Small and Medium-sized Enterprises (SMEs) play a crucial role in Sri Lanka’s economy, contributing significantly to the Gross Domestic Product (GDP). According to the Asian Development Bank (ADB), SMEs account for 52% of Sri Lanka’s GDP. However, they are facing challenges despite their economic importance, especially in the current context of a recovering economy.
The Government’s support and attention towards SMEs have been lacking, which has raised concerns among experts. Many SMEs are struggling and shutting down, leading to increased unemployment and potential poverty in the country.
Advocata, an independent policy think tank based in Colombo, reports that SMEs contribute to 45% of domestic employment. Despite their substantial contribution to employment and GDP, the SME sector remains vulnerable and in need of assistance.
This sets the stage for a critical examination of the current state of Sri Lanka’s SMEs, highlighting the disconnect between their economic significance and the level of Government support they receive.
Dire situation
When The Sunday Morning spoke to Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) President Keerthi Gunawardane regarding unemployment in the SME sector, he said that the sector’s current situation was dire and that many SMEs, not only the smaller companies but even medium-sized ones, were closing.
“Since we do not have a proper economic plan, we try to address certain issues in relation to debts, but no definite actions have been taken. The only good thing that has happened is that foreign remittances have increased. The tourism sector is doing well, but apart from that, exports are barely growing. Things are mostly the same as before; there is little growth, which is also insignificant,” he said.
He noted that there would be a significant impact on the future generation due to unemployment resulting from the closure of SMEs. Given the challenges faced by parents, schoolchildren struggled with schooling, obtaining nutritious food, etc., and statistics showed that poverty levels had grown, he further noted.
Addressing the possible solutions to the issues faced by SMEs, he said that there was no clear-cut economic plan to deal with the sector.
“The FCCISL has undertaken a few initiatives that we found successful. By and large, if the Government supports these initiatives, we can directly address the issue of foreign currency. However, currently, there is no significant new initiative of that nature in progress. Nonetheless, this is not a major concern,” Gunawardane said. The situation was likely to worsen with the upcoming election, he asserted.
He pointed out that there were few opportunities for SMEs to collaborate with large enterprises or industry players in order to access resources and opportunities for growth. “However, in the case of exports, since there is no significant growth there, we cannot anticipate that opportunity,” he said.
Moreover, he noted that while some SMEs would be operating despite challenges, others would be scaling down in order to continue. “Others will most likely opt for closure since they can’t afford it, having incurred losses throughout,” he said.
“The Sri Lankan SME sector is undergoing a turbulent period due to difficulties in securing funds. Additionally, with increased political upheavals, less focus is given to economic growth. This is the primary issue. Moreover, corruption has also increased significantly,” Gunawardane said.
Potential growth
Meanwhile, Ceylon Chamber of Commerce Chairman Duminda Hulangamuwa noted that the tourism-related sectors displayed growth.
“Since imports have been permitted again, other than for motor vehicles, within limits, there will be a slight growth in the SME sector with the resumption of consumption, and the cost of goods and services will drop slightly,” he said, adding that inflation would stabilise, leading to a slight momentum which would cause the sector to gradually rise.
He stated that SMEs would gradually improve should the economy perform favourably. “The only support the Government can give is to keep interest rates and inflation low so that there is space for SMEs to borrow to ensure reduced cost of production and services. The Government can ensure policy stability and the stability of the macro-environment,” he said.
Commenting on the possibilities for SMEs to collaborate with large enterprises or industry players to access resources and opportunities for growth, Hulangamuwa said that it had to be a process where some backward integration could take place, where companies could outsource some of their manufacturing and services and choose a company so they could vote for an outsourcing model.
Further, SMEs can have a lower cost of production than those of more prominent players, which will be a cost advantage for most of the SME sector. This requires integration in cost, efficiency, and resources.
Impact of previous years
During a recent press conference organised by the National Chamber of Exporters of Sri Lanka (NCE), its President Jayantha Karunaratne pointed to the lingering impact of the Covid-19 pandemic and subsequent financial strains on exporters, stressing that many SMEs continued to struggle with operational challenges and economic constraints.
Commenting on unemployment in the SME sector, he said that they lacked specific data on how many had been left unemployed due to SME closures.
“Some SMEs had to close down because they could not continue, since the cost of borrowing went up to 32% while the cost of energy also increased significantly. Therefore, these SMEs were unable to sustain themselves. Although medium- and large-sized companies are managing, they are still facing challenges,” Karunaratne said.
Fortunately, SMEs in the tourism sector had grown and several SMEs had also moved into tourism-related businesses, he noted. However, he also noted that skill levels differed from the required standards and that it would take a few years to upskill and adequately function in these sectors.
Unlike the SMEs that had moved into the tourism sector, other SMEs had faced closures, leaving many unemployed, he observed.
Need for Govt. support
He further stated that SME growth would not happen overnight as it was a process. “We are trying to make the Government understand that this sector is suffering. Some SMEs are struggling to survive, and without Government support, they will not last. Therefore, the country’s banking sector must help. However, the banking sector says it can do little because it is under the supervision of the Central Bank of Sri Lanka (CBSL).
“The CBSL has stringent rules with the intention of protecting the banking sector in order to prevent its collapse. Therefore, the CBSL has many regulations in place for the banking sector. SMEs will only survive if the banking sector has a little flexibility to help them,” Karunaratne elaborated.
He pointed out that there was hope since tourism and the Information Technology and Business Process Management (IT-BPM) sector were doing well. However, he noted that the SMEs in the merchandise sector were either closing or stagnant.
Speaking at the press conference, Sri Lanka Association for Software and Services Companies (SLASSCOM) Chairman Jehan Perinpanayagam emphasised on the significance of tackling issues such as providing affordable housing for employees and offering financial relief to support the expansion of industries in the growing IT-BPM sector. He also highlighted the importance of improving labour mobility.
Meanwhile, speaking to The Sunday Morning, Micro, Small, and Medium-scale Enterprises (MSME) Chamber Member Susantha Liyanaarachchi said that there were 1.2 million jobs in Sri Lanka based on construction-related SMEs.
“Among these, 1.2 million jobs have been abandoned because foreign-funded projects worth $ 5.5 billion are on hold due to the pandemic and the economic crisis. As a result, 50-55% of employees have migrated, most of them being engineers. The construction sector contributes about 7-8% of the country’s GDP, so this indirectly leads the nation to poverty,” he said.