World through a Pakistani Lens

Tag: PM COVID-19 Package

  • Pakistan’s COVID-19 Response: Help the SMEs, please @Government of Pakistan

    SME’s need help!

    The need for the government to help small and medium businesses is growing by the day as the lock-down continues. This has also been a key issue discussed during the daily virtual global-national brainstorming meetings being spearheaded by PIDE. How should the government help these SMEs during this pandemic and resulting economic slowdown?

    In the previous discussion “Pakistan’s COVID-19 Response: What of the Small and Medium Enterprises?” the significance of helping SMEs was highlighted and questions were raised about adequacy of the government’s COVID-19 fiscal support package and about who will be spearheading cause of the SMEs. [https://empowerpakistanbyazd.blog/2020/03/31/pakistans-covid-19-response-what-of-the-small-and-medium-enterprises/]

    SMEs matter to our economy!

    Allow me to refresh our collective memories. Somewhere between 3 and 4 million SMEs collectively provide 90 percent of the overall employment in Pakistan. Excluding the agriculture sector SMEs, 78 percent of the workforce is SME based. SMEs add 30 percent to 40 percent to the GDP of our country—depending on whose numbers you believe. They are spread in the proportion of our population across our provinces.

    These SMEs are in almost every imaginable sector: 10 percent in Wood & Furniture; 4 percent in Jewelry; 16 percent in Grain Milling; 5 percent in Art Silk; 4 percent in Carpets; 7 percent in Metal Products; 13 percent in Cotton Weaving; 6 percent in Other Textiles; and 35 percent in Other Sectors.

    This last “Other Sectors” is important. Technology and other start-ups, intellectual services providers, and so on constitute this “Other Sectors” category and are really where a lot of the employment for those with higher education is concentrated. The IT SMEs contributing to our exports fall within this category.

    The CONVID-19 resultant layoffs will hurt SMEs more than the big-industry!

    PIDE’s recent analyses in its recent CONVID-19 response bulletins on “Impact on Employment – Layoffs” [https://www.pide.org.pk/pdf/PIDE-COVID-Bulletin.pdf and https://www.pide.org.pk/pdf/PIDE-COVID-Bulletin-4.pdf] show the we are heading toward a vulnerable employed layoff in the neighborhood of 20 mil persons. Taking the range of estimates available, we have between 30 and 40 million Pakistanis employed by the SMEs. What the layoff estimates mean to SME sector is anyone’s guess, yet it would not be unreasonable to assume that almost a third to half of the SME sector employees are at risk if this slow down continues another month or so.

    SMEs are not benefited by the post COVID-19 relief measures posited by the State Bank of Pakistan (SBP)

    There is very little credit to the SME sector. SMEs finance is around 7 percent of the total private sector financing in Pakistan. The total outstanding SME financing per SME is barely 2.4milPKR per SME—way lower than even the allowed exposure of up to 25milPKR by SBP. This is further verified when we find that 83 percent of all credit by the SBP and scheduled banks is to the government sector (including State Owned Entities or SOEs). So, deferment of loan payments, lowering of interest rates, and other such financial measures really don’t by and large impact the SME sector of Pakistan.

    SME Financing by State Bank (Rs in Billion)Jun 19Sep 19
    SME Financing (outstanding)464.86422.12
    Domestic Private Sector Financing6,200.06121.1
    SME Financing as percentage of Private Sector Financing7.50%6.90%
    SME NPL ratio17.04%18.95%
    No. of SME borrowers183,606182,149

    Supporting Pakistani SMEs requires direct support to them through innovative approaches which may have multiple impacts

    Government of Pakistan should directly offer to support the SMEs as follows.

    A) Provide wage and rental subsidies to SMEs who have tax registration with FBR; this can be in the form of cash payments directly to SME employees and to lessors.

    B) Advertise that all SMEs registering with FBR through a simplified registration procedure will get all the same subsidies.

    As a start, both these measures will compliment the cash payment schemes for through the Kafalat program of Ehsas and will have a higher stabilization impact than supporting large businesses at this time.

     

    Acknowledgements to contributors

    Useful inputs for this blog were received from Ms. Uzma Zia (Senior Research Economist) and Dr Usman Qadir( Senior Research Economist), both at the PIDE.

