Empowering SMEs – the missing link in Pakistan’s growth strategy

For decades, Pakistan has pursued economic growth strategies centered on large industries, state-led projects, and external borrowing, often sidelining the real engine of sustainable development – small and medium enterprises (SMEs). While policymakers focus on macroeconomic stabilization and headline-grabbing mega projects, the backbone of the economy – millions of small businesses – continues to operate in a challenging environment marked by financing gaps, regulatory hurdles, and policy neglect.
Globally, SMEs are recognized as powerful drivers of exports, job creation, innovation, and inclusive growth. In countries such as Germany, Japan, and South Korea, SMEs account for a significant share of GDP and employment. Even closer to home, economies like Vietnam, Malaysia, and Bangladesh have built competitive export sectors by enabling their small and medium enterprises to scale up. In Pakistan, SMEs contribute around 40% of GDP, employ nearly 80% of the non-agricultural labor force, and account for roughly 25% of export earnings. Yet, despite their size and significance, they remain the least supported and most constrained segment of the economy.
One of the biggest challenges faced by Pakistani SMEs is access to finance. According to industry estimates, less than 7% of SMEs have access to formal credit. Most rely on informal lending or personal savings, which severely limits their ability to expand operations, adopt new technologies, or enter export markets. Commercial banks prefer lending to large corporations or the government through risk-free instruments like T-bills rather than investing in small businesses. As a result, SMEs are trapped in a cycle of underinvestment.
A robust SME financing framework is urgently needed. This means incentivizing banks to expand SME lending through credit guarantees, targeted refinance schemes, and risk-sharing mechanisms. It also requires the development of alternative financing channels such as venture capital, private equity, and microfinance. Digital financial inclusion can play a transformative role – by using fintech platforms to provide credit scoring, payment solutions, and working capital loans tailored to small enterprises.
While financing is a major constraint, it is not the only one. SMEs in Pakistan face a labyrinth of regulations, overlapping jurisdictions, and cumbersome compliance procedures. Setting up or registering a small business can take months, requiring multiple clearances from federal and provincial authorities. Tax compliance is equally daunting, with SMEs often forced to navigate multiple tax regimes, unpredictable audits, and opaque rules.
For SMEs to thrive, Pakistan needs a regulatory overhaul. A simplified, digitalized, and predictable business environment is essential. One-window operations, uniform tax codes, and digital platforms for registration and compliance would dramatically reduce the cost of doing business for small firms. Governments in several emerging economies have successfully adopted “SME-friendly” regulatory models – Pakistan must do the same.
SMEs are not just job creators; they are also powerful engines of innovation. Smaller firms tend to be more agile and adaptive, capable of introducing new products, services, and technologies. However, in Pakistan, this potential remains largely untapped because of limited access to technology, training, and markets. A national innovation ecosystem that includes incubation centers, digital skills training, affordable technology solutions, and university-industry linkages can enable SMEs to move up the value chain.
If empowered, Pakistani SMEs can play a pivotal role in diversifying exports beyond traditional low-value textiles. Sectors such as light engineering, IT and software services, food processing, leather, sports goods, and handmade crafts can become powerful export engines with relatively modest investments.
One of the reasons countries like Vietnam and Bangladesh have become export powerhouses is their ability to integrate SMEs into global supply chains. In Pakistan, most SMEs remain inward-looking, catering only to domestic markets. This is partly due to complex export procedures, lack of trade finance, inadequate logistics, and insufficient knowledge about international market standards.
To address this, Pakistan must build dedicated SME export facilitation centers that provide support in areas like certification, quality assurance, logistics, and trade finance. Trade agreements should include special incentives for small exporters, while government-backed credit facilities can help bridge the gap between production and payment cycles.
Linking SMEs with larger corporations through subcontracting and supplier development programs can also integrate them into global value chains. If even a fraction of Pakistan’s SMEs are connected to international markets, export revenues could grow significantly, reducing reliance on a narrow band of industries.
Modern infrastructure is crucial for SME competitiveness. In many parts of Pakistan, unreliable electricity, poor internet connectivity, and weak transportation networks hinder business productivity. Similarly, the lack of industrial clusters and common facility centers makes it difficult for small firms to benefit from economies of scale.
Public-private partnerships can help build SME-friendly industrial zones with shared facilities for logistics, warehousing, and digital services. Expanding digital infrastructure is equally critical. E-commerce platforms and digital payment solutions can open new domestic and international markets for small entrepreneurs, particularly women-led businesses.
Perhaps the most critical factor in unlocking SME potential is consistent and coherent policy. Pakistan has launched several SME development programs over the years, but most have been short-lived, poorly implemented, or inadequately funded. What SMEs need is a long-term national strategy with clear goals, measurable outcomes, and strong institutional backing.
The establishment of a dedicated SME authority with representation from business associations, government, and financial institutions can help coordinate policies, remove bottlenecks, and ensure continuity across political transitions.
Empowering SMEs is not just an economic imperative – it is a social one. SMEs are deeply embedded in local communities, creating jobs where they are needed most. Unlike large industries, they can drive inclusive growth that benefits both urban and rural populations. For a country grappling with unemployment, inequality, and fiscal pressures, leveraging SMEs can be a game changer.
Pakistan’s future growth cannot be built on external borrowing or a few large industries alone. It must rest on a broad base of resilient, innovative, and globally connected small and medium enterprises. Financing, regulatory reforms, infrastructure investment, digital transformation, and export facilitation are the building blocks of that vision.