Sri Lanka’s economy relies heavily on Micro, Small, and Medium-sized Enterprises (MSMEs), which account for more than 75% of registered businesses, contribute over 52% to Gross Domestic Product (GDP), and provide employment to nearly 45% of the workforce.
However, findings from the 2025 World Bank Enterprise Survey show that the sector continues to face major structural constraints, including high tax rates, limited access to finance, licensing barriers, regulatory inefficiencies, skills shortages, informality pressures, and weak integration into export markets and innovation-driven activities.
The issue, therefore, is the lack of organised and results-oriented support systems that can help Small and Medium-sized Enterprises (SMEs) and MSMEs grow and transform.
Govt. strategy
Against this backdrop, the Government recently introduced the National SME Strategy Framework 2026 through the Ministry of Industry and Entrepreneurship Development. It attempts to address various gaps through its 11 strategic pillars, using a more coordinated and market-oriented approach.
Speaking to The Sunday Morning Business, National Enterprise Development Authority (NEDA) Director Dhanuka Liyanagamage explained that the strategy framework had been designed to address a range of structural barriers faced by SMEs through several targeted pillars.
He explained that the framework’s 11 pillars each addressed specific challenges within the SME sector. Referring to the first pillar on digital enablement, he noted that the issue of the digital divide would be addressed by supporting entrepreneurs to become more digitally savvy.
“We will, through the ministry, support entrepreneurs, especially in digital marketing and digital tools. More affordable options of advertising and all those aspects are covered there,” he said.
He further noted that measures were also underway to simplify business registration procedures, adding that the final draft had already been prepared and only formal approval remained pending.
Commenting on access to finance, Liyanagamage pointed to the framework’s ninth pillar, noting that Rs. 95 billion had been allocated this year for concessionary loan schemes for SMEs, which he described as the highest amount allocated to the sector so far in a single year.
Equity capital, including private equity, and Initial Public Offering (IPO) listings on the Empower Board of the Colombo Stock Exchange are also to be promoted. He added that plans were also underway to introduce a venture capital fund, which, if not completed within this year, would be included in next year’s national budget.
Liyanagamage also highlighted reforms planned under the institutional pillar of the framework, noting that development officers attached to institutions such as NEDA, Small Enterprises Development Division, and Industrial Development Board (IDB) would be further trained and repositioned.
“There will be initiatives for enabling and building capacity among our development officers, especially in relation to digital tools, incubation knowledge, and branding knowledge. We will make them relationship officers instead of traditional development officers. We have already trained around 100 officers and the training of the second batch is currently underway,” he said.
He further explained that the framework’s third pillar focused on improving service delivery structures through the introduction of the SME Connect framework, which would function as a single-window access point for entrepreneurs seeking assistance.
On education and entrepreneurship development, Liyanagamage said that the framework also sought to expand entrepreneurship programmes across schools, universities, and higher educational institutions.
“There are already several programmes in place at present, such as the NEDA-initiated Brain Into Business university entrepreneurship programme and IDB-led school entrepreneurship circle programme. We will extend this to other higher educational institutes as well and widen the scope to cover the entire education sector to enable them with skills,” he said.
Further, referring to the framework’s incubation pillar, Liyanagamage noted that NEDA had already completed drafting the national incubation framework and was awaiting Cabinet approval, a process which is expected to be completed by July.
Moreover, he emphasised that most of the changes outlined under the framework were expected to take place within this year, including the institutional amalgamation process where the new institution will be functional from January 2027.
Strategy pillars
Put forth as a more coordinated national SME development model, one major focus of this strategy is technology and digital enablement, which targets improving enterprise productivity, competitiveness, and institutional coordination through digital tools, advanced production technologies, and integrated data systems.
The framework also places considerable emphasis on institutional integration and service delivery, proposing closer coordination among agencies involved in enterprise development through district and divisional committees, an inter-ministerial mechanism, and a single-window support system intended to reduce fragmentation and improve accessibility for SMEs.
At the same time, the strategy highlights incubation and new business support as a priority area, aiming to simplify business registration processes and create structured incubation pathways aligned with national priorities.
Another central component of the framework is market development and value chain integration, while emphasising that SME growth cannot depend solely on training programmes or financial support, but must be connected to actual commercial opportunities. The framework proposes demand-driven market access platforms, stronger export readiness initiatives, and measures to improve productivity, sustainability, and quality standards so SMEs can better integrate into local and global value chains.
It also introduces a stronger research and analytics component, especially through the proposed Strategy Impact and Business Analytics (SIBA) unit, and provides evidence-based policymaking and sector-specific research, export market intelligence, and value chain insights. The framework also hopes to expand recognition beyond enterprises themselves by acknowledging the role played by chambers, banks, development officers, Non-Governmental Organisations (NGOs), universities, and other ecosystem partners involved in SME development.
The remaining pillars focus on enterprise progression, financing, entrepreneurship culture, and regulatory reform. On financing, the strategy proposes creditworthiness development programmes, development banking solutions, and growth funds targeting priority sectors.