     

    References other than those listed above

    Economic survey 2018-19

    Akhtar S. H. Shah (2018) Framework for SME Sector Development in Pakistan, Planning Commission of Pakistan Ministry of Planning, Development & Reform Government of Pakistan

    SBP website (http://www.sbp.org.pk/sme/index.htm)

    Quarterly SME Finance Review(2019), SBP (http://www.sbp.org.pk/sme/PDF/DFG/2019/Sep.pdf)

    SMEDA (https://smebank.org/media-center/sme-sectors-brief/)

    Zafar, A., & Mustafa, S. (2017). SMEs and its role in economic and socio-economic development of Pakistan. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(4).

  • Pakistan’s COVID-19 Response: What of the Small and Medium Enterprises?

    I am lucky to be part of a very able and noble group under the aegis of Pakistan Institute of Development Economics (PIDE) who are daily undertaking analysis and discussions and recommendations geared towards the policy makers in our holy state of Pakistan.

    Today, after the daily morning virtual meeting of this group around COVID-19 issues, I came out thinking about the reality of my existence and of my associates in my small ‘do tank’, Reenergia! I am therefore going to talk about and present a use case of a Pakistani SME albeit on the ‘small’ rather than on the ‘medium’ side.

    Between Reenergia and its sister concern Paidartwanai, we have an annual turnover of less than 120milPKR. We have about a dozen employees and another half a dozen temporary/short-term staff, and all the typical overheads you can think about! Just FYI, loans to banks are not one of these overheads as banks in Pakistan tend not to look favorably on us—though included are loans extended either as advances by Clients or individuals. Let us review how COVID-19 is impacting us by asking some questions.

    First, how much has our work suffered due to the COVID-19 slow-down—in terms of pre-COVID-19 versus now/post COVID-19 business projections. These projections do not include slow-down in business development; but are based on work already developed and about to be signed/contracted. Our estimate of this slow-down is about 30 percent of projections.

    Second, how much is the slowdown in business development? This has two parts: a) the slow-down in the reactions to the work already solicited—includes delayed responses to proposals already submitted or being submitted; and b) the slow-down in solicitations for our services. Both are due to the Client base business slowdown or simply difficulty in working-from-home or even revision of priorities. All this hits our bottom line over the next six months by another 20 percent.

    With a cumulative impact on our SME of a reduction in revenues of around 50 percent of projected, we are beginning to see another, third, aspect which is hurting SMEs like us: the slow-down in receivables on work already in hand. This is also alarming as we are the part of a value chain and with a small size SME like ours, we are literally the ‘daily wagers’ of the SMEs and businesses. We don’t have reserves to keep paying our employees and our bills and rentals.

    I have not accounted for another fourth element which I see affecting almost every SME around us, especially in the tech and services sector; the inability to keep up the pace of work while working-from-home or the absolute inability to work remotely. I will not handle this presently as we are relatively less impacted by this element, till now.

    Pakistan, our operating environment, categorizes enterprises that have up to 50 employees and an annual turnover of 150milPKR as Small Enterprises (SE), and those with an annual turnover between that of 150milPKR and 800milPKR as Medium Enterprises (ME). The Small and Medium Enterprise Development Authority (SMEDA) of Pakistan categorizes SMEs overall as enterprises with up to 250 employees and turnover up to PKR 250 million. Pakistan has between 3.2 to 4.5 mil SMEs.

    These SMEs contribute up to 40 percent of GDP—adding more than 17trillionPKR. SMEs employ around 80 percent of the non-agriculture labour force—employing a total of around 32 million Pakistanis [between 7 to 10 employees per SME]. Estimated average monthly salary of a SME employee is anyone’s guess but I estimate we can take a range between 30,000PKR and 55,000PKR.

    Where are we heading with talking about how the COVID-19 is hurting a SME business like mine and about SMEs in Pakistan? Here’s the thing. If we, at Reenergia, are estimating revenues going down by 50 percent by June, what does this mean for other SMEs? Are we looking at SMEs laying off workers? [https://www.thenews.com.pk/print/633712-forecast-of-covid-19-pakistan-may-face-12-3m-to-18-53m-layoffs-says-study]

    Are we looking at an almost 8trillionPKR drag on the economy? How can we cater for the SMEs’ workers? Looking at the 100milPKR relief in the Prime Minister’s COVID-19 relief package, I am wondering if it is adequate? There is obviously no way that Pakistan’s government can afford emulating Canada or others, but even a 100bilPKR package for SMEs alone implies a onetime support of 3,125PKR per person employed in the SME sector of Pakistan.

    Who is thinking about this? Planning Commission? Ministry of Finance? Pakistan’s National Security Council? Should not institutions supporting SMEs in Pakistan not be taking a closer look? Karandaaz? SMEDA? Who?