• ILO report lists employment contraction, downsizing, labour migration, limited resources and borrowing capacity in MSMEs 

The Covid-19 pandemic severely impacted the business operations of nearly 80% of surviving micro-, small-, and medium-sized enterprises (MSMEs) in Sri Lanka, while the economic crisis of last year (2022) similarly impacted 89% of them. Employment contracted by one-fifth in the surviving firms during the multiple crises leading to small- and medium-sized enterprises downsizing. 

In addition, in the context of these crises, substantial numbers of enterprises lost both skilled and unskilled workers due to migration and nearly half of all surviving MSMEs found it difficult to retain or hire people because they could not pay enough to cover rising living costs.

This is the nature of the impacts of the crises that befell MSMEs in Sri Lanka during the past few years, which was described in a report titled “Impact of Multiple Crises on Sri Lanka’s MSMEs” and issued by the International Labour Organisation (ILO) last week. The study on which the report was based examined the impact of Covid-19 and the economic crises on MSMEs using multiple criteria, such as business closures and job losses, in terms of the enterprise size, the economic subsector, and vulnerable groups. 

The report noted that despite the fact that Sri Lanka’s MSMEs comprised 99% of all enterprises and was the main repository of its employed workforce in 2013 (latest available data), engaging 75% of the country’s employed population at that, MSMEs are notoriously vulnerable to shocks due to their limited financial resources and borrowing capacity with which to ride out a crisis.

In the report, ILO Country Office for Sri Lanka and the Maldives Director Simrin Singh explained that many of the challenges that MSMEs have experienced over the past two decades, including from the most recent crises, stem from long unaddressed institutional weaknesses, especially those related to governance.

State of MSMEs affected by Covid-19 and econ. crisis

This study examined the impact of the multiple crises on Sri Lanka’s MSMEs, their major sources of business vulnerability and the coping mechanisms that they adopted between 2019 to early 2023. It also assessed the effectiveness of the institutional support system and policy preferences of MSMEs to survive and grow. The study was conducted between January and March 2023, in 10 districts, and included a survey of 521 MSMEs that had survived the economic crisis, a survey of 50 MSMEs that had closed due to the crisis, and sector-based interviews with officials and officers of Government agencies and non-governmental organisations.

With regard to the findings, the report said: “The pandemic severely impacted the business operations of nearly 80% of the surviving MSMEs, while the economic crisis of 2022 similarly impacted 89% of them. Employment contracted by one-fifth in the surviving firms during the multiple crises, and small- and medium-sized enterprises downsized, which largely affected male employment but only marginally affected women’s employment because women were concentrated in the micro-enterprise sector, mostly in operations with three workers or fewer. 

“Substantial numbers of enterprises lost both skilled and unskilled workers due to their migration to other parts of Sri Lanka or abroad. Nearly half of all surviving MSMEs found it difficult to retain or hire people because they could not pay enough to cover their rising living costs. Continuing low employee morale and low productivity are also likely to hamper recovery. The crises left in their wake high levels of indebtedness, which will impede the continued survival and growth of MSMEs.”

The study looked at the way MSMEs responded to the challenges created by the multiple crises in terms of three metrics, i.e. adaptive and passive behaviour, dynamic capabilities and digitalisation. The analysis suggests that surviving MSMEs relied on more adaptive behaviours, whereas MSMEs that had closed resorted to more passive behaviours. In terms of dynamic capabilities, the surviving MSMEs responded proactively to the uncertain and changing business environment in the country. While most of them seized new business opportunities by adapting their business model so that they could survive and grow when conditions improved in the medium term, many such firms resorted to digitalisation in their adaptive behaviour although the digital strategies that they adopted were at the low end of the digitalisation scale, such as using social media platforms mainly for information searching, as per the report.

