Source: PBS (figures have been rounded off)
Source: PBS (figures have been rounded off)

THE State Bank of Pakistan (SBP) is pushing banks to their limits to lend more to small and medium enterprises (SMEs). But the outcome depends on the government and the private sector as well as compliance by banks.

Reinvigorating industrial production through a revival of the SME sector is a good idea: if it works well, it can help the domestic economy grow by infusing life into its industrial and services sectors and revitalising agriculture. It can also help the country contain rising joblessness. And, if SMEs within the supply chains of export industries are truly helped with cheaper finance and non-cash incentives, they can contribute effectively to the much-needed push in exports. The strategy is good. But the devil’s in the detail.

The SME sector remains largely undocumented and a very small percentage of them are documented enough to qualify for bank loans. The total number of SMEs that have a bank borrowing history stood below 200,000 in 2019 whereas the total number of SMEs in operation is estimated at three million. That is where the government and the private sector have a role to play and make the scheme of industrial revival via SMEs work. Sadly, this aspect remains missing. Covid-19 hit Pakistan towards the end of February. Since mid-March, the SBP has been trying to mitigate its impact on the economy. The central bank has not only opted for an aggressive monetary easing but it has also been pushing banks to take care of the private sector in general and SMEs in particular.

Since March 17, the SBP has slashed interest rates by 625 basis points to 7pc. It also oversaw the deferment of bank loans worth Rs623 billion and the restructuring of loans worth Rs152bn. In addition, it has also ensured the approval of wage loans worth Rs126bn, hospital loans worth Rs6bn and investment loans worth Rs11.8bn — all in the name of helping the national economy amidst the pandemic-triggered miseries.

Benefits of concessional finance and other incentives-laden schemes announced by the central bank would result in the revival of a limited number of SMEs

The government did augment the central bank’s efforts by partly subsidising financial relief meant for SMEs. But it did nothing to come up with quick documentation plans for the SME sector in consultation with the private sector. Policymakers in Islamabad perhaps thought it would be enough to link financial relief to SMEs with their electricity bills.

A documented sector, documented enough for banks to consider for prudent lending, demands much more. Compliance of tax laws by loan-seeking companies, traceability of their authentic financial accounts and their capacity to service banks loans are some of the things that banks examine before they lend.

Under a national emergency like Covid-19, the government and the private sector could have easily negotiated the ways in which a large number of SMEs could have been documented under a concessional regulatory regime. On the regulatory front, the government failed and with it failed the private sector that is so quick in demanding concessions after concessions but does little to help SMEs qualify for bank loans.

The Pakistan Bureau of Statistics reported in May — when the country was in the third month of the pandemic — that the large-scale manufacturing (LSM) output grew 20.5pc from April though it recorded a massive 24.8pc decline from the same month a year ago. Earlier, the LSM output was not growing even on a monthly basis. In April, it had recorded a record 32.85pc decline over March. A closer look at data shows that in May the production of fertilisers, tractors, wheat, tea and medicines remained higher than in May 2019 while the output of cooking oil and ghee remained stable.

Had the government attached some importance to SME and agriculture sectors while designing pandemic-focused economic revival package worth Rs1.2 trillion, it could have helped the country gain a broader revival in the LSM output. Right from the beginning of the pandemic, independent economists had been arguing that agriculture and SME sectors needed adequate government support to kick-start economic recovery and contain joblessness amidst pandemic-driven lockdowns. But sadly, the two sectors together got only Rs100bn out of the economic revival package.

The government still has time to rethink its agriculture and SME support policies. In the context of SMEs, it can offer not only larger financial assistance but also tie it to an easy-to-obtain status of documentation. And the representatives of the private sector still have time to devise a swift mechanism for SME documentation under the guidance of federal and provincial governments and the central bank.

Unless that happens, the benefits of the concessional finance and other incentives-laden schemes announced so far by the central bank would result in the revival of a limited number of SMEs. The revival and growth of even those SMEs that are documented and qualify for bank loans is remarkable during these troubling times. But far greater and more sustainable economic gains can be achieved if all the stakeholders also focus on “mainstreaming” the SMEs that operate in the informal sector.

Better results could also be obtained by ensuring that agriculture remains as strong a pivot for the revival of the SME sector as industry to avoid the concentration of financial incentives around big industries. That, however, requires fuller involvement of the provinces in economic decision-making and, in turn, a fair rebalancing of the civil-military relationship.

Published in Dawn, The Business and Finance Weekly, July 27th, 2020

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