SME SECTOR
STRENGTHEN THE BACKBONE!
Janaka Perera explains why bolstering the ‘forgotten sector’ is a dire need
Sri Lanka’s SME sector is the backbone of the economy; it accounts for over 75 percent of all active enterprises, 45 percent of national employment and 52 percent of GDP. Small and medium-size enterprises drive inclusive economic growth, regional development and poverty reduction, and are crucial for agriculture, manufacturing, services and IT.
However, these entities face extensive challenges including access to finance, managing raw material supply, and navigating the impacts of global and national economic crises.
SMEs play a pivotal role in maintaining the economic fabric of this country by contributing substantially to employment, GDP and social stability. However, they are presently finding it difficult to access finance due to bank refusals, higher corporate tax rates, the volatile economic recovery and supply chaindisruptions that impact operations.
These enterprises are also struggling due to a lack of skilled specialists, high operating costs, cash flow restrictions, shirking customer bases, and the need to adapt to digital transformation and cost cutting measures to survive the aftermath of the economic crisis, as well as evolving market demands.
The media recently reported that the banking sector as a whole made a Rs. 48 billion dividend payout, which adds pressure on the overall management of this issue.
Furthermore, the Ministry of Industry and Entrepreneurship Development has been tasked with managing this challenge; and unless it addresses the problems faced by SMEs urgently, there will be an adverse impact on industrial and commercial performance.
The SME sector generates more than 50 percent of state revenue through tourism, exports and so on. While there is considerable visibility of the formal sector in the print and electronic media, we rarely see SMEs highlighted in magazines or the finance, economy and business sections of newspapers.
They’re often lost in the industrial and commercial space – so much so that some even brand SMEs as the ‘forgotten sector.’
When the numbers are crunched, it is apparent that small and medium-size enterprises contribute a colossal 35 billion dollars to the economy, according to current statistics. So it is indeed the forgotten sector of Sri Lanka’s economy simply because its constituents’ voices cannot be heard over the noise of the larger industries and sectors.
In the recent past nevertheless, the SME sector has been seen and heard in the media with far more time being allocated to its members to discuss their aspirations, goals and achievements. Therefore, a new policy perspective of the government coming into play is imperative.
However, it’s difficult to be overly excited about the latest developments since we’ve heard such rhetoric many times in the past, following the SME white paper of 2002, which outlined a national strategy for its development and was presented to the public.
As with some other good intentions unfortunately, we haven’t heard much about it since then.
The SME sector began evolving in Sri Lanka back in 1952 when the World Bank suggested that the government works towards developing small and medium-size enterprises rather than spending its time promoting large industries.
According to the Export Development Board (EDB) and Sri Lanka Tourism Development Authority (SLTDA), the best way forward is for the government to allocate a single line ministry for this particular area of business.
This will lead to a clear and focussed agenda that’ll be followed by a set of policy guidelines. If this is done, some of the key issues will be addressed due to its targeted implementation.
Perhaps the Regional Development Bank (RDB) could establish a unit that helps SMEs structure their documentation in a way that enables easier access to finance even if the cost of such capital isn’t as attractive. The logic is that even if interest rates are reduced to levels that are quite attractive, SMEs need to practice strict financial discipline if they wish to access finance easily.
Finally, the government will need to fast track the setting up of industrial estates in various parts of the country in an industry specific manner as in India so that there is greater focus and stronger networking, which will lead to such industries or sectors becoming competitive.
This will also help drive specific technology that can be shared by diverse competitors, according to export promotion and tourism development authorities.
Strengthening the SME sector is key to maintaining Sri Lanka’s economic growth momentum. And it’s vital that the banking sector extends its fullest support to the Ministry of Industry and Entrepreneurship Development so that this crucial sector can be developed.
And the manner in which policies are implemented will be the acid test for the government. Indeed, the need of the hour is to strengthen small and medium-size enterprises.
