The role of SMEs in Sri Lanka - the economic backbone

By Nuzla Rizkiya

Small and Medium Enterprises (SMEs) play a huge role in Sri Lanka’s economy as it serves as the backbone of economic growth by facilitating job creation and innovation. Encompassing several avenues such as trade, service, and manufacturing sectors, SMEs contribute significantly to the nation’s Gross Domestic Product (GDP) and employment. According to recent statistics, SMEs account for 52 percent of the island's GDP and provide 45 percent of national employment for the general population. Therefore, the impact by SMEs on the economy is profound, making them indispensable for the country's economic stability and growth.

Employment opportunities are one of the most valued contributions of SMEs to the country. They are particularly vital for rural populations and youth as they provide jobs that help alleviate poverty and reduce income inequality. Though SMEs are often more labor-intensive than larger enterprises, they create more jobs per unit of investment. This was especially important in the aftermath of the Covid-19 pandemic and the economic downturn that followed, which severely affected job sectors such as tourism and agriculture. Since improving the SME sector has become increasingly essential for economic recovery and job creation, it is crucial to ensure the continued survival and growth of the economy.

Innovation for SMEs

Creativity and innovation are integral aspects generally seen in the journey for success in SMEs. As these enterprises are often centers of innovation, introducing novel ideas and products that boost the economy is a common observation. The flexibility of these independent businesses allows them to experiment with new technologies and processes that lead to process improvements and product diversification. This not only enhances their own competitiveness but also contributes to the emergence of new industries and the adaptation of existing ones to meet changing market demands. Despite the challenges faced during the pandemic and economic slump, many SMEs demonstrated remarkable resilience. They adapted to new circumstances, seized opportunities, and continued developing innovative solutions to navigate the tough economic landscape.

SMEs are mostly rural

Regional development is another crucial aspect of the SME sector as they often emerge in rural areas. This is a critical factor that helps contribute significantly to local economies to reduce regional disparities. Therefore, empowering SMEs in these areas can promote balanced growth across the country and improve living standards in rural regions. Government policies should therefore focus on supporting SMEs in these areas to stimulate economic growth and address regional imbalances.

Lessons from the crisis

The economic crisis in Sri Lanka was mainly characterized by an unsustainable debt load and persistent deficits that highlighted the need for foreign exchange earnings. The forex shortage created huge difficulties in importing essential goods, teaching us the cruciality of improving the export sector. In this situation, export-oriented SMEs were identified to have significant potential to contribute to foreign exchange earnings. By expanding their capacities and receiving adequate government support, SMEs should therefore be given enhanced support to improve Sri Lanka’s competitiveness in global markets and diversify the export base that ventures beyond traditional sectors.

Access to finance - the biggest hurdle

In any nation, SMEs face numerous challenges, particularly in financing. Many small businesses struggle to obtain affordable credit from formal financial institutions due to high interest rates, collateral requirements, and stringent lending criteria. Although financial institutions claim to offer SME loans, the application process is often time-consuming and complex. Medium-scale business owners report that obtaining a loan requires navigating a series of challenging measures, making it difficult for many SMEs to secure necessary funding. This issue was recently compounded by the temporary suspension of “Parate Executions” until December 2024, but the results of it seem mixed.

Supporting SMEs

Addressing these challenges requires the development of specialized financial products tailored to the needs of SMEs. Initiatives to promote alternative sources of funding, such as venture capital and angel investors, are now essential. Additionally, reducing regulatory burdens and streamlining compliance requirements can facilitate SME growth. Experts too recommend simplifying licensing procedures and reducing bureaucratic red tape that will help create a more business-friendly environment for SMEs.

Improving market access is another critical area for SME development. Investments in infrastructure, logistics, and market information systems are necessary to help SMEs expand their market reach and exploit new business opportunities. Government support in market research, branding, and market development activities can also assist SMEs in identifying and capitalizing on new markets.

Overall, despite the challenging economic situation, empowering the SME sector is vital for achieving sustainable economic growth, fostering entrepreneurship, and addressing socio-economic challenges. By implementing targeted policies and interventions, Sri Lanka can definitely unlock the full potential of SMEs and harness their contributions to national development.