SMEs will be critical to get Sri Lanka to the next level of growth

2 November 2015 02:36 am Views - 2669

All governments want small and medium-sized enterprises (SMEs) that form the backbone of our economy to play a greater role in the development of the economy. But, do very little to engage them fully. SMEs in most countries deserve special attention for one important reason: SMEs are critical for job creation, entrepreneurship and income generation.

In India, SMEs account for 45 percent of all jobs and contribute 40 percent of gross domestic product (GDP). In the Philippines and South Africa, SMEs provide more than 60 percent of all jobs. SMEs have also played a key role in propelling some of today’s most advanced economies forward. Similarly in Taiwan—an economy with approximately the same number of people as Sri Lanka, has 10 times higher average incomes—SMEs have been critical to Taiwan’s modernization and economic growth in the past five decades.

In the next few years as our market expands and becomes more competitive and Sri Lanka shifts away from a concrete economy towards a manufacturing and service-driven economy, it would be important to help create a diverse and a competitive SME sector.


Advanced economies
Some advanced economies have succeeded in this regard because SMEs form a fundamental part of their economies. In such economies, SME comprise more than 98 percent of the total establishments and contribute more than 65 percent of employment. Globally, SME contribute more than 50 percent to the GDP in developed countries.

Further, SME also constitute 95 percent of registered firms in the world. Specifically in the European Union, SMEs constitute 99.8 percent of all firms and employ around 76 million people representing around 67.4 percent of total employment in 2010. In the US, SMEs constituted more than 50 percent of the non-farm private GDP and created 75 percent net new jobs in the economy. 

Based on the above statistics, it is therefore very apparent that SMEs have been largely recognized as the backbone of the economy and play a significant role to generate employment, nurture a culture of entrepreneurship and support large-scale industries and open new business opportunities. Therefore, it is clear that promoting a viable SME sector is essential in the nation’s stride towards broadening the sources of growth and sustaining the growth momentum.
SMEs are defined differently by different countries based on different parameters such as number of employees, business turnover, capital investment, etc. Different definitions are also being used by different organisations within the same country to define SME for different purposes, which is common in our country as well. However, according to the recent guidelines issued by the Central Bank of Sri Lanka (CBSL), SMEs are defined as enterprises that have an annual turnover of less than Rs.600 million and borrowings below Rs.200 million.


Enormous potential
The SME sector has enormous potential in generating high level of socio-economic benefits to a developing country with a low level of investment. However, according to the Census and Statistics Department of Sri Lanka, “investment to generate employment” or “investment per employee” is said to be the lowest in small-scale industries compared to large entities. 

Nevertheless, the SME sector’s contribution is paramount to support the government’s efforts in promoting balanced regional development and developing the rural economy. The SME sector is an ideal platform for the government to invest and support to reduce the gap between the haves and the have-nots. 

As per government estimates, around 80 percent of businesses in Sri Lanka that fall under the SMEs contribute over 50 percent to the GDP of the country. Of the total employment in the country, SMEs account for a share of 35 percent. Hence, these statistics reveal that there is immense potential to enhance the present level of contribution made by the SMEs to the economy when compared with the GDP contribution in other countries.


Challenges for SMEs
Since independence, successive governments in Sri Lanka have taken various steps towards developing the SME sector (1) by improving access to finance, (2) technology support, (3) more access to information, (4) support for skills development, (5) better infrastructure, (6) SME networking opportunities, (7) linkage formation, (8) improvement of advisory services and (9) business development drives to support the growth of the SME sector.

Yet, one of the main challenges that SMEs still face is easy access to financing and working capital and also their inability to attract good skills. The reluctance of the SMEs to use state-of-the-art technology is also identified as another drawback for SME development. Unlike in other countries in the region, the adaptability of SME in Sri Lanka to latest technology is very much limited to lack of know-how, high investment cost and poor accessibility to finance, etc.


Way forward
However, despite the positive policy reforms and initiatives introduced, there are still many constraints that impede the growth of the SMEs. As mentioned above, the main problem that SMEs face is accessing adequate and timely financing on competitive terms, particularly longer tenor loans. 

Secondly, policy and regulatory issues, institutional weaknesses in the absence of good credit appraisal and risk management/monitoring tools, the absence of collateral arrangements and lack of reliable credit information on SMEs have made it difficult for lenders to be able to assess risk premiums properly, creating differences in the perceived versus real risk profiles of SMEs. 

Thirdly, most SMEs have limited access to larger markets in terms of market linkages, transport, telecommunications and information exchange which seriously undermine the demand for their products. Lastly, with the opening up of the economy and as globalization intensifies, lack of innovation and talent hurts the productivity and the competitiveness of Sri Lankan SMEs. 

Thus, mentoring and supporting SMEs to build capacity would be critical for their growth and development since the SME sector is instrumental in achieving inclusive growth which touches the lives of the most vulnerable and marginalized sections of our society, including women and other disadvantaged groups. 
Furthermore, they also go a long way in checking rural-urban migration by providing villagers and people living in rural areas with a sustainable source of local employment. Therefore, the key thing amongst all these economic factors would be the new developments in the banking and NBFI sector.

Going forward, the government must introduce radical reform to the so-called revolutionary budget to help SMEs to mobilize resources efficiently to build capacity within and also to help them to access new markets using our oversees representation, to grow our export sector. 

SMEs will be critical for Sri Lanka’s next level of growth, therefore financial institutions would have to be more forward-looking, innovative and develop new business models to position themselves to support small and medium enterprises in Sri Lanka.

(Dinesh Weerakkody is a senior company director)