Unlocking Pakistans Economic Potential: Overcoming Obstacles Faced by SMEs in the Engineering Sector

The recent report published by the Pakistan Institute of Development Economics sheds light on the numerous obstacles obstructing the growth of the country's engineering industry and, consequently, its small and medium enterprises (SMEs). The study, based on a survey of 328 engineering firms within the SME sector, highlights a multitude of challenges that hinder their progress. These challenges include unreliable electricity supply, limited access to formal bank credit, exclusion from global supply chains, issues related to branding, pricing, product quality, informality, and more.

One of the most alarming findings of the report is that 83 percent of industrial units in Pakistan lack plans for future expansion primarily due to the unavailability of a stable electricity supply. This shortage not only stifles productivity but also discourages entrepreneurs from investing in their businesses. Moreover, the lack of access to credit, mainly due to inadequate collateral, presents another significant hurdle for these enterprises to realize their full potential.

The report makes a compelling case for addressing these challenges urgently. It suggests that engineering firms should strive to adopt international and national quality standards to enhance their competitiveness in both domestic and international markets. Additionally, the study underscores the critical role of fostering strong relationships between businesses and the government, highlighting how political instability and unfavorable economic policies have eroded trust and satisfaction among business owners.

SMEs, particularly in the engineering sector, are recognized worldwide as the backbone of economies. They play a vital role in promoting economic growth, generating employment opportunities on a large scale, and reducing poverty. Consequently, successive governments in Pakistan have promised to improve the "ease of doing business" for SMEs since the 1990s to catalyze overall economic growth.

However, the reality on the ground falls short of these promises. For instance, the SME policy of 2021-25, with its promising incentives like tax reductions and a Rs60 billion bank credit line for collateral-free loans, has yet to be implemented. Meanwhile, SMEs are grappling with a host of challenges, including the ongoing economic slowdown and soaring inflation. Many units have already shut down due to financial troubles resulting from increased costs, leading to the unfortunate loss of jobs for thousands of workers.

Interestingly, SMEs linked to global export markets have shown more resilience compared to those focused on the domestic market. This disparity underscores the importance of integrating SMEs into global value chains to enhance their sustainability.

For long-term economic stability, increased exports, and the creation of job opportunities for the millions of individuals entering the labor market annually, Pakistan's policymakers must prioritize addressing the persistent issues holding SMEs back from realizing their full potential. These include providing a stable electricity supply, facilitating access to credit, and implementing policies that genuinely support the growth and development of these vital economic contributors. Only through such concerted efforts can Pakistan harness the full potential of its SMEs and achieve lasting economic prosperity.