A bumpy ride for small businesses

KARACHI: The persistent increase in the cases of coronavirus pandemic has badly affected the entire business chain of Pakistan, especially the Micro, Small and Medium-sized Enterprises (MSMEs), resulting in an economic crisis-like situation in the country.

Most of the enterprises are facing various issues with a certain degree of losses, including decrease in the demand-supply chain disruptions, cancelation of export orders, raw materials shortage, and transportation disruptions.

Besides, a large number of the enterprises were neither prepared nor have any plan to handle such a situation and; therefore, they are unable to survive in the current circumstances.

FPCCI President Mian Nasser Hyatt Maggo said that the State Bank of Pakistan’s (SBP) total refinance limit of Rs1.19 billion under the head of Refinance and Credit Guarantee Scheme for collateral-free lending to the Small and Medium Enterprises as per the budget documents for the year 2021/22 appears to be a small and insignificant amount.

“The miniscule amount is a joke with the SMEs. The Temporary Economic Facility Scheme has a total outlay of Rs560 billion and has mainly gone to large and established businesses, while the central bank continued to neglect the SMEs,” he said.

FPCCI’s Businessmen Panel Chairman Mian Anjum Nisar said like the domestic industry, the Covid-19 crisis has also forced the global investors to put their new investment plans on hold.

“There is no visible improvement in employment even after the business activities were allowed. The Small and Medium Enterprises (SMEs), the main providers of jobs, are still struggling because of the lack of funds and demand.

Different policy recommendations were proposed to ease the adverse effects of the outbreak on MSMEs. Although the policy recommendations may not be sufficient to help these enterprises go through the ongoing crisis, these measures will help them weather the storm.

Unisame President Zulfikar Thaver said that imported raw materials need reduction in duties, the technological gap needs to be filled and, logistics needs to be improved and made efficient and affordable.

“The prime minister needs to issue directives to the policymakers to not only ensure ease of doing business but also reduce the cost of doing business in all areas of production,” he added.

The major victims of the Covid-19 outbreak are the Micro, Small and Medium-sized Enterprises because they usually do not possess sufficient resources, especially financial and managerial, and are not prepared for such disruptions likely to go longer than expected, compared with the large enterprises.

Additionally, these firms are highly dependent on their routine business transactions and a small number of customers; hence, many such enterprises are running out of stocks, some hardly continue to operate, and some will be running out of stocks soon.

The Micro, Small and Medium-sized Enterprises are the backbone of any economy that provide income and employment generation to a large number of people.

Similarly, in the case of Pakistan, these enterprises are crucial for the economy, as they constitute over 90 per cent of the estimated 3.2 million business enterprises and contribute 40 per cent to the GDP with over 40 per cent to export earnings.

These businesses are spread across Pakistan and represent a significant portion of agriculture, manufacturing, retail, wholesale, trade, and service sectors.

Due to the Covid-19 outbreak, Pakistani firms are facing unprecedented adverse effects on their businesses.

KCCI former president M Zubair Motiwala said blocking refunds oppresses small businesses, which continue to face serious cash flow problems.

“We have no idea how long the Covid-19 pandemic would last and it is a well-known fact that almost every household is a victim of this pandemic; therefore, the government will have to provide relief, as it is totally uncertain where the businesses will land up in the days to come.”

“Big businesses may survive the pandemic but small traders need support, as they have also lost all their savings battling the pandemic situation and have no access to the financing facilities,” he added.

According to a report of the United Nations Conference on Trade and Development (Unctad), Pakistan would be hardest-hit by the Covid-19 pandemic; therefore, this justifies the need to examine the impact of the Covid-19 outbreak on Micro, Small and Medium-sized Enterprises operating in Pakistan.

Additionally, the ongoing pandemic crisis will severely hamper the operations of these businesses because MSMEs are highly dependent on the cash economy, which has been adversely affected by the pandemic.

Besides, the unavailability of labour, slowdown in production, shortage of raw materials, and transportation restrictions will have major ramifications on these businesses. This, in turn, will have a significant impact on the national economy, as a whole.

Hence, a robust policy response is also essential to offset the negative effects of the current outbreak. To-date, no study has been conducted to examine the outbreak’s impact on MSMEs operating in Pakistan. There is a need to assist the policymakers and practitioners in identifying strategies required to respond to the impact of the ongoing pandemic on MSMEs.

