By Imesh Ranasinghe It has become commonplace to see a shop or company closing down its operations or cutting down its staff due to the current economic uncertainty in Sri Lanka. But this has also heavily impacted Small and Medium Enterprises (SMEs) which keep the country’s economy moving. In Sri Lanka, a business is considered as an SME if its number of employees does not exceed 300 individuals and if its revenue does not exceed Rs. 750 million. Sri Lanka has more than 500,000 SMEs, each employing three to five persons on average. It is estimated that the SMEs account for over 90% of the total enterprises in Sri Lanka and 45% of the total employment, while making a contribution of about 52% to the gross domestic product (GDP). Despite their significant contribution to the economy, SMEs in Sri Lanka only account for a marginal proportion of total national exports, with only 5% of SMEs being actively engaged in exports. This suggests a severe disconnect between the interest of the SME community in expanding their market base beyond the domestic sphere and their practical ability to do so. SMEs heavily affected since Easter attacks  Sri Lanka Chamber of Small and Medium Industries (SLCSMI) Chairman Prof. Rohan De Silva said that the SME sector has been very badly affected since the Easter Sunday attack in 2019, a situation which became worse with the Covid-19 pandemic. He said that the SME sector is continuously going through a difficult period. The main concern for the SME sector is the repayment of loans obtained from banks and the repayment of leasing facilities since businesses have no income generation to service their loans. “We made requests to the Government on certain occasions and obtained certain things for SMEs but the banks are charging an interest on the interest when the moratorium is only given to the capital amount,” De Silva said. However, he said that Sri Lanka is a country with a lot of potential where a lot can be accomplished, adding that SMEs can diversify at a time like the pandemic to survive. “If businesses work hard this situation can be overcome,” he noted. He said that the SLCSMI encouraged the local manufacturers to manufacture more things locally. However, he noted that the relevant subject ministry, i.e. the Ministry of Industries, has not provided them with a proper plan for the SME sector. “What we do is take a proposal and go to the Ministry or to the Minister, whereupon they will look at it and then say yes or no,” he added. There are about 15 ministries, departments and authorities in the state sector covering the SME sector with a National Policy Framework.  De Silva said that the knowledge of the Ministry officials on the SME sector is limited. Addressing the Parliament last month, Minister of Industries Wimal Weerawansa said that a national policy for industries will be brought before the Cabinet by the first half of 2022 while amending the Industrial Development Act No. 36 of 1969. Some of the suggestions given by the members to the SLCSMI, he said, is importing the most essential goods for local manufacture.   “In the absence of the certain products manufactured locally due to the inability to import certain raw materials, few foreign players tried to replace them through the influence of powerful parties,” he said. De Silva said that if the SME sector, which is the backbone of the country’s economy, is not protected, Sri Lanka will face many more problems. According to him, most of the middle income group is employed in the SME sector, between the low and high middle income earners. The SLCSMI has nearly 624 micro, small, and medium industries registered, belonging to all sectors such as electrical manufacturers, furniture, footwear and accessories, light engineering, air conditioning and refrigeration, services such as management consultants, ISO standards, educationists, hairdressers, interior designers, bakery products and confectioners, exporters of food products etc. Situation exacerbated for SMEs due to Covid-19 According to a report released by the International Finance Corporation of the World Bank in 2020, the effect of Covid-19 on the SME sector in Sri Lanka showed that two-thirds of SMEs reported a decrease in demand for their products or services since Covid-19, and almost three-quarters reported decreased sales, with companies in the agriculture, manufacturing and construction sectors hit the hardest, followed by the services sector.  Further, it showed that almost two-thirds of those that experienced decreased sales saw a drop of more than 25% on their pre-Covid monthly average, while eight out of ten SMEs experienced difficulties meeting operating expenses and had some shortfall in debt repayment or ability to meet financial obligations due to Covid-19. Notwithstanding these challenges, almost three quarters of SMEs predicted they would continue to operate indefinitely under the current circumstances, after companies operating in the services sector reported the least certainty in terms of continued operations, with over one-third reporting a pessimistic outlook for continued operations. Further, the report showed that most SMEs made use of some form of financial support from their financial institution. However, challenges remain in accessing the financial support needed. Two-thirds of SMEs received some form of support from their financial institution, with a six month moratorium on loan repayment being the most common support received. Eight out of ten SMEs had to seek external funding to make up some shortfall in debt repayment, with over one-quarter reporting that they were unable to access funds to make up the shortfall. Over three-quarters of SMEs reported difficulties accessing their regular financial services. Recommendations proposed by the World Bank to address this included increased access to working capital and other loans. A significant portion of all SMEs surveyed indicated they would benefit from business restructuring advice or advice on how to adjust their business plan in response to Covid-19 by providing SMEs with access to business-related training. Government assistance in 2020 Rs. 150 billion was allocated for phase 1 and 2 of ‘Saubhagya Covid-19 Renaissance Facility’ for providing funds for SMEs to cover their basic working capital requirements such as salaries, utility bills and a part of the material costs etc.  Under phase 3 of the ‘Saubhagya Covid-19 Renaissance Facility’ around Rs. 26 billion was provided by the licensed banks by utilising their own funds with the Government Credit Guarantee Coverage. Collectively, approximately Rs. 176 billion has been granted for SMEs under three phases of this loan scheme. To meet the market demand for working capital loans, another $ 100 million (approximately Rs. 20,000 million) was obtained from the Asian Development Bank (ADB) and allocated among the 10 selected banks to fulfil the long-term working capital requirements of micro, small, and medium enterprises (MSMEs).  In addition to this, $ 65 million was provided by the ADB as investment loans for MSMEs with the potential to capitalise on the opportunity created by this pandemic and to encourage tea smallholders in replanting and new planting. According to the Finance Ministry Annual Report for the year 2020, 245,883 loans worth Rs. 759 billion were given by the banks to the SME sector  In 2020, out of the total loan amount granted to the SME sector by the banks, around 11% was for the agriculture sector, 28% for the industry sector and 30% for the services sector, while 31% was allocated for SMEs of other sectors.  Not enough funds to help SMEs The National Enterprise Development Authority (NEDA) is the main institute which aims for SME promotion, development and facilitation. Speaking to The Sunday Morning Business, NEDA Chairman Sunil Jayarathne said that although the various programmes are initiated to provide assistance to enterprises ranging from startups to medium scale businesses, it is hard for them to help those in the SME sector financially due to the current economic conditions. However, NEDA has 273 development officers across Sri Lanka who provide financial aid, loans and technological assistance through their regional development programme to SME businesses.  Jayarathne said that NEDA has already started collecting data on SMEs in the country into a database, adding that out of the 500,000 SMEs identified so far, 300,000 have been included in the database.  Meanwhile, the Ministry of Industries launched a trade portal named ‘Made in Sri Lanka’, which allows the local SME manufacturers to sell their products on the international market. “There are several problems faced by SMEs. Firstly, the financial problem which is a global problem at the moment, then the unavailability of a market to sell their products,” Jayarathne noted. He added that sustainability of SME businesses cannot be ensured due to the unavailability of a proper market, explaining that the 2022 Budget has only allocated Rs. 50 million for NEDA for the year 2022, and out of that only Rs. 15 million is left for regional development. The Budget allocated a total of Rs. 5,000 million for the SME sector development, which was allocated to over 15 ministries and departments.