales below 0.5 million rupees and 93 percent report sales below 1 million rupees. SME sector in Pakistan is primarily a less formally organized sector; more than 96 percent businesses are owned and managed by an individual as a sole proprietary concern. While 2 percent are partnerships, there are hardly any corporate entities in the SME sector, implying that the inclusion of professional people in business management process is yet to be witnessed. SMEs in an ideal situation should serve as the breeding ground for future corporate sector but this really does not seem to be happening in Pakistan.
These characteristics of SME sector suggest that most of the businesses are in a low growth trap, dealing in traditional products and unable to climb up the technology ladder. They often become...