ISLAMABAD: The government must expand and deepen the ‘Doing Business Reforms Sprint’ to address the myriad of regulations at the federal, provincial and local levels said the World Bank in a policy note.

The Washington-based bank said the piecemeal approach to reforms will not work given the overlapping layers of regulations.

The government should begin reforms by diagnosing product and factor market regulations at federal, provincial, local and sector-specific levels to identify pressing needs, it says.

The reform agenda could be driven by a high-powered ‘National Business Climate Reform Unit’ attached to Prime Minister’s Office, supported by complementary organisations at provincial level.

Leveraging digital technology, legal reform to regulations should be complemented by measures to improve transparency and ease of compliance for firms. A comprehensive inventory of all licenses and permits that apply to firms in each province or sector would be a good first step.

This could be used to prepare and maintain updated, consolidated regulatory repositories, or e-portals that list all requirements and procedures in the public domain, at federal and provincial levels.

The report says a fundamental challenge in improving credit allocation to firms — not unique to Pakistan — is that risk and informational asymmetry is worse in lending to young, small and innovative firms. Such firms also lack property and other immovable assets that are easier to collateralise. The government loans and short-term bank lending to corporates further crowds out lending to small and medium enterprise (SMEs) in Pakistan.

There are three private credit bureaus in the country and the Credit Information Bureau of the State Bank of Pakistan maintains a database of all individuals and businesses applying for loans, including SMEs but there is scope to expand these databases.

Rating the credit worthiness of SMEs is especially difficult, since many of them do not maintain adequate records, but establishing a specialised SME rating agency with public support can help solve the information gap.

Regarding collateral, the operationalisation of the recently passed secured transactions reforms law that expands the set of acceptable collateral will be important. A database or a national collateral registry of movable assets could help operationalising these reforms, policy note suggests.

An appropriate regulatory sandbox approach could facilitate such pilots while containing risks. Pakistan’s Development Finance Institutions (DFIs) and other specialised financial institutions, which could tailor products to meet SMEs and long-term financing gaps, are small and fragmented.

The note mentioned the need to strengthen existing DFIs, with clear mandates addressing well-identified market gaps, better governance and stricter financial supervision.

The evidence on the impact of such directed lending is limited. There is scope for both market failure (information asymmetry) and government failure (capture) in lending to firms, and so the best approach is probably somewhere between these extremes.

It would involve incentivising banks and other financial institutions to reach out to a broader set of firms, while strengthening the institutional underpinning for reduced informational asymmetry and risk management.

Published in Dawn, March 16th, 2019