As per the Ministry of Industries, Small- and Medium-sized Enterprises (SMEs) are defined as those that employ fewer than 300 individuals and generate annual revenues below Rs. 750 million.
According to the independent think tank Advocata, SMEs are labour-intensive and require less initial capital compared to larger firms. The think tank states that the growth of SMEs carries with it the potential to generate new jobs and distribute wealth more evenly across rural and regional areas. Additionally, it suggests that SMEs could contribute to the expansion of tax bases, leading to increased Government revenue.
Research reports, media articles, think tanks, and established institutions like the Asian Development Bank (ADB) all emphasise how SMEs, which collectively form the backbone of a country’s economy, must be well taken care of for the economy to thrive.
Although SMEs may be small, they hold significant importance within an economy. The ADB states that Sri Lanka’s SMEs, comprising 75% of all active enterprises, provide 45% of employment and contribute 52% to its Gross Domestic Product (GDP).
Given the slowly recovering economic context of Sri Lanka, the question arises as to whether SMEs are thriving or whether SMEs are being taken care of by the Government.
Sri Lanka United National Businesses Alliance (SLUNBA) Chairperson Tania Abeysundara has warned that 30% of SMEs have shut down, with a further 30% on the verge of collapsing.
If SMEs, which are the backbone of a country’s economy, are collapsing and not being taken care of, can we truly say that Sri Lanka’s economy is on a path to recovery?
FCCISL initiative
The Sunday Morning Business spoke to Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) President Keerthi Gunawardane, who pointed out the primary reasons for the downfall of Sri Lanka’s SME sector.
Accordingly, he noted that the collapse could be attributed to the Covid-19 pandemic and the economic crisis that the country had faced in recent years. When such businesses sought to restart, access to capital became crucial, however, banks had been reluctant to provide loans, Gunawardane continued.
Additionally, the cost of living has increased, leading to higher expenses, including increased wages for workers. The Government had taken no concrete action to address these challenges, he emphasised.
“We are trying to identify opportunities with low-cost investments and determine how we can support the SME industry. We identified small hotels as severely affected after Covid-19 as they had no income whatsoever. For such establishments, restarting business is very challenging.
“Therefore, we developed a team of coaches who can visit these businesses at their locations and assist them. This initiative is proving successful. The coaches identify such businesses, visit them, and provide assistance in various ways. If we encounter similar businesses, we send someone living closer to their location in order to help.
“Additionally, we are developing a system through social media, which has opened up a new market for such enterprises. Many people have begun patronising them subsequent to our intervention. This represents a success story in the small hotel industry and we are exploring the possibility of applying similar strategies to other sectors,” Gunawardane briefed.
He pointed to the spice industry as an example: “If spice SMEs wish to add value to their products, they require technology, equipment, and a significant amount of capital, which are currently a challenge to acquire. Given the cautious approach of banks, obtaining such substantial funding is unlikely.”
Gunawardane further said that due to the lack of a clear-cut policy, people were frustrated regarding the next steps and were questioning whether the Government would impose another tax or facilitate the sector.
He also said that given the current economic conditions in the country, some SMEs could rebuild themselves. However, for others, it would be very challenging because they may feel trapped given their situations, however, with a bit of innovation and a willingness to adapt their businesses to the current circumstances, they could start again, he continued.
Increased costs
Speaking to The Sunday Morning Business, Ceylon Chamber of Commerce (CCC) Chairman Duminda Hulangamuwa explained the factors behind the downfall of SMEs: “The reasons for this are quite obvious; it’s essentially a contraction in demand. Firstly, interest rates have risen significantly, with some reaching as high as 30%, 40%, and even 50%. With such exorbitant interest costs, SMEs and MSMEs, which rely on loans for financing, are unable to borrow and conduct business at these rates.”
He further said: “Secondly, there’s the foreign exchange crisis and the depreciation of the rupee, resulting in increased costs for imports. Many SMEs and Micro, Small, and Medium Enterprises (MSMEs) rely heavily on imported items, so the higher import costs make it difficult for people to afford them.
