EDITORIAL: Pakistan’s renewed focus on small and medium enterprises comes at a critical juncture. The economy has moved from the edge of external default toward macroeconomic stabilisation. Inflation has moderated, fiscal discipline has tightened, and the immediate crisis has eased. The unresolved question now is where sustainable growth will come from. SMEs are frequently presented as the answer. They employ a large share of the workforce, anchor domestic value chains, and are often cited as vehicles for export diversification and productivity gains. Yet despite decades of proclaimed policy attention, their contribution to formal credit, exports, and documented employment remains limited. The explanation lies less in intent and more in institutional design. As the policy conversation shifts from stabilisation to growth, pressure has once again mounted on banks to expand SME lending. This reflects a familiar misdiagnosis. The binding constraint is not liquidity, nor is it the cost of funds. It is risk. Banks operate in an environment where SME default risk is difficult to assess and costly to enforce. Documentation is weak, collateral is limited, and recovery remains uncertain. In such conditions, banks rationally allocate capital toward sovereign exposure, large corporates, and salary-backed consumer lending. This pattern has persisted through multiple credit cycles, regardless of policy signaling. Stabilisation has reduced macro volatility, but it has not altered this risk calculus. Without credible mechanisms for risk sharing and enforcement, lower inflation and improved fiscal metrics alone will not unlock SME credit. If growth is to follow stabilisation, policy must move beyond exhortation and toward building a functional risk architecture. This means scalable credit guarantees with transparent loss-sharing rules, enforceable secured transactions, and lending models anchored in cash flows and receivables rather than immovable collateral alone. Absent these reforms, SME finance will remain peripheral to the credit system. Even before financing is considered, SMEs encounter another structural barrier. Pakistan’s regulatory framework remains anchored in prior approvals, no-objection certificates, and overlapping mandates across federal, provincial, and local authorities. Entry into the formal economy is time-consuming and uncertain. Expansion often triggers additional layers of permission. While recent stabilisation has relied heavily on revenue mobilisation and enforcement, it has also reinforced a long-standing bias toward control rather than facilitation. This model may serve short-term compliance objectives, but it undermines growth formation. When entry barriers are high and discretionary, firms respond by staying informal, under-reporting activity, or avoiding scale altogether. The result is a narrow tax base, weak investment response, and limited productivity gains. A growth-oriented transition requires a regulatory shift toward risk-based oversight and post-commencement compliance. Reducing routine NOCs and making approvals time-bound is not deregulation. It is regulatory efficiency. Without such a shift, the benefits of stabilisation will remain confined to a small formal segment of the economy. Perhaps the least discussed, but most consequential, constraint on SME growth lies in labour regulation. Pakistan’s labour law framework imposes a sharp compliance cliff once firm size crosses 10 employees. Below this threshold, enterprises operate with minimal obligations. Above it, they face a complex set of requirements spanning social security, pensions, welfare funds, inspections, and industrial relations. For small firms, this transition is abrupt and administratively burdensome. The predictable response is to cap employment, fragment operations, or remain informal. This dynamic helps explain the dominance of micro-enterprises and the absence of a strong mid-sized firm segment.From a growth sequencing perspective, this is counterproductive. Labour protections are essential, but they must be proportionate. A tiered compliance framework that scales obligations gradually would encourage formalisation, expand the tax base, and ultimately extend worker protections more effectively than the current all-or-nothing structure. Penalising the firm with eleventh employee is not labour protection. It is growth suppression. Pakistan’s stabilisation phase has created necessary macro space, but growth will not emerge automatically from improved indicators. It must be engineered through institutional reform. SME strategies that focus on training programmes, workshops, and aspirational roadmaps do not address the binding constraints. The problem is not awareness. It is architecture. Risk remains unshared, entry remains constrained, and scale remains penalised. If policymakers are serious about converting stabilisation into sustained growth, SMEs cannot remain a rhetorical priority. They must become an institutional one. Without structural reform across finance, regulation, and labour markets, the transition from stabilisation to growth will remain incomplete, and the promise of SMEs will continue to exceed their performance. Copyright Business Recorder, 2026