SME SECTOR
Compiled by Yamini Sequeira
STRENGTHEN THE BACKBONE!
Tania Abeysundara highlights opportunities for growth in Sri Lanka’s SME sector
Q: What is your assessment of the SME sector in Sri Lanka at present, following the pandemic and economic crisis?
A: The small and medium-size enterprise sector is struggling in the aftermath of the COVID-19 pandemic and ongoing economic crisis. SMEs contribute substantially to the economy, accounting for over 75 percent of enterprises, 45 percent of employment and 52 percent of GDP, according to the Asian Development Bank (ADB).
Government statistics indicate that around 280,000 SMEs have shut down over the past couple of years. Today, they face tapering demand, disrupted cash flows and high costs, which have exacerbated supply shortages.
Compounding these woes, many SMEs struggle to secure loans due to poor credit histories and the risk averse nature of banks when there is economic uncertainty. The government has responded with debt moratoriums and loan guarantee schemes although their effectiveness is undermined by structural issues.
Retaining skilled employees and addressing the skills gap caused by talent migration are additional challenges, while transitioning to digital platforms and e-commerce has been difficult for the sector.
Efforts are needed to integrate SMEs into global value chains to drive economic recovery and create sustainable foreign currency inflows. And increasing female participation and supporting women owned enterprises is vital.
However, women entrepreneurs are a small proportion of SMEs and many don’t have the financial support to upscale their businesses.
Q: And what urgent sustainability challenges does the sector need to overcome?
A: Addressing the challenges faced by SMEs through innovative financing, supply chain development, digital integration, skills training and sustainable practices is critical for the sustainable growth of the sector.
Establishing special purpose vehicles (SPVs) to facilitate loans can mitigate poor access to finance by sharing risks between banks and the government. Furthermore, developing domestic supply chains and reducing import restrictions are vital to ensure consistent access to inputs.
Retaining skilled workers and addressing the migration of talent is crucial, but reforms in education and vocational training aligned with industry demands can bridge this gap.
Moreover, adopting environmentally sustainable practices is essential for long-term viability. Encouraging SMEs to implement green technologies and practices can enhance resilience and competitiveness.
However, many SMEs that are trying to enter the export market face obstacles, which must be addressed by the government while also combatting systemic corruption.
Q: The erosion of disposable incomes is a threat to consumption. What are the quick fixes for the economy to keep cash flow trickling to SMEs?
A: Several measures can be implemented including targeted cash transfers and direct support to low income households, to boost their purchasing power and stimulate demand for SME products and services. This can be funded through reallocations in the national budget or foreign aid.
Furthermore, temporary tax relief, lower VAT and other taxes can help SMEs by increasing sales. A mechanism such as stimulus vouchers can be used specifically at local SMEs to encourage spending at small businesses. Interest free loans will help manage cash flow issues and sustain operations without the immediate pressure of interest payments.
Moreover, implementing wage subsidies for SMEs to help them retain employees and reduce operational costs is vital, and may prevent layoffs.
SMEs need assistance to transition to online sales platforms by providing technical support and subsidies for digital tools. This can open new revenue streams and help reach a broader customer base through an online marketplace.
Expanding microfinance programmes to provide low interest loans to SMEs, particularly in underserved areas, would be key to revitalising the sector. Community lending initiatives can also help circulate money within local economies.
By implementing these quick fixes, Sri Lanka can boost consumer spending, support SMEs and maintain economic stability during this challenging period.
Q: Sustainability of resources is becoming a priority for companies and nations. In your view, what areas require a sustainability focus among corporates?
A: Sustainability of resources is crucial for long-term success.
For corporates in Sri Lanka, the areas that need a strong focus on sustainability are energy efficiency and renewable energy; energy consumption reduction; water conservation; waste reduction and recycling; sustainable supply chains; ethical and local sourcing; and employee wellbeing and fair labour practices among others.
By focussing on these areas, corporates can contribute to a more sustainable future, ensuring the wellbeing of people, efficient use of resources and a healthier environment.
Q: How do you view the year ahead for the SME sector?
A: The year ahead is expected to be challenging; yet, it holds potential for a gradual recovery. Economic stabilisation efforts by government and international financial institutions can create a more favourable environment.
Improving access to finance through innovative instruments and enhancing microfinance options will be crucial, along with accelerated digital transformation, tax relief and subsidies.
Developing local supply chains to reduce import dependency will help manage disruptions while stimulus to boost consumer spending will drive demand for SME products.
Lastly, focussing on sustainability through energy efficiency and waste reduction will benefit SMEs in cost savings and brand reputation.
