As third-quarter financial numbers continue to trickle in, one thing is plainly clear; Pakistan’s banks are making huge profits and witnessing triple-digit bottom-line growth. However, behind these great stats is a worrying reality: an economy in chaos, with the government fighting to put its budgetary house in order and financial institutions failing to perform their fundamental duty. The weight of this collective failure is being borne by Small And Medium-Sized Firms (SMEs).
Despite accounting for a staggering 90 percent of all businesses and employing 30 percent of the labor force, Pakistani SMEs are far from realizing their full potential. The primary culprit is their limited access to credit, a crucial lifeline for any business. This is a stark reminder that Pakistani banks have been somewhat reluctant to engage in unconventional financial dealings, unless, of course, you happen to be a prominent oil marketing company.
Recent data reveals a discouraging trend. By the end of June, the total outstanding SME financing through financial institutions had plummeted to Rs457.1 billion, a 5.7 percent decrease compared to the previous year and 4.6 percent over the preceding quarter. The number of SME borrowers reached a record low since June 2015, with 154,229 SMEs availing credit.
Adding to the misery is the shrinking share of SMEs in private sector credit, falling to a meager 5.22 percent by FY23, the lowest since at least June 2015. While it’s reasonable to attribute some of this decline to the economic and political tumult of the past year, this issue predates recent challenges and requires a more profound, long-term solution.
A look at the World Bank’s latest Enterprise Surveys paints an even bleaker picture. In Pakistan, an alarming 40.9 percent of businesses are facing complete credit constraints, while an additional 15.2 percent are grappling with partial constraints, according to recent findings. The figures in question surpass the average rates of 17.1 percent and 17.7 percent observed in South Asia. In a striking revelation, it has come to light that a mere 2.1 percent of Pakistani firms have the privilege of accessing bank loans or lines of credit. This glaring disparity becomes even more apparent when compared to the regional average of 23.7 percent.
In recent years, there have been numerous endeavors to tackle this matter, with regulatory bodies consistently emphasizing the significance of small and medium-sized enterprise (SME) financing. Unfortunately, these efforts have borne little fruit. A recent report from the Better than Cash Alliance reveals the extent of the challenge – by December 2021, total outstanding SME credit stood at Rs460 billion, well short of the Rs800 billion target set by the National Financial Inclusion Strategy of 2015. The goal of SMEs’ share in overall private sector financing missed by 11.6 percentage points, achieving only 5.22 percent.
Recent history reflects a concerning pattern of flip-flopping policies that have left SMEs caught in the crossfire of shifting political tides. The introduction of the SME Asaan Finance Scheme (SAAF) offered uncollateralized loans with capped pricing and the federal government’s partial credit risk guarantee. Regrettably, SAAF’s promise unraveled as the macroeconomic environment shifted with changing governments, a common narrative in Pakistan.
Imran Khan launched the Kamyab Jawan Programme, disbursing loans to thousands of SMEs, only for Shehbaz Sharif to follow with the Prime Minister’s Youth Business and Agriculture Loan Scheme, essentially covering the same ground. This game of policy musical chairs is a recurring theme, with SMEs paying the price. As political figures and their initiatives come and go, the issue of SME financing remains a constant challenge. Pakistani SMEs continue to face limited access to credit, while a far less competent sovereign soaks up available loans.
The discrepancy between ambitious targets and actual outcomes is evident. While Pakistan seeks to expand trade relationships with countries like Nigeria and Turkiye, domestic economic challenges remain pervasive. Reversing the current economic trajectory is a monumental task, and Pakistan must confront the realities of inflation, high lending rates, rising utility tariffs, and fuel prices. The prospect of economic revival is clouded by the constraints imposed by IMF program conditions and a shortfall in government revenue.
The path forward requires a commitment to curbing wasteful government expenditure and divesting from loss-making public sector enterprises and the beleaguered power sector. Political stability remains the linchpin for economic stability. Turning these hopes into realities will require concerted efforts at all levels.
