Sri Lanka’s Small and Medium-sized Enterprises (SMEs) have been suffering from both external and internal shocks for many years.
While economic recovery may have restored a certain extent of economic security for SMEs, the crisis triggered by the US-Israel attacks on Iran and the subsequent supply chain disruptions at hand bring out yet another challenging period for these businesses, which have yet to recover from the destruction caused by Cyclone Ditwah as well.
So far, the Government has appointed several committees to manage potential economic challenges facing Sri Lanka amid the Middle East crisis.
The country’s economic growth has always largely depended on the performance of Micro, Small, and Medium-sized Enterprises (MSMEs), which accounted for 75% of the employed workforce in 2013, according to the National Economic Census of that year.
Numerous implications for SME sector
Speaking to The Sunday Morning Business, University of Colombo (UOC) Department of Economics Professor S.P. Premaratne stated that the impact of the ongoing crisis on Sri Lankan SMEs would manifest through several key channels, with energy price pressures being one of the most immediate.
He noted that global oil price increases, logistical disruptions, and domestic price changes had all contributed to rising production costs, especially as energy remained a major cost component for both SMEs and other sectors.
Prof. Premaratne explained that another major challenge stemmed from the sector’s heavy reliance on imports, estimating that nearly 80% of SME inputs, excluding labour, were either directly or indirectly imported. As a result, delays in trade and supply chains have not only increased costs but also led to shortages, specifically during this peak seasonal period of the Sinhala and Tamil New Year.
He added that exchange rate pressures further added to the issue, as depreciation increased the cost of imported raw materials, thereby raising overall production costs.
“SMEs engaged in export markets also face additional difficulties due to disruptions in shipping and changing global demand. Sri Lanka’s exports are largely non-essential goods, which are usually the first to be deprioritised during such times of global uncertainty,” he said.
A study titled ‘Impact of multiple crises on Sri Lanka’s micro, small, and medium-sized enterprises’ by the International Labour Organization (ILO), examining the impact of Covid-19 and the economic crisis on MSMEs using multiple criteria, identifies that the pandemic severely impacted the business operations of nearly 80% of surviving MSMEs, while the economic crisis of 2022 similarly impacted 89% of them. The large bankruptcy rates of these businesses raise concerns regarding the financial security of SMEs in times of crisis.
Observing the SME financial aspect and how it was affected, Prof. Premaratne noted that as high interest rates increased risk, it limited bank lending to SMEs at a time when their need for financing was rising. This, he noted, may push some businesses towards informal lending sources with higher interest rates.
“Situations such as these expose a dependency-driven financing culture in Sri Lanka, where SMEs rely heavily on Government support. If needed, both the Government and the Central Bank could introduce short-term, targeted support mechanisms, especially for leading sectors such as tourism and agro-businesses,” he said.
A study conducted by the Institute of Policy Studies on MSME recovery in post-Ditwah Sri Lanka reveals that 460 MSMEs (18.3%) in the sample were at least moderately exposed to flooding and landslides caused by the cyclone, with manufacturing MSMEs as the most exposed sector, followed by trade and retail services and the agricultural and fisheries sectors.
In light of such climate vulnerabilities, Prof. Premaratne highlighted the need to move towards sustainable and green finance, noting that financial products should be linked to climate resilience and environmental outcomes.
He also stated that external demand remained another area of concern, given the slowdown in global markets and Sri Lanka’s reliance on export markets such as Europe and the US, while imports were largely sourced from countries such as China. In addition, he noted that labour migration, at a time of crisis, may have indirect effects on SMEs, especially at the micro and self-employment level.
“Also, many SMEs increasingly depend on tourism and the crisis affecting tourism flows has direct implications for the sector. Further, financial resilience has remained weak among SMEs, and many have not built internal buffers such as savings or alternative financing mechanisms,” he said.
Despite these risks, Prof. Premaratne noted that the current situation also presented certain opportunities that could be looked at. He stated that SMEs could diversify markets, including the exploration of both local and alternative international markets.
He also noted opportunities in energy-related products, pointing out that crisis conditions could create space for new entrepreneurial activity. In addition, he identified logistics as a potential growth area, suggesting that Sri Lanka could position itself as an alternative logistics hub, provided there was adequate Government support for SME participation.
Prof. Premaratne further stated that tourism-related SMEs could explore new segments, rather than relying only on the usual models of tourism.
On macroeconomic policy, he stated that maintaining stability was critical, especially in relation to exchange rate management, given SMEs’ dependence on imported inputs. In the medium term, he focused on the importance of policy measures beyond finance, including export diversification, value addition, and the development of sectors such as energy-related and agro-based SMEs.
Furthermore, Prof. Premaratne highlighted the need for innovation at both policy and enterprise levels, stating that SMEs should move beyond conventional products.
MSME concerns
MSME Chamber of Sri Lanka Media Spokesperson Susantha Liyanaarachchi noted that the effect of Cyclone Ditwah had yet to subside, causing a substantial loss to the economy. Non-residential buildings including businesses were heavily impacted due to the cyclone, accounting for $ 562 million in estimated damages.
“The impact of the fuel crisis is significant and poses a severe challenge to the MSME sector. It is unfortunate that Sri Lanka’s SMEs have to face such negative implications so frequently. On the other hand, the rupee keeps depreciating. The additional financial burdens on businesses due to the crisis are severe and hard to cushion,” he said.
Liyanaarachchi noted the need for the Government to properly establish a means of providing fuel for industries, highlighting that such decisions needed to be made promptly. “Businesses must bear significant costs even when operations stop for a short period. Thus, these issues require immediate attention. There should be a proper economic strategy and administration to ensure stable solutions for industries.”
On the financial side, he noted that if businesses were unable to repay loans, it would once again create financial issues with banks. If the rupee’s stability is not maintained, businesses are likely to face further issues.
Severe impact on logistics sector SMEs
Speaking to The Sunday Morning, Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) President Keerthi Gunawardane noted that the crisis had already seriously affected several sectors, with logistics being one of the most disrupted, and observed the impact on SMEs in the tourism sector as well. Moreover, he added that raw material imports had declined drastically.
“In time to come, prices of many items may rise. Most SMEs depend on raw material imports and will be significantly affected. If the fuel crisis continues for several months, there will certainly be companies shutting down. This is an extremely unpredictable situation for its status to be fully assessed yet,” he said.