Given the prolonged sluggish or negative industrial growth and low tax-to-GDP ratio, policymakers and relevant institutions are taking a more concerted and integrated approach to promote small and medium enterprises (SMEs) and encourage them to enter the formal sector.

The Small and Medium Enterprises Authority (Smeda) recently held a consultative session with various stakeholders from the textile industry to align the second phase of its Industrial Stitching Units project with the Uraan Pakistan programme, aimed at boosting exports through SMEs.

Concerned stakeholders from the industry also provided recommendations for Phase II, which will now cater to multiple textile export sectors, including readymade garments, hosiery, knitwear, denim, leather garments, and towels, besides sports goods.

“Our focus is on integrating SMEs into the local, regional, and global value chains,” says a Smeda official. The representation of the private sector in the Smeda board is being increased, and microenterprises have been made part of SMEs under Prime Minister Shehbaz Sharif’s instructions.

The government had made decided efforts to increase small and medium enterprise finance and representation to improve the economy

While adopting a transparent process, the prime minister also asked Smeda to hire an international standard workforce at salaries in accordance with market rates.

Mr Sharif had told the Smeda Steering Committee meeting on March 6 that he was giving top priority to promoting the small and medium-sized industry.

The 1,000 Industrial Stitching Units project was approved by the government in 2018, of which Phase-I, with 150 units, is set for completion by June 30, 2025, while Smeda is preparing PC-1 to establish 350 units for Phase-II in alignment with Uraan Pakistan’s objectives.

Under Phase II, 100 per cent of grants will be allocated to export-oriented units, unlike Phase I, which primarily focused on the domestic garment sector. The grant size for Phase II has also been increased from Rs1.8 million to Rs5m supporting approximately 50 machines per unit, enabling businesses to handle export orders more efficiently.

Smeda’s impact assessment shows that 93 units of Phase I created 1,208 new jobs and promoted women’s entrepreneurship, with 41pc of the stitching units owned by women.

On March 8, Mr Sharif also unveiled a major initiative to integrate women in cottage industries and small businesses into the SME sector. The announcement was made during a review meeting on ongoing reforms under Smeda held in Lahore.

To strengthen this initiative, the prime minister announced the formation of a special committee tasked with developing a comprehensive plan for empowering women through business opportunities. The committee will soon present its recommendations to him.

According to the Pakistan Bureau of Statistics, in the last 40 years, the industry’s share of GDP has declined annually by an average of 0.6pc, dropping from 22.3pc in 1980 to 20.8pc in 2023.

Furthermore, Pakistan’s ranking on the Competitive Industrial Performance Index (CIPI) has also worsened, falling from 78th in 1990 to 80th in 2022 out of 153 countries. In a regional context, Pakistan’s CIPI ranking is the lowest, with India and Bangladesh ranking 40th and 65th, respectively.

The total size of the country’s informal economy, projected by a conservative estimate by the Ministry of Industry and Production, is around $457bn. The size of the country’s formal economy was $340bn in 2023, according to a study jointly organised by SMEDA and the International Labour Organisation and titled ‘Mapping of Barriers and Opportunities to Reduce the Informality of Enterprises in Pakistan’.

That said, a significant portion of Pakistan’s economy remains undocumented, resulting in a low tax contribution, with the tax-to-GDP ratio never exceeding 13pc.

In both developed and emerging economies, SMEs are a primary driver for job creation and GDP growth. They contribute to economic diversification and social stability while playing an essential role in private sector development.

The research shows that an estimated 5.24m SMEs in Pakistan drive our economic engine. Exports of the sector are estimated at 30pc. In terms of employment, 70pc of the non-agricultural labour force is associated with the sector. The majority of SMEs, around 53pc, operate in wholesale and retail trade, hotels, and restaurants, followed by community, social, and personal services at 22pc and manufacturing at 20pc.

Bank financing also helps SMEs’ documentation and the sector grow faster. The Bank of Punjab is recognised as the best SME bank in Pakistan, earning multiple prestigious awards for 2022–2024. It supports over 375,000 SME customers with artificial intelligence-driven digital solutions and innovative financial services to foster entrepreneurship and economic growth.

Furthermore, the Pakistan Banks Association has announced the development of an SME index over the next year, aiming to provide a barometer to the financial sector and help accelerate financing to SMEs in the country. Currently, the bank’s share of SME financing in total domestic private sector credit stands at 6pc.

The State Bank of Pakistan aims to support SMEs in their journey towards financial success through measures to ensure their full participation in the mainstream financial ecosystem, with the governor, Jameel Ahmad, stating that the central bank plans to double

SME outstanding financing to Rs1.1 trillion by 2029.

Published in Dawn, The Business and Finance Weekly, March 17th, 2025