Micro, small, and medium enterprises (MSMEs) have long served as the backbone of Sri Lanka’s economy, significantly contributing to employment, entrepreneurship, and rural development.
Since the 1980s, they have played a key role in poverty reduction by offering income-generating opportunities beyond traditional agriculture.
Despite longstanding challenges - such as limited access to finance, inadequate infrastructure, and low levels of technology adoption - MSMEs expanded steadily, accounting for nearly 40% of GDP and 35% of employment by the early 2000s.
The Sri Lankan government has consistently acknowledged the sector’s importance, implementing various policies to support its growth. Between 1948 and 1970, focus was on traditional industries like textiles and agriculture.
The 1970s and 1980s saw the emergence of development programs and rural industrial zones aimed at expanding small-scale industry. Economic liberalisation in the 1990s spurred private-sector participation and a rise in informal MSMEs.
In the early 2000s, formal SME policy frameworks and microfinance initiatives were introduced to promote financial inclusion in rural areas. By the 2010s, youth entrepreneurship and women-led MSMEs gained energy, aided by donor agencies and NGOs committed to sustainable and inclusive development.
MSME growth over the decades has been notable. In 1980, there were around 400,000 MSMEs, comprising 70% of all enterprises and contributing 20% to GDP and 25% to national employment.
By 1995, this had increased to 600,000 MSMEs (80% of enterprises), with their GDP contribution rising to 30%. In 2005, there were approximately 850,000 MSMEs, representing 85% of total enterprises, providing 40% of employment and contributing 35% to GDP.
By 2010, MSMEs had reached around 1,017,000 in number, forming 90% of businesses and contributing 45% each to both employment and GDP.
From 2005-2015, MSMEs were distributed across agriculture (32%), manufacturing (25%), and services (43%). Key sectors included farming, food processing, apparel, tourism, retail, and ICT.
Government initiatives during this time included the establishment of the Industrial Development Board (1970s), the Small and Medium Industries Development Programme (1983), the Samurdhi microfinance programme (1990s), and the SME Bank (2002).
The National SME Policy Framework, introduced in 2012, marked a major step toward formalisation and competitiveness, aiming to increase investment and support long-term development of the sector.
MSMEs in Sri Lanka at present
Sri Lanka classifies MSMEs based on employee count and annual turnover, as per the National SME Policy Framework. Micro enterprises have 1-10 employees with turnover below Rs. 15 million.
Small enterprises employ 11-50 people and generate Rs. 15-250 million, while medium enterprises have 51-300 employees and turnover between Rs. 250-750 million. This structure guides targeted policy, finance, and regulatory support.
As of 2024, Sri Lanka has around 1.1 million MSMEs, accounting for over 90% of all businesses. These enterprises contribute approximately 52% to GDP and 45% to national employment.
Despite their economic impact, MSMEs contribute just 10% to exports, indicating underutilised potential in international trade.
Sectorally, MSMEs are most active in services (43%), followed by agriculture (32%) and manufacturing (25%), highlighting a shift toward service-oriented activities.
The Western Province dominates with 34% of all MSMEs, while the Central, Southern, and North Western Provinces hold 15%, 14%, and 12%, respectively. The rest of the country shares the remaining 25%.
This distribution reflects both regional economic hubs and disparities in enterprise development.
MSMEs in Sri Lanka in the future
Sri Lanka’s MSME sector is projected to expand significantly by 2030, with the number of enterprises rising from 1.1 million in 2024 to 1.4 million. Their GDP contribution is expected to grow from 52% to 60%, and export share from 10% to 25%, reflecting greater global integration.
Digital transformation will accelerate, with e-commerce adoption rising from 25% to 75%, and increased use of cloud accounting, digital payments, and AI tools. The government’s “Digital SME Empowerment Roadmap” aims to digitally enable 60% of MSMEs by 2027, supported by ICTA and SLASSCOM.
Sustainability is also a key focus, with over 5,000 green MSMEs to receive support under the Climate Smart Entrepreneurship Programme (2025-2030). Eco-friendly practices and circular economy models are being encouraged.
Inclusivity is expected to improve, with women-led MSMEs projected to grow from 25% to 40%, and enhanced support for youth entrepreneurship via TVEC, incubators, and business chamber partnerships.
Main challenges and barriers faced by MSMEs in Sri Lanka
Sri Lanka’s MSMEs face several critical challenges. According to the World Bank (2023), 68% struggle with access to finance, while 52% are hindered by regulatory burdens.
Digital adoption remains limited, with 65% lacking access to e-commerce platforms (ICTA, 2024), and only 35% using digital tools such as online sales, mobile payments, or cloud accounting. Although 60% use social media for marketing, adoption of CRM and accounting software remains below 10%.
A skills mismatch affects 40% of MSMEs (UNDP/TVEC, 2023), and 35% are impacted by energy and infrastructure issues (ADB, 2022). Export participation is low, with only 8-10% engaged in international trade.
Barriers include poor product standardisation, inadequate packaging, and limited global market knowledge.
