FeaturedNationalVOLUME 18 ISSUE # 43

SMEs at critical juncture

Pakistan’s small and medium-sized enterprises (SMEs) are facing a critical juncture as the nation grapples with an ongoing economic slowdown and surging inflation. These SMEs, already burdened with formidable challenges, find themselves at the frontline of economic turmoil.

In this environment, many have succumbed to financial pressures, leading to closures and job losses. However, a glimmer of hope emerges for those SMEs connected to global export markets. To ensure long-term economic stability, promote exports, and accommodate the growing labor force, Pakistan’s policymakers must urgently address the persistent obstacles hindering the full potential of the sector.

The country’s long-term economic growth is facing significant challenges, with the possibility of stagnation or even decline. The composition of the economy, particularly the share of different sectors in the GDP, suggests that the industrial sector is experiencing premature decline. Furthermore, there are indications that productivity levels across various sectors of the economy are decreasing. According to the Pakistan Institute of Development Economics, in order to steer the economy towards sustainable and equitable long-term growth, it is imperative to assess the state of the industrial sector and identify the key obstacles impeding its progress. The sector has been adversely affected by an unstable policy environment, as evident from recent factory closures. Consequently, it is crucial to examine the nature of the crises faced by the industry and determine the necessary measures to enhance efficiency, which is the primary objective of this study.

Conducting such an analysis necessitates access to data on the industrial sector, particularly the engineering industry, which is currently limited and outdated. For instance, the most recent Census of Manufacturing Industries (CMI) was conducted in 2015-16 and only released last year. There is a lack of readily available comprehensive datasets or reports on the engineering industry within the country. Developing effective policy interventions and proposals without the requisite research and data is a formidable challenge. Given that the manufacturing sector contributes 12.4% to GDP and employs 14.9% of the labor force, it holds significant importance in the domestic economy. Therefore, it deserves attention from both researchers and policymakers. Considering this, it is advisable to create a comprehensive overview of the industrial sector or delve deeply into a sub-sector like the engineering industry.

As a part of the broader industrial sector, the engineering industry plays a pivotal role in the economy, with strong connections to other sectors. It meets the demand for its products within the economy and also stimulates the demand for inputs from other sectors and downstream economic activities. Consequently, it exerts a substantial influence on various industries, including manufacturing, construction, and transportation. As such, it serves as a critical driver of economic growth and development.

The engineering industry is at the forefront of the rapid technological changes occurring in the economy. This has resulted in an increasing need for skilled workers who possess the knowledge and expertise required to operate and maintain complex equipment and systems. The development of new materials and manufacturing techniques has further led to significant enhancements in the performance and efficiency of various infrastructure elements and systems, such as bridges, buildings, and transportation networks.

One of the major challenges confronting the engineering industry is the swift pace of technological change, which necessitates a growing demand for skilled workers with the requisite knowledge and expertise to handle intricate equipment and systems. Additionally, the development of new materials and manufacturing techniques has led to notable improvements in the performance and efficiency of various infrastructure and systems, including bridges, buildings, and transportation networks.

The engineering industry is witnessing significant interest and transformation due to technological advancements, particularly in automation and Artificial Intelligence (AI). Research indicates that integrating AI technologies can enhance the efficiency and precision of various engineering processes, including design, planning, and maintenance. However, concerns have emerged regarding the potential impact of automation on employment and job security for workers within the engineering sector.

Besides technological advancements, the engineering industry is also influenced by broader economic and political factors. Global economic trends and geopolitical events can significantly affect the demand for engineering services and the availability of skilled labor. Additionally, regulatory frameworks and policies related to environmental protection and sustainability play an increasingly vital role in shaping the industry’s direction.

Pakistan’s engineering industry encompasses a wide range of activities, including civil, mechanical, electrical, and electronic engineering, among others. The sector faces notable challenges, such as infrastructure limitations, a shortage of skilled labor, and limited research and development capabilities. However, there are also opportunities for growth and development, driven by the country’s strategic location, availability of natural resources, and a young and expanding population. These attributes can provide a solid foundation for sectoral expansion, achievable through continued investment in education and training, research and development, and the advancement of new technologies and processes.

The report sheds light on the numerous obstacles hindering the growth of Pakistan’s emerging engineering industry and, consequently, its small and medium enterprises (SMEs). Based on a survey of 328 engineering firms, primarily operating in the SME sector, the report identifies unreliable electricity supply, limited access to formal bank credit, exclusion from global supply chains, branding, pricing, product quality, and informality as major factors impacting the growth and productivity of these enterprises.

These challenges are not unique to the engineering sector but are prevalent among SMEs across various industries. The report underscores that a majority of industrial units, approximately 83%, lack plans for future expansion, primarily due to electricity unavailability. Some entrepreneurs, however, intend to invest in technology, machinery, land, and skilled labor to enhance their business prospects. Furthermore, the report highlights the significant issue of limited access to credit for most of these firms, primarily due to inadequate collateral. It recommends that engineering firms adhere to international and national quality standards to address these challenges effectively.

The study also emphasizes the importance of fostering strong ties between businesses and the government. It notes that political instability and unfavorable economic policies have contributed to mistrust and dissatisfaction among business owners.

SMEs, particularly within the engineering sector, are globally recognized as the backbone of economies. Their crucial role in fostering growth, creating substantial employment opportunities, and reducing poverty is universally acknowledged. Consequently, successive governments in Pakistan have pledged to improve the “ease of doing business” for SMEs since the 1990s to boost overall economic growth. However, practical implementation of these measures, such as the SME policy of 2021-25, which offers incentives like tax reductions and a Rs60bn bank credit line for collateral-free loans to small and medium entrepreneurs, is yet to be realized.

Small and medium-sized enterprises (SMEs), already grappling with significant challenges, have been disproportionately affected by the ongoing economic slowdown and surging inflation. Many of these enterprises have been forced to shut down due to financial difficulties stemming from rising costs, and numerous workers have been laid off as industries struggle to mitigate losses during this crisis. The impact of this crisis has been particularly severe on units operating within the domestic market. In contrast, those connected to global export markets, either directly or indirectly, have managed to weather the storm to some extent, despite facing their own set of difficulties.

For the sake of long-term economic stability, increased exports, and the creation of more jobs to accommodate the millions of individuals entering the labor market each year, Pakistan’s policymakers must urgently address the longstanding issues that have hindered SMEs from realizing their full potential.

The challenges faced by Pakistan’s SMEs amidst the current economic crisis are undeniable. The impact has been particularly harsh on those operating solely within the domestic market, while those with global export connections have displayed greater resilience. To secure a stable economic future and foster job creation, it is imperative for policymakers to tackle the longstanding impediments that have held back the sector. By doing so, Pakistan can unlock the full potential of its SMEs and navigate these turbulent times towards a more prosperous future.