What are SMEs?
Small and medium-sized enterprises (SMEs) are businesses that maintain revenues, assets or a number of employees below a certain threshold. Each country has its own definition of what constitutes a small and medium-sized enterprise (SME). In Pakistan, criteria to be categorized as SME is employing less than 250 workers or having paid-up capital of up to Rs. 25 million and sales up to Rs. 250 million. Small Medium-Sized Enterprises (SMEs) in the COVID-19 faced major challenges. SMEs are spread all across Pakistan and play a vital component in the growth and sustenance of Pakistan’s economy.
There are almost 3.3 million Small and Medium Enterprises in Pakistan. These include manufacturing units, service providers, and startups operating on various levels. SMEs employ 78% of the non-agricultural labour force, make up about 25% of manufacturing exports and over 30% of the GDP in Pakistan.
Millions of citizens of Pakistan are dependent upon SMEs for their livelihood and the current Covid-19 has been a huge force against the footing of SMEs across Pakistan. Lockdowns, social distancing and the consequent emergence of e-commerce have created a huge impact against these SMEs which are now facing major survival threats.
Impact of Covid-19 on SMEs
Covid-19 pandemic has brought the entire world to a standstill with the spread in almost all countries of the world. As a result, many countries including Pakistan used the option of lockdown in order to curb the spread of the disease in the country. This led to all the SMEs being other completely or partially shut down and dampened the growth of the crucial sector. Many people found it hard to sustain the loss and had to shut down their businesses in entirety. Almost all of the Small and medium-sized entrepreneurs suffered major financial implications and had found it hard to deal with their personal expenses.
After the end of lockdown, ‘new normal’ has not been easy on the road for SMEs as well and the growth of e-commerce has created a huge competition.
Not only that, the implementation of SOPs by the government means that customer bases are reduced as well. In addition, due to the overall effect on the economy and employment, people are increasingly reducing their spendings in order to save money and ensure survival until the situation gets back to normal. These effects have caused a huge toll on the sales revenue of SMEs and drastically reduced the profit margins of these organizations. As a result, Small Medium-Sized Enterprises (SMEs) in the COVID-19 are going through major ups-and-downs.
In order to improve the dreadful business conditions, business leaders are demanding the government to create a harmonious business environment and help the cash-strapped SMEs through relief packages, soft loans and tax concessions. According to some, the government has not been able to support SMEs the way other countries have done in order to get them back on track and protect them from bankruptcy. Other nations are providing loans at zero per-cent interest rates in order to help their SME sector.
After a two month lockdown, businesses started to reopen in phases in the month of May 2020 at the festival of Eid and registered sufficient numbers of sales. However, the number was still below par as compared to last Eid as people were sceptical while stepping out for shopping. Smart lockdown impositions in red-zone areas have again led to the closure of businesses and business associations are now calling out the government to announce a relief package or some major reduction in import duties and sales tax so that SMEs can gain some advantage.
Policies of SBP and Federal Government
State Bank of Pakistan in its current monetary policy brought the interest rate down to eight per-cent which is almost a five-per-cent cut in a six month period. The primary reason for this was to create an easy borrowing environment for entrepreneurs and the public in order to help them in the financial crisis which erupted as a result of Covid-19 pandemic. The idea as a whole was to increase the flow of money supply in the economy and keep the wheel rolling. This was considered to be a huge aid to SMEs as borrowing becomes less expensive and can be used as a measure to address pending expenses.
The Federal Government of Pakistan in the budget announced for the Fiscal Year 2020-21 tried to support the small businesses by not imposing any new taxes and even reducing the sales tax and import duties on certain items. The stimulus package of more than Rs. 1200 billion which was introduced as a relief package for SMEs, farmers and daily wage workers will be carried forward in the upcoming fiscal year in addition to Ehsas program which aimed to support vulnerable segments of the society.
Government as part of its expenditure outside the Public Sector Development Programme has tried to allocate sufficient amounts to SMEs as can be seen in the table above. Insurance schemes, credit guarantees, SME lending programs etc. Increase in SME lending program from Rs 450 million to Rs. 2000 million suggests that the government is keen to support SMEs.
In light of the above data, it can be evaluated that the government is interested in supporting the dying SMEs of Pakistan and protecting them from adverse effects of Covid-19 pandemic. However, the measures are still not substantial enough considering that SMEs are vital in rural areas as well as urban areas and exist in a huge number. Moreover, there is a large number which is operating as an unregistered SME and thus the benefits are not enough and might not reach all as well.
Adding on to this fact, the budget still places huge importance on other sectors of the economy which are not strategically important during the pandemic like Housing projects, tree plantation etc. The amounts must be reallocated to support the SME sector which plays a vital role in the livelihood of millions. Moreover, tax reliefs are still announced and small reductions in tax rates still mean that taxes must be paid amidst the fact that sales revenues are in a major decline. Therefore, the government should revisit this policy and try to create a more favourable environment in order to protect vulnerable SMEs.