Across all 11 pillars, the framework identifies competitiveness, exports, employment, sustainability, and GDP contribution as its core outcome areas.
Financing and market access crucial
Meanwhile, The Sunday Morning Business looked into the most pressing structural barriers and the current challenges faced by the sector. Stakeholders noted that the SME sector continued to struggle with immediate pressures stemming from currency fluctuations, rising operational costs, weak domestic demand, and limited market access amid ongoing global economic uncertainty.
Commenting on the structural gaps facing the SME sector, Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) President Dr. Rohitha Silva said the challenges varied depending on the category and scale of the enterprise, noting that most Sri Lankan SMEs primarily operated within the domestic market while another faction operated as industry SMEs.
He noted that in local sectors such as agriculture and fisheries, the issue was not necessarily external market conditions, but the lack of knowledge, value addition, market access, and financing support available to small-scale entrepreneurs.
“The biggest challenges faced by SMEs are financing and the marketplace, since medium and large sectors are more directly exposed to economic crises. In my view, there should be greater focus on knowledge expansion among our growers and small industries, along with their benefits, as this area currently lacks sufficient attention. Certain local products need to be better promoted in the local market, alongside their specific advantages compared to imported products,” he stated.
Dr. Silva also observed that many SMEs remained self-financed, with limited access to formal credit facilities, as banks were generally reluctant to lend to small entrepreneurs.
“The dollar gap can be bridged primarily through the SME sector. However, this requires improved financing. One important step here is targeting projects by international funding agencies such as the Asian Development Bank (ADB), since such projects help the development of entrepreneurship,” he said.
He also highlighted the need for greater investment in regional processing facilities and value-added industries, specifically in agriculture and food processing.
Rising utility costs a key issue
Meanwhile, Ceylon Federation of MSMEs Chairman Mahendra Perera noted that the sector’s most urgent concern at present was sustaining businesses amid currency instability and rising utility costs.
Speaking to The Sunday Morning Business, Perera noted that fluctuating exchange rates had significantly increased the cost of imported raw materials, making production planning increasingly difficult for SMEs. He also noted that the electricity tariff escalations had added to these pressures.
Accordingly, Perera noted that businesses were finding it difficult to maintain stable costing structures due to the unpredictable and unstable operating environment.
Addressing the root causes
Sharing a broader assessment of the proposed framework and SME struggles, University of Colombo (UOC) Department of Economics Professor S.P. Premaratne noted that while the initiative was a positive step, certain structural issues highlighted in the document had remained unresolved for years.
He said that this raised concerns as to whether successive policy efforts had meaningfully addressed the root causes affecting the sector. Therefore, he highlighted the importance of effective and comprehensive practical steps that could address the root causes affecting SMEs.
Prof. Premaratne however acknowledged that the current framework identified important areas such as policy consistency, regulation, access to finance, and technology adoption, while noting that many of these concerns had been discussed repeatedly over the past two decades without sufficient progress.
“There are three layers embedded in the sector. These include the individuals investing and conducting the business, internal business matters, and external business matters. Overall, it is a matter of demand and supply.”
He stated that the initiatives were yet to sufficiently address demand-side constraints, export integration, or value chain development, despite these being critical weaknesses in the Sri Lankan SME sector.
According to the latest available information, the SME contribution to export earnings remains around 8%, although Export Development Board (EDB) goals for 2035 hope to increase contribution up to 25%.
“Domestic demand remains questionable at present due to purchasing power constraints and many people tend to choose imported products over domestic products, an aspect that must be addressed by the framework.
“On the other hand, although the framework mentions export orientation, it lacks effective strategies to integrate firms into the export market, establish large-scale firms, or ensure value-chain integration, market linkages, and value creation. Currently, only a marginal number of businesses enter the export market,” Prof. Premaratne said.
He also noted continuous financing and productivity challenges, noting that policy discussions continued to focus narrowly on bank credit rather than wider financing mechanisms and different avenues of capital.
“Two prominent issues in the sector are low productivity and technology innovation. While these are discussed in the framework, the focus must move to the latest technology, rather than traditional forms of technology. In addition, there are skill development and labour capacity issues that need addressing in terms of the productivity aspect, which must reflect the specific requirements of the SME sector,” he stated.
He highlighted that the strategy should adequately reflect changing global trends, especially the rapid shift towards digitalisation and Artificial Intelligence (AI)-driven economies.
Sri Lanka’s cost of production has also increased, especially amid ongoing global tensions and the resultant price escalations in fuel, electricity, and other costs. Prof. Premaratne pointed to the burden created by high taxes, bureaucracy, transaction costs, logistic costs, and regulatory barriers, which he said discouraged SMEs from entering the formal economy.
“This framework primarily addresses coordination and capacity gaps. However, certain root causes, practical measures, and structural changes are yet to be properly addressed. Proper conceptualisation and direction aligned with evolving global trends are important to ensure effective support and to set an established vision for the future,” he said.
Overall, it is evident that the success of the framework would ultimately depend on implementation and whether the proposed reforms translate into practical support for SMEs operating under increasingly difficult economic conditions.