“Additionally, there are restrictions on imports. Although imports increased until last year, there have been restrictions imposed, preventing businesses from importing necessary raw materials and other items.
“Furthermore, the increase in taxes has led to a decrease in consumption levels. As a result, demand has fallen and multiple factors have contributed to the collapse of SMEs and MSMEs. I would even go so far as to use the term ‘collapse’ to describe the decline in their production volumes and subsequent closures; some have even had to scale down operations. Therefore, all these factors have contributed to the decline in sales and demand, and, ultimately, to their closure.”
Areas of growth
Hulangamuwa stated that despite financial assistance being one area where the Government could extend its support, considering that banks were also offering assistance, it did not specifically do so in order to improve the situation.
For example, in the case of the tourism industry and other sectors, the Government had instructed banks to grant money, which was one method through which it offered support, enabling individuals to be able to afford their loan payments and interest with their regular income, he further said.
“Tourism is bouncing back to pre-Covid levels, marking one of the best periods for the industry. Consequently, I believe that various sectors associated with tourism, including even three-wheeler drivers in those areas, will experience an increase in income, contributing to the revival of the village economy.
“Overall, I anticipate positive economic outcomes, particularly in the tourism sector. Therefore, I believe that we should focus our efforts on further promoting tourism. It’s an area where we can see significant potential for growth and recovery,” Hulangamuwa noted.
The CCC Chairman further expressed his belief that things were back on track in the agriculture sector: “The production and harvest are good, which means people will have more money in the village economy once the harvest income arrives. Consequently, money will circulate within the village economy. Since the crops are good, I don’t foresee any issues in that sector and agriculture seems to be stable.”
“As for other sectors, I think the economy is gradually picking up. With increasing demand, stability needs to be brought to the industry. However, an immediate revival is unlikely; it might take around two to three years,” Hulangamuwa concluded.
Govt. actions
Meanwhile this week, the ADB sanctioned a $ 100 million loan aimed at enhancing financial accessibility for SMEs in Sri Lanka, as well as supporting their resilience against external pressures like economic crises and climate change.
Speaking to The Sunday Morning Business, State Minister of Finance Shehan Semasinghe said that the struggles faced by the country’s SMEs had definitely been addressed, explaining: “I believe it’s a misinterpretation to say that the struggles of SMEs are unaddressed. This sector receives significant attention because we understand its importance. It contributes 52% of the economy and provides 45% of all employment, roughly averaging 50% in each category.
“Therefore, we took steps to address this issue, with the President leading the effort. We engaged with the ADB, the World Bank, and the International Finance Corporation (IFC). Typically, these organisations take about one-and-a-half to two years for loan approvals.
“In the first quarter of 2023, following the President’s instructions, we initiated discussions with the ADB. Subsequently, various missions visited Sri Lanka. Despite some clarifications needed, we managed to secure approval. Now, with the first phase underway, 50% of the $ 100 million will be allocated to SMEs, while the remaining 50% will serve as capital,” Semasinghe explained.
The State Minister also pointed out the importance of a holistic approach in supporting SMEs: “Can any business survive, even with Government support, in an economy similar to what we had two years ago?
“Therefore, first and foremost, we need a holistic approach. There needs to be a better integration of SMEs into the economy, which has fortunately happened. The economy has stabilised, the supply chain is functioning without disruptions, the rupee is appreciating, inflation is down, and reserves are up, so we don’t face shortages of import requirements.
“The entire country is back to normal, but further improvements are needed. Businesses that were under heavy stress are now beginning to operate again, which will enable a better contribution to the economy. Building confidence is crucial for the MSME sector to thrive and we are working on that. Unfortunately, when a country’s economy crashes, stabilisation and growth take time – definitely longer than expected,” Semasinghe elaborated.
Meanwhile, giving an update on the parate, the Minister noted that the gazette announcing the suspension of parate execution until 15 December had been published and that they expected to introduce the amendment in Parliament on Thursday (21).
Parate has been enacted to support SMEs in Sri Lanka as it is seen as a method to enable the SME sector to borrow money easily by making recovery easy for banks, which were earlier reluctant to provide loans due to recovery issues.