A key objective of the Export Development Board (EDB) in advancing Sri Lanka’s export potential is to support Small and Medium-sized Enterprises (SMEs) in establishing a sustainable position in international markets.
For instance, the Sri Lanka Export Excellence Initiative (SLEEI) focuses on enabling SMEs to meet global market requirements through a targeted programme aimed at enhancing their export potential.
Central to these initiatives is the emphasis on adopting sustainable practices, identified as a necessity for Sri Lankan SMEs to succeed in the competitive global marketplace. However, it is challenging for SMEs to achieve this, as an already struggling faction of the economy.
No longer a requirement exclusive to EU market
Addressing the prominence of sustainability principles in the export sector, National Chamber of Exporters (NCE) Secretary General Shiham Marikar told The Sunday Morning Business that, moving forward, adopting sustainable principles was essential for Sri Lankan exporters.
Looking ahead, the NCE calls for all exporters to adhere to these sustainable processes and principles, as it is imperative for exports and accessing the international market at present. Matching the cost factor in increased financing to obtain sustainable practices can be considered a matter of concern for SMEs in terms of profitability.
However, Marikar noted that buyers in the global market were willing to pay even higher prices to ensure working with companies that were able to prove their stance on commitment to sustainability, ethical training, and good governance.
“Adhering to sustainable principles can be challenging for the SME sector, particularly due to the cost factor, given that achieving these standards involves a significant cost. The NCE has already discussed with stakeholders in the Government sector, requesting them to provide support and facilitate SMEs in obtaining these required standards and certifications. On the other hand, there are overseas donor agencies in Sri Lanka as well that have specialised programmes to support SMEs in order to achieve these standards.”
He added that since the Government was focused on an export-driven economy and advocated for the importance of achieving this goal, it was essential to facilitate SMEs in order to enhance the role they played in the export sector as well.
“It would be beneficial if the Government can introduce specific incentives or assistance programmes for SMEs to help secure these certifications and standards, which will certainly contribute to boosting Sri Lankan exports and achieve the target set by the EDB as well.
“Previously, adhering to sustainable principles was mainly a concern specific to reaching the European market and buyers. However, in the present context, even Asian and Middle Eastern countries have started prioritising these principles, engaging well with countries that insist on sustainable practices, good governance, and ethical training,” he said.
Marikar further stated that the NCE had introduced a certificate on ethical training, inclusive of 10 principles covering sustainability, ethical training, and good governance several years ago. This included gender equality and good environmental practices, as well as traceability in order to cater to this progressing trend.
“The NCE noticed during overseas trade delegations, where exporters are facilitated in meeting buyers overseas, that the buyers insist on having partnerships with Sri Lankan exporters who can prove waste maintenance practices as per the demands of end consumers in the modern context. This is the reason behind this concept of certification on ethical training we have introduced to our members.
“Moreover, we are planning on securing the Sri Lanka Accreditation Board’s involvement in this certification procedure to ensure further credibility,” he added.
Important to facilitate SMEs in certification
Sri Lanka’s export sector experienced growth in October this year, recording an 18.22% Year-on-Year (YoY) growth in merchandise exports alongside an increase in services exports.
Positive growth was observed in key export markets, including the US, the UK, India, Germany, the Netherlands, and Canada, both during October and the cumulative period from January to October compared to the same periods in 2023, highlighting the need to sustain this momentum.
Speaking to The Sunday Morning Business, Ceylon Federation of Micro, Small, and Medium-sized Enterprises (MSMEs) President Mahendra Perera also emphasised the importance of adopting sustainability practices to enhance the export potential of SMEs.
“In order to facilitate these practices as well as address other issues encountered by the SME sector, we suggested the new Government implement a national policy for MSMEs with all necessary measures inbuilt.
“This means that the policies should not undergo changes over time. It is imperative to establish a long-term national policy which helps MSMEs to engage with the market more efficiently and grow accordingly,” he said.
To address the need to facilitate SMEs to meet global market trends, Perera stated that a seminar would be organised on Friday (6) where KPMG was expected to take part and provide counselling and advice for MSMEs seeking export possibilities, especially those targeting European Union (EU) countries.
“We hope to provide guidelines on entering the global market and the aim is to provide clear guidance on export regulations and compliance to at least 1,000 SMEs through this endeavour. We believe it will facilitate SMEs in reaching the global competitive market.
