ISLAMABAD: Pakistan and the European Union have signed a €20 million grant agreement to launch the “Better Governance and Business Environment” initiative in the South Asian country, Pakistani state media reported on Thursday.

The agreement, signed by EU Ambassador to Pakistan Dr. Riina Kionka and Secretary Economic Affairs Division Dr. Kazim Niaz, aims to enhance the competitiveness of Pakistan’s private sector, particularly small and medium enterprises (SMEs), including those led by or benefiting women.

Pakistan’s government has increasingly spoken about achieving sustainable economic growth and moving the country away from his usual “boom and bust” cycle through financial reforms, signing trade, business and grant deals with regional allies worth billions of dollars and enhancing its exports.

“The program will strengthen SME-related legislation, support the green transition of export-oriented firms, facilitate targeted green investments, and promote public-private dialogue,” the Radio Pakistan broadcaster reported.

The development comes as Pakistan takes policy measures to increase lending portfolio of SMEs to enhance their contributions to employment, exports and the national GDP.

These enterprises account for approximately 40 percent of the country’s GDP, 25 percent of exports and nearly 78 percent of non-agricultural employment, according to the Pakistani finance ministry.

But despite their contributions, their access to formal finance remains “disproportionately low,” with a small percentage of private-sector lending currently directed toward them

“This expansion is expected to enhance the contribution of SMEs to GDP, exports, employment, youth and women’s digital empowerment, and overall financial inclusion, laying the foundation for sustained and inclusive economic growth,” the finance ministry said this month.

“Deregulation efforts, such as reducing reliance on NOCs and increasing e-inspections, are also being introduced to reduce compliance burdens for SMEs.”

Pakistan will also use a $1.4 billion loan from the International Monetary Fund’s climate resilience fund to expand fiscal space, embed climate planning into public investment decisions and unlock private-sector capital for green projects, the IMF said last week.