“An overwhelming majority of MSMEs did not receive any support from institutions dedicated to supporting MSMEs’ development. They either struggled or shut down. Although the stimulus packages offered by the Government to affected individuals and MSMEs were much smaller than what was offered in other countries in the region, these too seem to have bypassed most MSMEs. Political economy-related factors appear to have had some role in determining who really accessed this support. Additionally, financial institutions dedicated to supporting MSMEs largely ignored them, even though these institutions posted substantial profits while the economy contracted,” the report explained, adding that certain support mechanisms were not actually supportive and that therefore, Sri Lanka needs effective reforms to fix these governance-related issues that have long distorted and retarded the country’s development trajectory.

The report added that Sri Lanka’s investment climate has deteriorated steadily over the past 20 years, stifling the healthy growth of enterprises and leaving them vulnerable to the kind of cataclysmic shocks that have rocked the economy since 2019. It said that many of the impediments to enterprise growth that were rigorously identified decades ago continue to impede the survival, recovery, and growth of MSMEs. Important among them are the high cost of energy, the uncertain macroeconomic environment and the cost of and access to finance as well as inefficiencies and corruption in governance structures that were not a problem 20 years ago which now act as a considerable drag on business.

Necessary policy interventions

In this context, explaining that Sri Lanka’s economy is expected to face significant challenges in 2023 and beyond, notwithstanding ongoing macroeconomic reforms, the report suggested several interventions to be initiated at the national and sectoral levels in order to revive and strengthen MSMEs. The success of Sri Lanka’s medium-term growth prospects will depend on progress with debt restructuring, fiscal consolidation, the efficient targeting of social welfare programmes, and the effective implementation of growth-enhancing structural reforms, according to the report.

Adding that household economies, rising poverty, and soaring cost of living require attention, the report said: “In the immediate present and medium term, Sri Lanka needs to address the long-identified constraints to enterprise growth and build agile, resilient, and adaptive entrepreneurship development systems that can help MSMEs prepare for and respond to the current economic crisis and future shocks. Sri Lanka can use the crisis to reset its development model and work towards resilient and job-rich growth. Stabilisation has been largely achieved, but Sri Lanka needs to implement serious reforms that address the constraints on growth, enterprises, and job creation consistently and in a sustained manner. 

“Trust in public institutions also must be rebuilt through good governance, greater transparency, and accountability. Linking institutional and policy support to provide economic opportunities, such as skills development, digitalisation, business coaching, and access to finance can help MSMEs rebuild their assets, improve their business competitiveness and become an engine of economic recovery and growth.”

The ILO report further said that in order to promote job creation, the above-mentioned interventions can be supported through an improved business environment, skills development, supply-side efficiency, and access to finance. It explained the importance of MSMEs joining the global value chain-based exporting process, either directly or by subcontracting through large-scale exporters, pointing out that the country’s untapped export potential is estimated to be around $ 10 billion per year, which could create an additional 123,500 jobs.

Eradicating corruption by instituting mechanisms to ensure transparency and accountability in public sector institutions and to promote more inclusive institutions is one of the key recommendations presented in the report.

It explained that in addition to institutional reforms, the most urgent policy reforms needed for growth to recover from the recent crises involve maintaining economic stability, facilitating employment growth, and concentrating on sectors with the potential for rapid growth, such as exports and MSMEs. As for prioritising the policy interventions recommended, it added that the most important will be creating an enabling macroeconomic environment through the macroeconomic policy reform process, with support from leading donor agencies. Reforms should focus on good governance, improving investment, operating and regulatory environments for the private sector, and facilitating the efficient functioning of the labour market. At the next level of priority, interventions must promote high growth sectors that are capable of swiftly advancing the country’s economic recovery.

“As the economy begins to recover, more economic and employment opportunities will be created for men and women, and especially for young people. This will require skilled, educated, and motivated workers whose adaptability and productivity are enhanced through structural reforms and the provision of adequate resources to the skills development sector. These reforms will help workers acquire the skills needed to access employment opportunities that will be generated if the macroeconomic conditions are ensured. In this period of unprecedented economic crisis, timely and tailored progress monitoring will be vital to share what is learned and thus provide stakeholders with well-calibrated policy advice. Continuous monitoring will also help determine appropriate and corrective courses of action in response to any slow progress of project interventions.”