VAT to affect SMEs By ENGINEER HUSSAIN AHMAD SIDDIQUI

ARTICLE (May 20 2010): Yet another structural weakness of the Small and Medium Enterprises (SMEs) sector has come to light, as it is reported that the exporters have recently suffered huge financial losses at the hands of overseas buyers of their products in countries like Bangladesh, the US and Canada.

Despite shipments having made against letters of credit, and supplies done in accordance with the purchase orders, the buyers, in many cases, would obtain stay orders from the courts against remittances of proceeds, on one pretext or the other. Thus, not only the payments are withheld for long, the Pakistani sellers are also forced to allow significant price discounts at that time, to settle the issue.

This may be one-sided story. But the fact remains that the SMEs in Pakistan, which contribute about USD 2 billion to annual exports, lack business support mechanism and financial management, and resultantly, their interests are compromised. There are over three million business houses, including 500,000 manufacturing units, with 30 percent share in the GDP and accounting for 25 percent of exports of manufactured goods.

Like most of the developing countries, the SMEs sector in Pakistan too is the mainstay of the national economy. It plays a catalytic role in low-cost employment generation, poverty alleviation and economic development. Efforts have been made in recent past to invigorate and promote the SMEs' sector aiming at exploiting its optimum potential.

Nonetheless, the progress is slow and a lot more is desired to be done, primarily by the government. The chronology of events is reflective of the situation. It was in 1998 that the potential of the SMEs for economic growth was recognised and the Small and Medium Enterprises Development Authority (SMEDA) was created in October. But it was not before January 2004 that drafting an SME policy was entrusted to the SME task force.

Finally, the SME Policy was approved by the government after a lapse of another three years-in January 2007. The Smeda, mandated to developing the SMEs through serving as key resource base and facilitating necessary support services, has done significant work during the last 12 years, particularly in developing human resources and devising marketing strategy.

But it has not been successful in achieving desired agenda, targets and objectives, in spite of support of international agencies such as Asian Development Bank (ADB), UN Industrial Development Organisation (UNIDO) and Asian Productivity Organisation (APO). These agencies and industrialised countries like Germany and Japan are supporting programmes of the SME projects, products and processes through transfer of technology arrangements.

In the absence of overall enabling environment, the sector could not show the requisite dynamism. In recent years, acute energy shortages, adverse security concerns and periodic spiral increases of the POL, gas and electricity have caused generation of low production at high cost, adding to the sector's sufferings.

The imposition of value-added tax (VAT) will adversely affect development of the SMEs. Currently, a small fraction of the SMEs are exporters, whereas the SMEs, which remain a driving force behind many innovations, have ability to expand markets abroad.

There are 16 on-going projects under the umbrella of the SMEDA. Funds for launching another 16 approved projects, however, could not be launched due to paucity of funds and may be undertaken now under public-private partnership programme. A critical component for growth of the sector is specialised credit financing to cater to the needs of the SMEs, which has not yet been promoted effectively, and lack of provision of adequate and timely long-term credit facility is an impediment.

Initially, in February 1999, it was decided to focus ten sub-sectors, namely information technology, light engineering, sports, fisheries, transport, fruits & vegetable processing, marble & granite, gems & jewellery, horticulture and pharmaceutical products. Khushali Bank was created and the small-credit regional bank was converted into SME Bank in 2002. The State Bank of Pakistan presented a roadmap to the commercial banks in May 2005.

The SME Business Support Fund was created in 2006 for enhancement of competitiveness and profitability. Still some 78% SMEs do not have access to credit from the formal sector, as the banks consider it a high-risk area for extending credit facilities, besides other factors and constraints that have hampered the SMEs growth. The SMEs financing of banks, which was PKR 437 billion in December 2007 has drastically declined to PKR 348 billion in December 2009. Likewise, the share of the SMEs financing in total banks' financing has also been reduced from 16.2% to present 10%.

It is heartening that the State Bank of Pakistan has recently announced developing a multi-dimensional strategy for the SMEs financing. It will arrange international resources, including that of the World Bank and the USAID, to meet the requirements of capital forr developing the SME projects To regain economic momentum, it is imperative that the agenda for the development of the SMEs sector be pursued in real earnest, and on priority.

(The writer is retired Chairman of the State Engineering Corporation, Ministry of Industries and Production)

Source: http://www.brecorder.com/index.php?id=1059461&currPageNo=1&query=&search=&term=&supDate=