The challenges to micro, small, and medium-sized enterprises (MSMEs) in Pakistan in accessing foreign markets include the inability to meet required labor, environmental, social, and international standards, in addition to compliance with complex trading regulations, says the Asian Development Bank (ADB).
The bank stated in its report ‘Asia Small and Medium-Sized Enterprise Monitor 2021’ that work is needed to strengthen the availability of bank credit, create an enabling regulatory environment, and target business development services for MSMEs to spur economic growth and job creation.
MSMEs contribute about 25 percent of export value and could expand further through trade compliance and business development, as per the report. An estimated 5.2 million MSMEs operated in the country in 2020 and contributed nearly 40 percent to the GDP and 25 percent of exports by value. They are an integral part of the economy, which is why they are prioritized by the government through its Small and Medium-Sized Enterprise (SME) Policy 2019, and the emphasis on MSMEs within pandemic recovery measures.
The report detailed that MSMEs are aided by several measures, including concessional loans for exporters, and the implementation of the Digital Policy 2018 that supports technology and innovation, alongside venture capital and ‘angel’ funding. Nevertheless, there are barriers to the development and growth of MSMEs, such as their largely informal status, difficulties in regulatory and trade compliance, limited government support, and access to finance.
The number of SME borrowers remained below 200,000 between 2011 to 2020, due to supply-side challenges such as nonperforming loans (NPLs), risk averseness of lenders, and skewed commercial lending that favors the public sector. The demand-side issues include the lack of documentation and the absence of collateral. The report detailed that this leaves many MSMEs ineligible for the government to refinance schemes or other formal support.
Furthermore, e-commerce holds a lot more potential for MSME growth, but measures such as digital literacy must spread among micro and small scale entrepreneurs for them to take advantage of digital platforms.
Pakistan’s start-ups raised $77 million in 2020 and nearly $178 million from 2015 to 2020. The startups Airlift ($22 million) and Bykea ($13 million) that focused on transportation/mobility were beneficiaries, along with multi-million dollar investments in e-commerce such as Cheetay ($9.6 million) which deals with last-mile delivery, and Bazaar ($7.8 million), an online marketplace that links retailers directly with manufacturers and wholesalers.
Innovation (and investments) in other areas, including fintech, edtech, agritech, and healthtech, are also expanding.
The State Bank of Pakistan has multiple refinance schemes for MSMEs, with some related to the pandemic. However, many MSMEs are ineligible for bank credit and public financing schemes due to their informal status, and inadequate registration and documentation.
A Pakistan Credit Guarantee Corporation (PCGC) was established in 2019 but became operational in April 2021. Microfinance institutions play a critical role in enhancing access to finance for rural MSMEs. Nonetheless, NPLs are rising, and venture capital funds are actively providing growth capital to startups.
Concessionary refinancing schemes are available to encourage lending since the COVID-19 outbreak, but their effectiveness has been limited. Access to bank credit remains a challenge for MSMEs, and commercial bank lending is also skewed toward the public sector which offers healthy returns with less risk.
Compounding these supply-side issues were also demand-side challenges. Many MSMEs are informal and lack the requisite registration and documentation to apply for formal bank loans (or benefit from refinance/formal schemes). Furthermore, weaknesses in contract enforcement are an impediment to lending microenterprises. There is also no program-based lending and value-chain financing for small enterprises that lack collateral, the report revealed.
The report recommended that the financial infrastructure needed to promote MSME access to finance continues to evolve. There is progress in DFS, the rise in venture capital, and business angel investments. Other measures, although nascent, in capital markets such as the GEM Board and the PCGC should ease MSME access to credit.
The SECP will review its regulatory framework in its 2021 outlook to reduce over-regulation and remove practical difficulties. It will also leverage its digitized platform and provide new businesses the facility to open bank accounts at the time a company is registered. However, other critical areas remain weak. They include better enforcing contracts and resolving commercial disputes in a timely manner, difficulty in obtaining credit or construction permits, varying taxation policies, and weak enforcement of intellectual property rights.
The report also showed that Pakistan’s economy contracted by 0.5 percent in the fiscal year 2020 (that ended 30 June 2020), due to the adverse effects of the COVID-19 containment measures. These caused supply chain disruptions amid a decreased demand for goods and services, contributing to a loss in the GDP of Rs. 2.5 trillion, unemployment of four to five million workers, and a reduction in business earnings.
However, the economy rebounded to grow by 3.9 percent in the fiscal year 2021, supported by a strong fiscal and monetary policy responding to the pandemic.