In theory, it is common knowledge that economic participants can generate livelihoods in two ways; first by productive use of assets to generate profits and second, by sale of human capital in the form of skills and/or labour. Thus, in the context of Pakistan’s economy, poverty and lack of growth can be easily explained; the society is quite evidently asset as well as skill deficient as a result of which the long-term growth path of the economy currently resides in the lower quadrant.
But there is a ray of hope and thus a solution to be proposed. The deconstruction of real GDP growth in recent years reveals languishing agriculture and large scale manufacturing growth figures. Much underrated and less analysed is the growth of small scale manufacturing, staying put at levels above seven per cent since 2005, although its share in the GDP lies between a measly 4-5 per cent in the said period. As a corollary, a very obvious observation would point towards the sector’s imperviousness from the domestic and negative international ‘happenings’ at large, in addition to the fact that the sector remains highly marginalised when it comes to accessing funds from formal sources in these times.
The figures for the small scale manufacturing sector are indicative constituents of the larger small and medium enterprise sector (SMEs), which also comprises other segments such as trade and agriculture. The SBP defines SMEs as entities that own up to Rs50-100 million in productive assets (including land), employ less than 250 people and realise a turnover of less than Rs300 million. According to a study by SMEDA, overall SME contribution to the GDP and exports stands at 25 per cent each, wherein the sector provides employment to 78 per cent of the labour force. The report further highlights that only 11 per cent SME participants out of the respective universe approach the formal sector for credit, and are successful in obtaining funds 20-60 per cent of the times.
This can be considered distressful considering the potential of small scale enterprises to bring in greater foreign exchange and provide a stimulus to growth, given that the most notable segments are the leather industry – attributed as the second highest export earner after textiles – and the cotton industry, which has inelastic demand domestically and internationally.
A separate stream of solutions exists in the form of micro-finance institutions with a portfolio worth of Rs25 billion during 2010, but few avenues exist for slightly larger SME’s. SBP has also only acted on the regulation front focusing on enlarging the scope of the credit information bureau, facilitating licensing for development finance institutions, development of an SME skill base and focusing on SME lending as part of the lending program.
However, with the exception of donor money, no internally generated formal fund is currently functioning or in the process of being set up. Given the overall distressed financial environment with soaring NPLs, a general aversion exists towards lending to the private sector. Lending as credit to the latter has mostly been hovering around Rs3 trillion since FY08, indicating that no hope really exists for the SME sector, which is perceived to be much riskier.
A lesson in history would illustrate how East Asian economies rose to their glory by encouraging investment in small-scale industries. Specifically, the Korean Cheabols are a much-sited example of creation of backward and forward linkages within the industry. An overall high risk environment with crashing markets and low liquidity naturally leads to a low appetite for risk. But if risk undertaking remains completely subdued, then rebounding on to higher growth for an economy like Pakistan may not be possible.
We all believe that every drop makes an ocean, dont we?
The writer is an economic researcher and freelance journalist