“Moreover, we are hoping to encourage more SMEs to seek export possibilities, reach the foreign market from 2025, and facilitate the required certification procedures. For financial support, we expect assistance from the Government and relevant financial institutions as well,” he noted.
Perera further emphasised that following sustainable standards was crucial and that the seminar was supposed to provide exposure to necessary guidelines as well as requirements. Additionally, he noted that certification standards were a significant issue in the country in terms of accessing the global market, as it was challenging for MSMEs to procure these certifications individually.
“It is important that the Government intervenes and supports the procedure and implements a helpful system, as MSMEs struggle with these processes. For exports, standard certification is of highest priority as well as highest difficulty, as far as MSMEs are concerned. This is more challenging due to sustainable principles being mandatory to reach many markets in the EU,” he said.
Commenting on additional struggles that SMEs must endure, he noted that the loans were still crippling MSMEs, and in order to sustain in competitive markets, Government and financial institution support was required.
“From 2022 onwards, the electricity bill has not really been affordable, leading to high cost of production. As the country is supposed to head towards a production-based export-driven economy, it is important to establish a conducive environment that serves that purpose. Otherwise it is difficult to compete with other regional competitors for exports.
“If the Government can reconsider duties on raw materials and reduce duties or implement a duty-free basis, it would contribute significantly to promoting a manufacturing-friendly environment. We continue to encourage and support our MSMEs to reach their export potential, as it is a significant priority at present,” Perera added.
Lack of resources and knowledge obstructing SMEs
Adopting sustainable practices requires SMEs to incur additional costs during implementation, which can disrupt the equilibrium between demand and supply. However, in the long term, studies indicate the benefits gained from these practices can outweigh the initial expenses by lowering long-run average costs through the adoption of green and lean approaches.
Moreover, research indicates that SMEs often lack awareness of sustainable business practices, with most focusing primarily on economic performance. Due to the unstable economic environment in the country, SMEs prioritise short-term profits, perhaps driven by the estimated high failure rates of SMEs, spanning over 45%.
Additionally, their limited resources hinder the development of innovative sustainability models. Moreover, the performance of SMEs in Sri Lanka is largely dependent on the skills and capabilities of their owners, while challenges in recruiting and retaining talented employees further exacerbate these issues.
National Enterprise Development Authority (NEDA) Director Dhanuka Liyanagamage stated that the current status of many MSMEs concerning compliance with sustainability principles and international standards indicated a lack of resources and knowledge.
“NEDA initiates programmes to help bridge the gap by offering training and financial tools. However, despite these efforts, adoption rates remain low, particularly among smaller enterprises.”
In terms of the challenges SMEs face in adopting sustainability principles, financial barriers are significant. For instance, high costs of green technologies and limited access to sustainable financing options remain notable impediments. Liyanagamage added that knowledge gaps were another challenge, as there was a lack of understanding of international sustainability requirements.
“These also contribute to market access issues such as poor market linkages which prevent these SMEs from reaching eco-conscious consumers globally. Market access issues are further burdened by regulatory complexities such as inconsistent policies and inadequate support mechanisms,” he noted.
Mitigating these challenges in order to achieve sustainable principles requires careful planning along with implementation. As knowledge and awareness are key factors hindering the potential of reaching the global market, Liyanagamage noted the necessity of administering more training programmes in order to enhance awareness through workshops and capacity-building efforts.
One such move is the ‘Uplift’ project conducted by NEDA, an initiative focused on aiding migrant returnees and communities in vulnerable situations to work towards enhancing their skills, promoting safe migration, and fostering economic resilience.
He further noted the value of financial aid, such as introducing subsidised loans and grants for sustainability-focused projects. In addition, policy support will ensure that sustained support is provided for MSMEs.
“For policy support, simplifying regulatory processes and offering tax incentives for compliance is important. On the other hand, digital transformation stands as a prime concern and promoting the use of digital tools will be highly beneficial for monitoring and improving sustainability practices,” Liyanagamage noted.
Addressing the economic impact of non-adoption of sustainable principles by SMEs, he emphasised that reduced market access would be one concerning impact, hindering overall export growth.
“Non-compliance limits entry into international markets, causing a competitive disadvantage and falling behind global and regional peers affects market share. This would certainly lead to economic stagnation of SMEs and contribute to a number of missed opportunities in growing sectors, such as green products,” he concluded.