Rebuilding Small to Medium Size Enterprises

Recovering SMEs, Post Covid, Market Economy, SME Market, Finance, Business, Employment

To understand why the world economy is in grave peril because of the spread of corona-virus, an idea that once was blindingly obvious and sneakily profound shall be revised: financial inclusion of SMEs in production and exports. Pakistan has lost one-third of its revenue and exports dropped by 50% due to lockdown, and financially damaged were the SMEs and daily-wage workers. This article covers the unique challenges and opportunities for recovery of the SMEs, which hold a 30% chunk in Pakistan’s GDP and 25% in manufactured products export.

Remember what Harrison Ford in the hat said when he was riding the horse? ‘It's not the years honey, it's the mileage.’ That is right, the alleviation of lockdown poses a new set of challenges for not only the public’s health but also for small and medium-sized enterprises (SMEs) as they claw their way toward recovery. It took SMEs not just an unbearable time of years but also a massive cycle of hurdles and setbacks to reach in the spotlight of Pakistan’s economy. And now with just a hit of a virus, many of them face muted demand, new customer expectations, and operational challenges because of uncertain income patterns and health restrictions which ensure recovery’s dilatory arrival. Or Indiana Jones, was it?

Wrestling Challenges
Covid rapidly converted into a global economic issue from what started as a health catastrophe. The bombardment of a series of crises, including health, economic, and business, kept SMEs under pandemic’s claw making the economy’s rebound even harder. Nonetheless, firms are coping with financial and supply chain shocks by reducing production costs, increasing digitization, specifically for marketing and sales, and focusing on business development.

small medium enterprise challenges sme post covid

SMEs, SMEs! There’s a reason to why they tell the large firms, ‘don’t call me junior’.

Over 80% of ventures in Pakistan are SMEs, depicted by about 3.3 million businesses. These comprise manufacturing units, service providers, and startups operating on various levels. SMEs employ 78% of the non-agricultural labor force, make up about 25% of manufacturing exports and over 30% of the GDP in Pakistan. This entire workforce however faced a huge setback due to lockdown when they held laid off by their owners. The drastic shift in consumer behavior has also created an everlasting ripple effect on businesses from all industries. The short-term behaviors of consumers coping with this crisis tend to last long-term impacting business models, partnerships, and the competitive landscape.
Pakistan needs to develop policies that would not only keep its people safe, while also preparing for increased uncertainty and long-lasting changes to the work environment.

The Saucy & Not-Sassy Tale
Reportedly, Pakistan has lost one-third of its revenue and exports dropped by 50% lockdown. Due to the ongoing crisis caused, Pakistan's real GDP growth in FY20 is expected to contract by 1.3% as national and global economic activity slowdowns abruptly during the last few months of the fiscal year. Now in case the pandemic deteriorates and stays longer than expected, Pakistan's real GDP growth for FY20 may contract by 2.2% before just recovering to 0.3% growth in FY21. Even in muted recovery, it would take more than five years for most affected sectors to return in the 2019-shape to contribute to GDP. The textile and apparel industry has been affected mainly due to the imposition of lockdown. 54% of Pakistan's manufacturing sector exports are beverages, food, tobacco sub-sectors, and textile, a reduction in export demand for these SMEs led to disproportionate distress in the economy.

The part that they play in the economy is elaborate but the attention paid to them is negligible in comparison. The figure below shows:

SME market recovery, economic, estimation, markets

The domestic economic activity in Pakistan worsened notably, and growth is preliminarily estimated at 0.4% in FY20. A gradual recovery is expected in FY21 as the economy began to reopen after the Government’s order for the activity under SOPs. Since SMEs were economically hurt the most, they are going to need many years to recover wholly. Now how outrageous is that for the saucy?

The revenue earned by the businesses is subsequently disbursed to several other businesses or people, linking several sectors, paying numerous employees or clients directly for their services. It pays the suppliers, the investors with accrued profit, or even the taxes that are used to finance employees’ service sectors, like the police force, public schools, & other professional institutes. A rather plunged consumption spending has had the economy drastically oscillating between recession and economic doom.
SME's owners not only are receiving any income to compensate employees to pay their rents but also are hemorrhaging cash to pay for their own.

