Revitalising MSMEs, Key
Studies instituted by multilateral development agencies such as the World Bank (WB) recently have identified that of all those employed in Sri Lanka, 70 per cent of them were employed in the informal sector.
This, taken together by an Asian Development Bank (ADB) Report released yesterday titled ‘Asia Small and Medium-Sized Enterprise Monitor 2021,’ which said that micro, small and medium enterprises (MSMEs) comprise 99 per cent of all enterprises and employ 75 per cent of Sri Lanka’s labour force, emphasised the importance of ‘access to finance’ as a matter of priority to revitalise the MSME Sector.
Such assistance is urgent, considering the devastation caused by the COVID-19 pandemic which has caused massive job losses and revenue contraction to the MSME Sector, the ADB Report said.
The ADB Report also said that though the MSME Sector comprises 99 per cent of all businesses in Sri Lanka, employing 75 per cent of the island’s total labour force, ‘yet the MSME Sector held only 11 per cent of total bank credit equivalent to five per cent of GDP last year.’
The ADB report therefore recommended the promotion of digital finance, which it said was of low cost to the consumer.
Promoting digital finance, whilst simultaneously ensuring consumer protection and financial sector stability however requires investments. Nonetheless, the Government, in its Rs 2.51 trillion ‘2022 Budget’ plans to allocate only Rs 1.25 billion to the ‘Digital Technology and Enterprise Development’ State Ministry, equivalent to a mere a 0.05 per cent of ‘Budget 2022.’
While ‘Digital Technology’ is not fit enough to earn Cabinet rank, Cabinet ranked Highways Ministry however is earmarked to be allocated a massive Rs 250.19 billion, equivalent to 9.99 per cent of ‘Budget 2022,’ while being more than 200 times the spend allocated to the Digital Technology State Ministry.
Where are the Government’s priorities?
Meanwhile, the ADB’s yesterday report, emphasising that ‘finance’ is pivotal to MSME growth, further said, “As MSMEs in Sri Lanka are a key driver of the economy, but consequent to their devastation by the COVID-19 pandemic, revitalising operations and their growth is key to building a more resilient economic recovery.”
For instance, a Census and Statistics Department conducted MSME survey to assess the initial impact of COVID-19 which drew 17,469 responses from MSMEs, found MSMEs had sharp drops in revenue and employment during the lockdown – comprising a revenue decrease of 40.9 per cent from March 2019 to March 2020, 74.2 per cent for April, year-on-year (YoY) and 55.2 per cent for May, the ADB said.
Meanwhile, the decrease in employment in the MSME Sector was 38.5 per cent in March, YoY, 82 per cent in April, and 66.7 per cent in May, the ADB said. In April 2020, the lockdown cut mining and quarrying revenues by 90.7 per cent, construction by 89.4 per cent and services by 87.9 per cent. Employment in these sectors fell by 91.3 per cent, 85.4 per cent and 85.9 per cent, respectively, the Report said.
‘Limited business operations or temporary closures lost many MSMEs most of their revenue. Supply chain disruptions also increased costs of keeping businesses operating. Many were forced to temporary cut staffing to save funds to survive the pandemic,’ the ADB said.
However, as MSME access to bank credit remains limited, it remains a serious barrier to MSME growth, the ADB Study said.
And, as the pandemic continues to remain a risk that could impede economic recovery and MSME development, the Government will need to strengthen its current phased recovery approach and differentiate policies by firm size and sector to meet the demand of groups devastated by the pandemic, the ADB advised.
State assistance should pay more attention to developing entrepreneurship and creating access to growth capital for viable MSMEs. It needs to find the optimal approach that mobilises domestic resources, while at the same time reducing the budgetary burden during the recovery, the ADB further said. It must also do so without impeding national revenue growth or increasing budget deficits, the Study emphasised.
“The pandemic showed that public finance is critical to support MSMEs vulnerable to unexpected shocks. But limited access to it remains a huge challenge. Information asymmetry between lenders and borrowers is the prime reason,” the ADB Report further said. Therefore, public finance and credit enhancement can help narrow the MSME financing gap, it said.
Meanwhile, a national economic development programme, ‘Vision 2025’ cites MSME development as part of its growth framework. It stresses the need for MSMEs to formalise, digitalise, and adopt new technologies.
Digitalising MSME business is another policy priority in this regard, particularly those in the informal sector, it said. Digital financial services offer low-cost financing to traditionally un-served or underserved segments. It is a critical tool to promote inclusive growth nationally. Demand for digital financial services has increased sharply since the outbreak of COVID-19, the ADB said.
A micro enterprise is a firm with fewer than 10 employees and annual turnover of less than Rs 15 million, the ADB said. A small enterprise is a firm with 11–50 employees and annual turnover of between Rs 16 million-Rs 250 million. A medium-sized enterprise is a firm with 51-200 for services employees and 51-300 for manufacturing, with annual turnover of between Rs 251 million-Rs 750 million, the ADB said.