Small and Medium Enterprises (SMEs) are considered to play an important role in the economic growth, employment generation and poverty alleviation in the economy. The annual time series data is used for examination of impact of SMEs on poverty in Pakistan for the period of 1972-2008. The study utilizes Johansen cointegration and error correction mechanism to examine long run and short impacts small scale industries and other explanatory variable on poverty in Pakistan. The results of the study confirm a strong and poverty alleviating impact of small scale industries’ output in Pakistan. The study suggests the economic policy makers to focus on the establishment of formal financial markets to overcome the financial constraints faced by the SME sector in Pakistan. Simplification of lending procedures, enforcement of credit rights, and reduction in credit costs would be helpful for the establishment of robust SME sector in Pakistan.
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