One person’s spending is another person’s income
Pakistan’s Rs. 44 Trillion economy, in a nutshell, is merely defined as one person’s earning is led by another’s spending. This interrelationship is at the core of how a capitalist economy works. It is the basis of a perpetual motion machine depicting the most basic state of the economy. This perpetual motion machine, however, is required to mothball a huge chunk of the economy to deal with the virus’s potential ripple effect.
Pakistan is yet struggling to understand the reaction of the economic machine towards lockdown and unemployment. We might manage to embroider our essence of wellness and prosperity by taking an action, since discussing the issue at its core isn't enough. Factories that were not producing essential goods were closed off. Global supply chains in different sectors, especially the garment and textile industry, was drastically interrupted, with brands cancelling orders for the manufactured or in process products, resulting in huge production loss. This had exacerbated radical shutdowns and layoffs, particularly in the textile and garment factories that employ Pakistan’s largest industrial workforce. In the most recent figures available, the International Labour Organization (ILO) of Pakistan estimated that in 2014 to 15, roughly four million people were employed in this sector, which contributed 8.5 percent of Pakistan’s GDP and at least 50 percent of its total exports. The numbers are pretty higher now.

Employment Challenges SMEs, unemployment, covid jobs, covid market

Massive financial compression has the SMEs and low-income workers distressed, leading to an inclining unemployment and suicide rate. After five months of lockdown trail, the best measure Pakistan's Government could take was the reopening of food, transportation, and recreational sectors to cope with the compounded risk of livelihood and employment.
Considering the gravity of the outbreak, laying off employees and shutdown of many businesses was already expected. According to SMEDA, only about 17% of SMEs have a slight plan of continuing their businesses in this uncertain economic scenario. Due to the outbreak, the Pakistani economy has witnessed an unprecedented slowdown; therefore, the economy must be stimulated by allowing trade to continue to help SMEs survive the crisis. Furthermore, to hurdle the crises of income and employment, SMEs must focus on restructuring their strategies to reduce the economic burden.

Covid, SMEs, New normal, Market recovery strategy

Exploiting the New Normal
The so-called “new normal” of forced economic inactivity should not lower productivity for SMEs but rather increase it. The pandemic may have shrunk demand for some products in the international market. Though, the challenging transition into the betterment is sustaining the demand for products and creating new products-demand, as well as new markets. With digitalization, critical processes such as trade registration, inspections, screening, and payments, shall be hastened.
What would Indiana Jones do in this shocking uncertainty given nothing really shocks him? Liquidating the puzzle in the first place instead of panicking would be his first bait. And it so should be of the SMEs’ too. If the SMEs are ready to exploit the new normal scenario led by the global economic crisis, they must consider four characterized strategies to reshape their own normal: an emphasis on resilience to shocks, embrace of digitalization opportunities, greater inclusiveness, and sustainability.

‘If you want to be a good Archeologist, you gotta get out of the Library’
It doesn’t specifically have to be archeology but Indie made a point, business owners need to own their challenges like leaders instead of waiting post-pandemic wonders to happen. The temporary trade-restrictions must not dissuade SMEs from capitalizing on the global supply chain. The private sector must play a part in the bounce-back strategy and assist the government in how resiliently the “new normal” could take place. They must propose standard procedures conducive to business operations that best suit their financial and marketing structure.

While recovering from the crisis, Pakistan can capitalize on the lessons learned from this catastrophic shock and strengthen its health systems, creating work opportunities, and building resilience. The survival of SMEs across the economy will require new business models and digital solutions that few have the resources to finance. The COVID-19 crisis has certainly exposed financial frailties that have built over time, and the next normal could ironically impose additional burdens. Adapting to such challenges will require SMEs to discover what best works for their recovery, adapt these operating models, and embrace the cultivation of technologies. The solutions will not mend the distress overnight and will require a mountain climbing effort to extract financing, restore demand, and improve small businesses’ capability and resilience. But only with resilience can the SME phoenix rather wrestle away the challenges.

This article was originally published in the ICMAP MA Journal Issue of Sep-Oct 2020.
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Rebuilding Small-Medium Size Enterprise (SMEs) : Post Covid-19