- SMEs contribute 40% to Pakistan’s GDP and employ 80% of the non-agricultural workforce, driving economic stability
Small and Medium Enterprises (SMEs) are the backbone of Pakistan’s economy, contributing significantly to employment, GDP, exports, and innovation. Despite operating with limited resources, these enterprises play a crucial role in driving economic stability and social development. In a country with a population exceeding 240 million and facing persistent economic challenges, SMEs offer a pathway to sustainable growth and resilience. The contribution of SMEs includes:
Employment generation: Lifeline for workforce
One of the most critical contributions of small enterprises in Pakistan is employment generation. With large-scale industries unable to absorb the rapidly growing labour force, SMEs provide job opportunities, especially in rural and semi-urban areas. According to estimates, SMEs employ over 80% of the non-agricultural labour force in Pakistan. This not only reduces unemployment but also prevents mass migration to big cities, easing pressure on urban infrastructure.
Driving GDP growth
SMEs contribute approximately 40% to Pakistan’s Gross Domestic Product (GDP), making them an essential pillar of economic stability. These businesses operate across various sectors, including manufacturing, trade, services, and agriculture. By ensuring broad-based economic activity, they help diversify the country’s revenue streams and reduce reliance on a few large industries.
Boosting exports — backbone of trade: Pakistan’s exports are heavily reliant on SMEs, particularly in industries like textiles, leather goods, handicrafts, and sports equipment. The city of Sialkot, for instance, is renowned for producing world-class surgical instruments, footballs, and sportswear — most of which come from small enterprises. Many international brands source their products from Pakistani SMEs, contributing to foreign exchange earnings and strengthening the country’s trade position.
Encouraging entrepreneurship and innovation: Small enterprises foster a culture of entrepreneurship and innovation. Unlike large corporations, SMEs have the flexibility to experiment with new ideas and adapt quickly to market trends. This has led to the rise of tech startups, e-commerce platforms, and home-based businesses in Pakistan, particularly among the youth and women entrepreneurs. Government initiatives like SME Policy 2021 and startup incubators are encouraging this trend further.
Reducing urban migration & strengthening rural economies: Rural-to-urban migration is a major challenge for Pakistan, with cities like Karachi, Lahore, and Islamabad facing overcrowding and housing shortages. SMEs help mitigate this issue by creating local job opportunities in smaller towns and villages. Industries such as handicrafts, cottage industries, and food processing thrive in rural areas, ensuring economic activity beyond metropolitan centers.
Economic resilience against shocks: Unlike large corporations that require extensive capital and are vulnerable to economic downturns, small enterprises have the advantage of quick adaptability and lower operational costs. During the COVID-19 pandemic, while major businesses struggled, many SMEs pivoted their models — shifting to online sales, home deliveries, and localised supply chains. This resilience makes them a stabilising force during economic crises.
Strengthening supply chains for large industries: Small enterprises act as key suppliers and service providers to large-scale industries. In sectors like automobile manufacturing, construction, and agriculture, SMEs provide essential components and raw materials. This interdependence between large and small businesses ensures a stable industrial ecosystem and enhances overall productivity.
Women’s economic participation: Women-led businesses are thriving in Pakistan’s SME sector, particularly in handicrafts, home-based food services, online retail, and fashion design. By empowering women entrepreneurs, small enterprises contribute to gender inclusion in the workforce, increasing household incomes and social mobility. Platforms like Daraz, Facebook Marketplace, and Instagram shops have further enabled women to launch businesses with minimal investment.
Tax contribution & formalisation of the economy: As more SMEs register their businesses, they contribute to government tax revenues, which fund public services and infrastructure. Encouraging SMEs to enter the formal economy through simplified tax structures, financial incentives, and digital payment solutions can significantly boost national revenue.
Utilising local resources & reducing import dependency: SMEs often rely on locally available raw materials, reducing dependence on imports. This is especially true in sectors like agriculture, textiles, and construction materials, where indigenous resources are used to manufacture products. Promoting locally made goods through policies like ‘Made in Pakistan’ initiatives can strengthen self-reliance and reduce trade deficits.
Challenges and the way forward
Despite their immense potential, SMEs in Pakistan face several challenges, which majorly includes:
- Limited access to financing due to stringent bank lending policies
- Regulatory hurdles and bureaucratic red tape
- Lack of infrastructure like electricity and transport
- low digital literacy hindering e-commerce adoption
- Inconsistent government policies affecting business stability.
To fully harness the power of small enterprises, Pakistan needs targeted reforms such as:
— Easier access to credit: Expanding SME financing programs and microloans
— Simplified taxation: Reducing bureaucratic red tape for small businesses
— Infrastructure development: Ensuring uninterrupted power and better transport networks
— Digital transformation: Encouraging SMEs to adopt e-commerce and online payment systems
— Skills training: Enhancing technical and business management education for entrepreneurs.
Conclusion
Small enterprises are the lifeblood of Pakistan’s economy, driving growth, creating jobs, and fostering innovation. With the right policies and support, SMEs can not only strengthen the country’s economic fabric but also pave the way for sustainable and inclusive development. If Pakistan prioritises SME-friendly reforms, these businesses will play a decisive role in shaping a prosperous future.
The writer is a student at University of Sargodha. He can be approached at azamtariqalihaider@gmail.com