Muhammad Asad Tahir Bhawana

The World Bank in collaboration with the Pakistan Bureau of Statistics (PBS) and with sponsorship from the Foreign, Commonwealth, and Development Office (FCDO) conducted an enterprise survey in Pakistan to address data gaps in understanding the private sector, reports WealthPK. The survey gathered feedback from 1,300 firms of varying sizes across sectors and regions. Manufacturing sector firms were selected based on the Census of Manufacturing and Industries (CMI), while the services sector utilized a specialized framework constructed from secondary sources. Data analysis pertaining to the private sector in Pakistan has provided valuable insights, shedding light on several significant aspects.

According to the data, a mere 1.86% of the surveyed firms were allocated funds for research and development (R&D) during the Fiscal Year 2021. This figure encompasses the expenditures made either internally or through external contracts with other companies. Dearth of investment in R&D has resulted in scarcity of innovative firms in recent years. Merely 3.3% of the surveyed companies reported to have engaged in innovation over the past three years, with innovation defined as the introduction of new or improved products or services.

Firm-level innovation and adoption of technology are pivotal drivers of structural transformation and economic growth within an economy. Lower productivity growth caused by deficiency in innovation lies at the core of Pakistan's growth predicament, as outlined in the recently published Pakistan Country Economic Memorandum. The report highlights a decline in aggregate productivity in the country, attributing it to diminishing efficiency among firms.

Furthermore, data reveals that women continue to be underrepresented in Pakistan's formal private sector, whether as owners, managers, or formal workers. A mere 4.9% of the surveyed firms reported female participation in ownership, with an even lower proportion of 2.1% having a majority female ownership. Similarly, female representation in management and permanent full-time employment stood at 3.4% and 3.3% respectively.

Access to finance remains a persistent challenge for the private sector in Pakistan. This issue has been consistently identified as a significant constraint in previous assessments and public-private dialogues focused on private sector growth. The statistics underscore the magnitude of the problem, with firms reporting that only 1.4% of their investments in fixed assets and 2.1% of their working capital requirements were financed by banks in the previous fiscal year.

Moreover, a mere 2.1% of the firms surveyed had an outstanding loan at the time of the survey. Complex application procedures, high interest rates, and stringent collateral requirements were cited as primary reasons for firms' reluctance to engage with the financial sector. Notably, 47% of the surveyed firms indicated that they did not require external financing. Furthermore, access to finance varied significantly among firms based on their size, with larger firms reporting greater access and lower dependence on external financing. Encouragingly, over 92% of the firms reported maintaining checking or savings accounts with formal financial institutions.

Overall, the firms identified political instability, access to finance, and taxation as the three primary constraints hindering their growth and development. This represents a notable shift from previous assessments, which emphasized energy and corruption as the leading impediments to sectoral growth. While challenges related to access to finance and taxation are commonly observed in the upper-medium economies worldwide, further investigation is warranted to explore the implications of political instability as a prominent concern in Pakistan's private sector.

Credit: INP-WealthPk