CHINA has agreed to facilitate larger imports from Pakistan into its markets to help Pakistan narrow its huge trade imbalance of close to $10 billion with it.

In FY18, Pakistan’s exports to China fetched $1.75bn whereas imports from the country totalled $11.46bn, according to State Bank of Pakistan (SBP) data compiled on the basis of actual inflows of export proceeds and forex outflows via imports.

Advisor for Commerce Abdul Razak Dawood says the ball is now in Pakistan’s court and it’s up to exporters to seize this opportunity. But government officials and business leaders both admit that there is not much scope left this fiscal year as it would take Pakistan’s export based industries some time to develop enough capacity to become competitive in Chinese markets.

Small and Medium Enterprises can play a more effective role in achieving high export growth to China in particular and to the rest of the world in general

The government is also making efforts to increase exports to other markets including the US, the EU, the GCC and ASEAN regions and even to far-off African countries. But, in order for these efforts to be successful, the government, exporters and banks all need to work in greater coordination.

In this context, Small and Medium Enterprises (SMEs) can play a more effective role in achieving high export growth to China in particular and to the rest of the world in general.

But to help SMEs play this role, the PTI government will have to fulfil its promise of creating an enabling environment for them.

This is, therefore, a good time for banks to boost SME financing and get regularised so that they may qualify for bank borrowings owing to greater efficiency and innovation.

Most of Pakistan’s SMEs are in the informal sector; that is why bank financing to SMEs is so low despite high annualised growth rates.

In CY2017, the SME sector showed a 12 per cent annual growth in the stock of loans made to this sector. But its share in the stock of banks’ total lending to the private sector till that year was a mere 8.7pc — far lesser than ideal and even lower than 9.2pc in 2016.

“If our SME financing does not grow by 15-20pc per year for a decade or so, we run the risk of hurting export-based large industries let alone direct SME exports,” says a senior central banker.

The SBP keeps pushing banks to lend more to SMEs and has even put in place a comprehensive set of prudential regulations for this purpose. But banks say lending to this sector remains lower than desired because many SMEs fail to meet borrowing prerequisites and loan infection ratio in this sector remains high.

“Putting SMEs to work in Naya Pakistan is both easy and difficult,” says the head of a big local bank.

“It is quite easy because SMEs can be encouraged by the current government to promote its agenda of creating 10 million jobs and construct 5m housing units for low-income groups.

“But it is very difficult given the challenges we face in modernising the country’s industrial and export-base and in producing value-added goods and services by the industries they feed.”

The SBP has recently made recording forex transactions of Pakistan-based IT companies easier and more transparent. In a follow-up action, banks should enhance lending to already operating and upcoming software development companies. Doing so can help boost productivity and earnings of services sector SMEs on the one hand and increase services exports on the other, central bankers say.

But to achieve the goal, banks will have to come up with more venture financing instruments and maintain closer coordination with Karandaz and the Pakistan Software Houses Association.

In 2017, banks loaned Rs11bn to services sector SMEs, which is less than 25pc of total SME lending.

As CPEC gains momentum, SMEs will see new patterns of demand popping up. The government, banks and the private sector needed to recognise these patterns and create an enabling environment which in turn will have a decisive impact on SME growth.

In 2017, the share of trading and manufacturing sector SMEs stood at Rs24bn (50pc) and Rs13bn (around 25pc) respectively.

Is this a healthy credit distribution pattern?

“These are serious issues. We need an integrated SME development policy by the PTI government. Banks alone cannot do much,” declares the president of another large local bank.

“Similarly, we will have to look at whether the distribution of SME credit in its broad financing categories (fixed investment, working capital and trade finance) is as it should be or whether we need to change them. If so, how? At the level of individual we’ll have to reset some ‘dos and don’ts’ of SME financing.”

During 2017, the bulk of SME financing (Rs41bn) was in the form of working capital. Financing for fixed investment got Rs10bn whereas trade financing declined by Rs3bn.

This pattern of lending has to change in favour of fixed investment without which capacity building of SMEs is not possible. If SMEs continue to work with near-obsolete or traditional units, they run the risk of maintaining a narrow export market base.

There is also a need for banks to accommodate more SME borrowers. The number of such borrowers stood below 164,000 at the end of 2017, down from 177,000 a year earlier. And this happened at a time when loan infection ratio of SME sector rather came down to 17pc from over 20pc.

Published in Dawn, The Business and Finance Weekly, November 12th, 2018