National Roadmap for Transitioning Informal SMEs: A Step Toward Formalisation

February 23, 2025 Mahi Bukhari

Introduction: Empowering Small and Medium Enterprises (SMEs)

In an era where small and medium-sized enterprises (SMEs) form the backbone of the economy, it is crucial to empower them to grow, contribute more to the economy, and benefit from the opportunities available in formal sectors. In Pakistan, SMEs account for approximately 5.2 million businesses, according to a 2020-21 survey. To unlock their full potential, the Small and Medium Enterprises Development Authority (SMEDA), in collaboration with the International Labour Organisation (ILO), has launched a significant program called the “National Roadmap for Transition of Informal Businesses Towards Business Formalisation.”

This initiative aims to facilitate the transition of informal SMEs into the formal business ecosystem, enhancing their competitiveness, access to financial services, and global market opportunities. The pilot phase of this program focuses on the textile and auto sectors, which are key drivers of Pakistan’s industrial landscape.

Understanding the Need for SME Formalisation

Why Formalisation Matters for SMEs

SMEs in Pakistan face numerous challenges that hinder their growth and formalisation. A large number of SMEs operate in the informal sector, where they are unable to take full advantage of legal protections, government schemes, and financing options. Formalising these businesses is essential to not only improve their operations but also to unlock various growth opportunities offered by the government and the global market.

Formalisation helps SMEs with:

Access to Government Schemes: With proper registration, SMEs can take advantage of incentives such as tax reliefs, financial aid, and capacity-building programs.
Better Market Access: Formal businesses can participate in trade fairs, exhibitions, and collaborations with international clients.
Financing and Loans: Registered SMEs have access to better financing options, including loans with lower interest rates and better credit terms.
Increased Export Potential: The formalisation of SMEs opens doors for participation in international markets, improving the export sector of the country.

The Role of SMEDA and ILO in SME Formalisation

Collaboration with the ILO: A Strategic Partnership

The Small and Medium Enterprises Development Authority (SMEDA), in collaboration with the International Labour Organisation (ILO), is at the forefront of this formalisation process. The partnership is designed to address key barriers such as lack of awareness, insufficient market intelligence, and high compliance costs.

A Technical Working Group consisting of stakeholders from trade bodies, public and private sector organizations, provinces, and experts has been formed to ensure the successful implementation of this program. The working group’s role is to identify the specific barriers to formalisation, gather data, and devise strategies to overcome these challenges.

Pilot Project in Textile and Auto Sectors

Textile and Auto Sectors Chosen as Pilots

As the first phase of this formalisation initiative, the textile and auto sectors have been chosen as pilot projects due to their significance in Pakistan’s economy. These two sectors offer a substantial opportunity for growth and job creation, both of which can be enhanced by transitioning businesses to the formal economy.

Textile Sector: This is one of Pakistan’s most prominent industries, with vast potential for export and employment. Formalisation will allow textile SMEs to streamline operations, meet international quality standards, and increase their competitiveness in the global market.
Auto Sector: The auto sector in Pakistan also has immense potential for expansion. By formalising auto manufacturers and component suppliers, this sector can gain access to state-of-the-art technology, increased production capacity, and improved labor standards.

Benefits for SMEs in the Pilot Phase

Both the textile and auto sectors stand to benefit significantly from formalisation:

Incentives for Export-Oriented Enterprises: Formal businesses are eligible for various government incentives designed to promote exports.
Digital Trade: Formalising businesses will facilitate digital transactions, ensuring greater transparency in business dealings.
Skill Development: Formalisation will enable businesses to invest in employee training and capacity building, enhancing the overall productivity of SMEs.

Challenges in the Path to Formalisation

Barriers Faced by SMEs in Transitioning to the Formal Economy

While the benefits of formalisation are clear, the path to transitioning informal SMEs into formal businesses is not without challenges. These barriers include:

Information Gaps: Many SME owners lack proper knowledge about the benefits of formalisation and the steps involved.
High Compliance Costs: The cost of certifications, legal processes, and taxation compliance can be overwhelming for small businesses.
Connectivity Issues: In many regions, SMEs face internet and connectivity challenges, limiting their ability to access digital platforms or communicate with global markets.
Limited Market Intelligence: Many SMEs struggle to gather market insights and identify export opportunities.

Strategies to Overcome Challenges

To overcome these challenges, the SMEDA-ILO collaboration is focusing on:

Awareness Campaigns: Educating SME owners about the advantages of formalisation and the support programs available.
Reducing Compliance Costs: Streamlining processes to make it more affordable for businesses to comply with legal and tax requirements.
Improving Connectivity: Ensuring better access to digital platforms and improving infrastructure in key areas.

Future Plans for Expanding the Formalisation Initiative

Expanding Beyond the Textile and Auto Sectors

Although the pilot phase focuses on the textile and auto industries, SMEDA plans to expand this initiative to other key sectors in the coming years. The goal is to ensure that all SMEs, regardless of industry, can access the resources and opportunities available to formal businesses.

SME Fund and Financial Access Program

Alongside the formalisation initiative, SMEDA is also working on a few complementary programs:

SME Fund: The government has approved an SME fund, and this year, Rs5 billion will be allocated to SMEs to help them grow. SMEDA will invest these funds in promising businesses, allowing them to access capital and scale up their operations.
Financial Access Program: This program focuses on enhancing access to finance by ensuring proper credit scoring, training, and capacity-building efforts. SMEs will be able to secure loans and other financial products to fuel their growth.

FAQs on the National Roadmap for SME Formalisation

1. What is the purpose of the National Roadmap for SME Formalisation?

The roadmap aims to transition informal businesses into the formal sector, allowing them to access government support, international markets, and improved financial opportunities.

2. Why were the textile and auto sectors chosen for the pilot phase?

The textile and auto sectors are vital contributors to Pakistan’s economy, with significant potential for growth and exports, making them ideal candidates for the formalisation initiative.

3. How does formalisation benefit SMEs?

Formalisation provides access to government incentives, loans, training, international markets, and a transparent business environment, all of which can enhance growth and competitiveness.

4. What are the challenges SMEs face in transitioning to the formal sector?

Barriers include lack of awareness, high compliance costs, limited access to digital infrastructure, and market intelligence issues.

5. What additional programs is SMEDA running to support SMEs?

In addition to the formalisation program, SMEDA is running a fund for SMEs, a financial access program, and an initiative to boost exports.

Conclusion: A Bright Future for Formalised SMEs

The transition of informal SMEs into the formal economy is a transformative process that can significantly boost Pakistan’s economic growth. With the support of the ILO and SMEDA’s comprehensive strategy, SMEs in Pakistan are set to benefit from improved access to financial resources, international markets, and government support. The success of the pilot project in the textile and auto sectors will serve as a model for expanding formalisation efforts across other key industries in Pakistan.