Mainly, more emphasis should be laid on the huge risks brought by external environmental uncertainty to MSMEs and help these enterprises in predicting risks in the early stage of business decision-making and planning, and specify countermeasures.

Impact of Covid-19 on MSMEs

Pakistan’s revenue and exports dropped 50 per cent due to the Covid-19 outbreak.

Economists had warned of recession in Pakistan. Similarly, the World Bank has also warned that Pakistan might fall into a recession, as the national economic activity slowed down abruptly since the start of the Covid-19 pandemic.

Karachi consists of the country’s largest industrial zone, accounting for 30 per cent of the total exports. Due to the Covid-19, a large number of factories of the total 2,700 in Karachi were not fully operational.\

Further, there are around five million people in Pakistan who live just at or below the subsistence line, while there are the masses of largely unskilled or low-skilled people (such as labourers, waste recyclers, construction workers, transport workers, and domestic workers) who work in different industries, services, and agriculture, and rely on daily wages to meet their needs.

These daily wagers have been hardest hit by the coronavirus pandemic. After them, there is a class of microenterprises (also known as self-employed persons) such as small shop owners, household businesses, and street vendors, among others, who heavily rely on their micro business.

These businesses are usually operated by family members in different industries ranging from agriculture to education.

Further, these microenterprises are considered a part of the informal economy, and most of their activity is undocumented; hence, the accurate number of these businesses is not known.

Besides, many Small and Medium-sized Enterprises are also facing huge issues. Approximately 54 per cent of Pakistan’s manufacturing sector exports are beverages, food, tobacco sub-sectors and textiles, a reduction in export demand for these sectors will have a disproportionate impact on the country.

The slow pace of businesses and disruption of national supply chains are having a significant impact on the retail and wholesale, transport, warehousing, and communications services. Likewise, the situation of other industries is no different.

However, the rupee is also depreciating against the dollar, posing another threat for the businesses. Likewise, the unemployment figures are also moving upwards. However, due to the ongoing crisis, the unemployment rate is expected to reach alarming levels.

Impact of environmental crisis on MSMEs

Many external environmental crises, which occurred in the past, have severely affected MSMEs, such as floods, earthquakes, etc. Further, the Covid-19 pandemic has a significant impact on the economy and MSMEs; moreover, these events not only cause economic losses but also create a severe threat to the business continuity. Owing to natural disasters, the disruption of supply chain occurs, and in case of significant disruptions, the MSMEs enterprises are adversely affected even if they are not directly affected by a disaster.

External environmental crises such as earthquakes, floods, epidemic diseases and other issues adversely affect business activities and their survival. Moreover, since MSMEs are financially fragile, smaller in size and resources, they are more vulnerable to the environmental crisis than their counterparts, i.e., large enterprises.

The external environmental crisis can affect MSMEs directly or indirectly. The direct impact includes fatalities, supply chain disruptions, property damage, and loss of inventories. In contrast, the indirect effect includes damage to public infrastructure such as electricity supply, communication and transportation systems, and roads leading to increase in production cost and even business discontinuity.

According to the World Trade Organization, since 1998 to 2017, the number of natural disasters has increased tremendously. During the period under review, a total of $2.9 trillion direct economic losses have been reported by disaster-hit countries.

In a similar vein, Pakistan has also experienced such a devastating crisis caused by external environmental disasters.

For instance, floods in 2010 affected not only public and private property but also crops with a loss of $4.5 billion, according to the WTO data. Pakistan has also witnessed several similar crises in the past such as climate change, 2005 and 2008 earthquakes, droughts in 1998 and 2004, etc.

Moreover, in 2015, nearly all main types of natural disasters such as earthquake, drought, flood, heat waves, and cyclone, were faced by Pakistan that severely affected many businesses. Several businesses due to their small size and resource constraints do not reach to the post-disaster stage. Moreover, due to the lack of sufficient governmental support, most MSMEs face financial decline and even go bankrupt.

MSMEs have limited capability and resources to recover from such crisis, especially those operating in developing countries such as Pakistan with high poverty rate, economic and political instability.

These reasons indicate that Pakistan will suffer disproportionately. The impact of coronavirus on the global, especially Pakistan’s economy will leave deep scars. Therefore, it is extremely important to empirically assess the impact of Covid-19 outbreak on MSMEs to assist the policymakers and practitioners to streamline their strategies to help these businesses survive from the ongoing crises.