By Yakuta Dawood  The Small Medium Enterprise (SME) sector, considered as the backbone of the Sri Lankan economy, is facing many challenges. SMEs used to be the driving force in promoting economic growth, regional development, employment generation, and poverty reduction – but how can they still do this when they are on the verge of collapse?  Beginning with the effects of the Easter Sunday attacks in 2019, followed by the Covid-19 pandemic, and then the ongoing economic crisis, SMEs are now hanging by a thread. With hundreds having left the sector, existing businesses are extremely vulnerable and seeking any assistance that can be granted by the Government.   Institute of Policy Studies Sri Lanka Director of Research Nisha Arunatilake explained to The Sunday Morning that amidst the current challenges, SMEs were affected on several fronts.  The first major challenge is procuring required raw materials to continue business operations due to shortages. For example, disruptions to electricity and difficulties in obtaining fuel are major problems which delay orders and make it difficult to send products to markets due to disruptions to transport facilities.   In addition, there are shortages of goods such as milk, butter, and other goods which directly impact small-scale baking businesses, bakeries, and other SME food sector-based businesses. Moreover, several SMEs that rely on imported inputs (i.e., the shoe industry) are also affected due to difficulties in sourcing inputs from abroad due to the forex shortage.  Secondly, SMEs are severely affected by high inflation rates. As a result, operational costs have increased substantially since prices have increased simultaneously. Subsequently, SMEs are also affected by reduced consumer demand. Consumers reserve demand for essential goods and services and limit their spending.   “The main solution to this problem is stabilising the inflation rate and the exchange rate. If this cannot be done in the short-term, SMEs need to resort to using local inputs for production. But this can only be done to a limited extent as not all inputs have good local substitutes,” Arunatilake added.   The Sunday Morning spoke to several key industries in which SMEs are going through a challenging time and on the economic impact due to the ongoing crisis. Tourism industry  Speaking to The Sunday Morning, Association of Small and Medium Enterprises in Tourism (ASMET) President Rohan Abeywickrama emphasised that due to the current social unrest and the economic situation, there was a drop in tourist arrivals.   He noted that once the presently ongoing tours ended, all existing SMEs would run out of business as tourism would come to standstill for a few months, given the current rate of cancellation or postponement of tours. He further disclosed that the existing moratorium, a relief on loans granted by the Central Bank of Sri Lanka (CBSL), would be cancelled from the upcoming month, which would add fuel to the fire.  “By the end of June or July, we will have to pay back the loans we took to pay our staff and for other reasons. These payments have accumulated and there are no upcoming payment forecasts because we have no sales in the coming season. Moreover, there is no financial support for another 24 months,” Abeywickrama said.   Further, he shared that it would take another two years for SMEs to recover, which would lengthen if the prevailing situation was not brought under control immediately.    He noted that if the situation could not be controlled, all SME businesses would be crippled and would shut down as they functioned on a day-to-day basis. He shared that even though the industry had survived the tsunami and the civil war, they had been unable to do the same since the 2019 Easter attacks.  Expressing further disappointment, he said that the Sri Lankan Tourism Development Authority (SLTDA) was highly politicised and had no proper management and that it was not doing its work efficiently in terms of promoting the country to attract sufficient tourist arrivals. He highlighted that, with businesses shutting down and people moving to the Maldives or the Middle East for employment, in the long term Sri Lanka would face a dearth of skilled workers. “We will have a dearth of employees such as hotel staff and tour guides since they have enough jobs in the Middle East, the Maldives, and other places. We have already lost enough human assets and the prevailing situation will make it worse,” he added.   Chefs’ Guild President Gerard Mendis on a previous occasion told The Sunday Morning that unfortunately for Sri Lanka, employees seeking overseas employment had the advantage of new job opportunities, as recruitment had suddenly commenced not only in the Middle East but even in countries like Australia, Canada, New Zealand, and also certain countries in Europe, including the UK.   