To address this, the Export Development Board aims to make 1,000 MSMEs export-ready by 2026 through targeted support and training programmes, helping improve competitiveness and integration into global markets.
Necessity of developing MSME sector in Sri Lanka
MSMEs are vital to Sri Lanka’s economy, representing over 90% of all enterprises, employing about 45% of the workforce, and contributing approximately 52% to GDP as of 2024. With around 1.1 million MSMEs operating nationwide, their potential to drive inclusive economic growth is significant.
Sri Lanka faces a youth unemployment rate of 21.2% among those aged 15-29 (DCS, 2023). MSMEs can absorb much of this labour, especially in rural and underdeveloped areas.
Women-led MSMEs also offer a path to reduce the gender employment gap, as only 34% of women are economically active (World Bank, 2023).
Additionally, MSMEs can help reduce import dependency - Rs. 450 billion worth of goods imported in 2023 could potentially be replaced by local MSME products.
Currently, less than 10% of MSMEs are export-oriented, but the Export Development Board aims to increase this to 25% by 2030 through support for value-added agriculture, ICT, and crafts.
Unlike large firms centred in urban areas, MSMEs are distributed across rural and semi-urban regions, promoting balanced development and reducing regional disparities.
However, over 60% operate informally, limiting their contribution to the tax base and access to formal finance. Promoting formalisation through incentives could enhance revenue and sustainability.
Emerging MSME sectors - such as green industries, ICT, and Ari-tech - also present opportunities for innovation and climate resilience, especially with targeted research and development investment.
Between 2025 and 2030, substantial growth is expected across MSME sectors: agro-processing (80%), ICT and services (120%), tourism and hospitality (60%), manufacturing (40%), and handicrafts/exports (75%), largely driven by value addition and digital integration.
The future of Sri Lanka’s MSMEs is promising, with growth driven by digitalisation, supportive policies, inclusive entrepreneurship, and sustainability.
To realise this potential, however, critical challenges must be addressed- especially access to finance, business formalisation, and skills development.
With strategic reforms and coordinated investment, MSMEs can become key engines of inclusive and resilient economic development.
Recent country level initiatives taken to develop MSMEs in Sri Lanka
Sri Lanka has recently launched several strategic initiatives to support MSMEs, recognising their vital role in economic growth, job creation, and innovation.
Key programmes since 2024 include Enterprise Sri Lanka Revival and SME Loan Schemes for financial access, SME Incubator System for research and development and startups, and GovPay and LankaQR to promote digital payments.
Skill development and entrepreneurship are supported through UPLIFT, GET Ahead, and Brain into Business programmes. The Public R&D-Private Industry Partnership fosters innovation, while Central Bank Relief Measures provide financial recovery support.
These efforts, driven by entities like the Ministry of Finance, ICTA, NEDA, and the Central Bank, reflect a commitment to building a supportive ecosystem for MSMEs.
By promoting financial inclusion, digital transformation, skills development, and public-private collaboration, Sri Lanka aims to empower MSMEs as engines of inclusive and sustainable economic growth.
Recommendations for further development of MSMEs in Sri Lanka
MSMEs contribute over 52% to Sri Lanka’s GDP and employ about 45% of the workforce (CBSL, 2023). Despite their significance, many face barriers to growth. To realise their full potential and support Sri Lanka’s 2030 development goals, key strategic actions are recommended.
Improving access to finance is vital. Expanding credit guarantee schemes like SMELoC, promoting fintech lending and digital credit scoring, and encouraging micro-leasing and invoice financing can help reduce collateral dependence.
Only 15% of MSMEs currently use digital tools, highlighting the need to digitize operations. The “Digital MSME 2030” roadmap, subsidised tech tools, and ICT training through agencies such as NEDA, ICTA, and TVEC can drive this transformation.
With 70% of MSMEs operating informally (DCS, 2022), simplifying business registration, offering tax incentives, and providing social protections are essential to encourage formalisation.
To foster innovation, allocating 1% of GDP to research and development, funding green tech and ICT, and promoting university-industry collaboration through incubators are necessary.
Enhancing export capacity is also crucial. MSMEs account for under 10% of exports (EDB, 2023); increasing trade facilitation, reducing non-tariff barriers, and supporting certification and e-marketplaces like LANKA.GLOBAL will improve competitiveness.
Supporting inclusive and green enterprises - via financing, sustainable packaging, and targeted programmes for women and youth - will further strengthen the sector.
Decentralising support by developing rural industrial parks, SME zones, and regional incubators will promote balanced regional growth.
Institutional strengthening is also key: Fully implementing the National SME Development Framework (2025-2030), centralising data systems, and establishing an SME Ombudsman can streamline support.
By 2030, Sri Lanka aims to increase MSMEs’ GDP contribution to 60%, double formal credit access, raise digital adoption to 50%, and expand women-led MSMEs from 25% to 40%. A comprehensive, multi-faceted strategy is essential for inclusive and resilient economic growth.
(The writer is a Professor in Management and Organisation Studies at the Management and Finance Faculty of University of Colombo.)
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(The views and opinions expressed in this article are those of the author, and do not necessarily reflect those of this publication.)