Mendis explained that this overseas recruitment hike was a very dangerous sign for the tourism industry as a ‘professional chef’ was a highly-skilled occupation in Sri Lanka. “We are not doing anything to address this present situation. We need the authorities including the Tourist Board to take a serious look at addressing this issue as highly-trained professionals in the industry are leaving. There won’t be professionals to groom and train new recruits down the line. Where are we going to find these people?” Mendis stressed.  Export industry  National Chamber of Exporters of Sri Lanka (NCESL) President Ravi Jayawardene stated that due to the ongoing situation, there was a twofold impact on the economy.   He explained that the first was the direct impact where SMEs with less than 100 employees were facing major challenges due to fuel shortages and power cuts as they were repeatedly unable to meet targets as the situation has not yet improved. Hence, the buyer (an international SME) would immediately cancel orders previously placed with these companies operating in Sri Lanka.   “SMEs mostly cater to niche markets. This is a very serious challenge, especially since they gain 10-15% more than others. In the long term we are losing niche market services, which will result in SMEs closing down at some point,” he explained.   The second is the socio-economic problem where the people employed by SMEs are now in a position where they are no longer able to support their families, since they would have lost the supplementary income generated through these SMEs.   To prevent the situation from escalating further, the NCESL President noted that it was important to sort out the energy problem, which he said was the main cause of the problems affecting the economy. “The moment a country lacks energy, the entire machinery or industry comes to halt because machines depend on energy. We need to address this issue for industries to continue their businesses. This should be the first priority,” he exclaimed.  Apparel  A senior official, who wished to remain anonymous, expressed that SMEs were the real backbone of the apparel industry as they did all the work for big companies on contract basis.   The official said the current power cuts were the major reason for the crisis faced by the SMEs. “SMEs catering to us operate outside Board of Investment Zones, hence most SMEs do not have the power to generate electricity. When this happens, there is a possibility of orders being delayed and the entire process is jeopardised.”  The official said that Sri Lanka may lose its apparel market to existing competitors when orders get delayed by SMEs to the larger factories that undertake exports. Hence, the long-term impact would be in losing out on foreign revenue as well as the competitive advantage that Sri Lanka had built so far in international markets. Retail industry  Sri Lanka Retailers’ Association (SLRA) Chairman Hussain Sadique stated that everyone was facing difficulties in the industry as only one-third of the industry sourced goods locally while the remainder came from imports. He said that newcomers to the industry were more likely to leave as they lacked sufficient cash flows, customers, and other essential requirements for business, whereas the old retailers could experience a gradual recovery. “Recovery for businesses will take three years because we are losing our capital due to inflation. If you look at jewellers, they will go out of business as their margins will go down, even though they are making money with the price increase. I don’t think we can think of growth – it will take three years for businesses to become stable after repaying all their loans. Right now, it’s about survival,” Sadique said.   He suggested that the Government could present proven scientific formulas to support SMEs rather than simply increasing employee salaries.   However, according to Sadique, the core 80% of retail businesses will remain in the industry and fight for what they want, while a minority will leave and switch to another employment and return to the retail industry once the economy is sorted out.  Tile industry Speaking to The Sunday Morning, Tile and Sanitaryware Importers’ Association President Kamil Hussain stated that due to the ongoing import ban, about 80,000 to 100,000 employees had left the industry. Government  Government responds  Speaking to The Sunday Morning, Trade and Samurdhi Development Minister Shehan Semasinghe stated that the collaborationcollaboration )with the International Monetary Fund (IMF) and the expected funds from the World Bank would provide wouldprovide sufficient funds to focus on revivingreviving the economy and helpinghelping the SME sector in the coming months. This would be made possible as the funds to import fuel, gas,, and other essential items will be taken takenfrom the money received by the Indian Government. ““This will save our forex requirements for other purposes. With the cash infusion and once we sort out the forex issue, there will be a positive impact on our economy,” Semasinghe highlighted.  The Minister noted that a social safety net through which SMEs could seek assistance from the Government would be established. “All these transactions will happen through banks. It will be a very transparent and accurate social protection system,” he added.