SMEs generate US$ 30 b+ to Sri Lankan economy

Last week I had to kill almost 20 hours as I was on route to New York to attend the Global Apparel and Retail CEO summit on behalf of EDB as Sri Lanka was being featured as an Ethical sourcing destination at this event.

In my hand were the two latest business magazines where Sri Lanka’s corporate sector was featured. Reading from cover to cover, I felt how unfair life could be when we get highlighted in the media showcasing Sri Lanka’s economy when the reality is that it is the Small and Medium Scale enterprises (better known as SMEs) are the real backbone of the Sri Lankan economy.

SMEs generate more than 70% of Sri Lankan GDP, but we never see this sector in any of the glitzy magazines or the financial sections of any of the newspapers, even though in money terms they account for a colossal US$ 30 billion or more. It may not be incorrect to say that they are the forgotten entity of the Sri Lankan economy.

Who is a SME?

One problem in this sector is that there is no proper definition of who a SME is. The problem is not unique to Sri Lanka, but common to many countries around the world. Classifying an SME can be on a multitude of variables that can vary from one country to another. Further, the absence of data in this uncontrolled sector of the economy adds to the complexity.

In Sri Lanka, some say that an enterprise which has less than 99 people and an asset base of four million can be termed an SME. Then another definition is less than 50 people but an asset base of 20 million.

The World Bank states that if any enterprise has below 99 people, it can be termed an SME. Hence, it is very clear that this is one key decision that Sri Lanka needs to take as a country, given that concessionary financial facilities can be targeted as well as specific business development services can be made available if there is a clear classification of an SME.

Apart from the fact that over 70% of the GDP is being generated by SMEs, another important point to note is that from the 4,700 odd exporters that generate almost Rs. 8,000 billion, nearly 80% of them are SMEs.

If we take another sector like the tea industry, from the 300 million kilograms of tea that Sri Lanka produces, almost 70% of them are from the small holding producers that have just half an acre of land area. Hence we see that there are many unsung heroes in the SME business that never get highlighted or for that matter identified so that development can be done from a state perspective.

How SMEs evolved

If I may take you back to how the SME sector evolved in Sri Lanka, apparently way back in 1952, the World Bank had suggested to the Government that it should develop the Small and Medium Scale enterprises instead of promoting large industries.

Then in the 1960s the Sri Lankan Government began focusing on developing cottage industries and the SMEs for the sole purpose of saving foreign exchange through import substitution and to spruce up employment.

Thereafter, in the 1977 post liberalised economy, SMEs were developed to drive the export market, which is actually when the SME sector was unleashed to become the backbone of the country’s economy.

With this development came the multitude of government agencies and private sector banks that were being set up to provide the policy environment to support this fast-developing business sector. This included the Department of Small Industries, CISIR, EDB, SLSI, IDB, SLECIC, Textile Department, National Gem and Jewellery Authority, NEDA, DFCC, NDB, SME Bank and later renamed as Lankaputhra and today, the powerful bank called Regional Development Bank (RDB), to name the key institutions.

In the recent past we have seen many line ministries like the Ministry for Traditional Industries and small enterprises coming into the fray, which explains the fast-growing importance of this sector.

Core issues

Be that it may, today what we see is that there are over 40,000 SMEs and almost 100,000 plus micro enterprises in the country. However, the challenge is that almost 50% of the GDP contribution comes from the Western Province and we see that the rest of regions are lagging behind, which are essentially small enterprise-led.

This is the challenge that the policymakers are up against that needs to be resolved as a matter of urgency. The reason I say as a matter of urgency is that there is a hypothesis that poverty can be the root cause for terrorism and this is something that Sri Lanka cannot allow to surface at any cost and collectively we have a responsibility to make sure SMEs get the respect that they rightfully deserve.

To take one case in point to illustrate the robust development agenda that is required is Jaffna. In the 1990s there were around 745 companies in the Jaffna peninsula but by 2007 this number had dwindled to just 34 and I remember when I was heading Economic Affairs of the Government’s Peace Secretariat, we were able to rebuild the business climate to carry 150 companies by mid 2009.

Today, it is estimated that the peninsula has around 280, but it is way below the 1990s number. This explains the policy environment that needs to be created to develop livelihood and thereby ensure that there no extreme behaviour is allowed to be manifested. The logic being it is this extreme behaviour that results ultimately in terrorism, according to an anti terrorism expert I used to know during the war times.

Specific issues

Visiting some of the SMEs in different parts of the country, one of the key issues that were cited was that there was no clear policy for a typical small and medium scale entrepreneur to be guided.

Some SMEs in Ekala went on to say that if one was to register property, it takes almost 258 days and five per cent of the land value, which is not conducive to foster entrepreneurship. I guess that is why Sri Lanka’s rating in the Ease of Doing Business Index is way below a country that demonstrates 8% GDP growth.

Some went on to say that very little business development services are available such as research and development facilities, quality certification at district level and the linkage to export markets.

Most SMEs harp on the difficulty in having access to concessionary finance, being the key hindrance to business development. However, last week the Government has made available monies at special rates to the SMEs in the north and we will have to see how this facility is utilised in the next few months.

The facility is quite attractive given that 250,000 is provided at 4% interest for a 10-year time period with a year’s grace, that is quite attractive. Anyway let’s see how the diffusion takes place.

Another point highlighted by the SMEs is the fact that almost 60 types of taxes have to be paid to a bank during a year, which is very cumbersome and time-consuming and it must be a priority item that must be addressed. Some went on to say that a typical SME being stretched for talent results in these archaic tax systems affecting the productivity of the organisation.

The good news is that the recent proposals presented by the Tax Commission to the President will correct most of these administrative roadblocks. But once again it needs to be observed how it will be rolled out post the budget later this month.

Indian experience

If I may cite an experience shared at the recent SME Conference that was staged in India, in 2002-3 there were around 24.9 million SMEs in India but with key changes to policy on the lines discussed above, the progress has been phenomenal.

Today, the number stands at 332 million SMEs as per the statement by the Minister of Small Scale Industries – Agro and Rural Sector. He went on to say that with minimum policy changes, the greatest results were being achieved, given that there was a passionate commitment to drive strategy. I guess we need to pick up a few lessons from this experience.

What Sri Lanka must do

The first key task is for this sector of business to have a single line ministry. This can result is a clear and focus agenda that can be developed, which will be followed by a set of policy guidelines. If this is done, some of the key issues highlighted can be addressed straightaway with minimum impact to the tax revenue model of the country.

Secondly, a SME Policy Unit must be set up so that very close contact can be made with the SMEs, which will result in an updated database which will make the task of developing specific business strategies possible.

This can also lead to a once-a-month SME forum to be organised where the key obstacles that SMEs are faced with can be highlighted and a PPP model of problem solving can be applied, just like the ‘Samatha Piyasa’ Exporters Forum that was staged at one time at the EDB.

Thirdly, support linkages can be developed with ITI, EDB, SLSI and Department of Registration so that at regional level too this service can be accessed by a typical SME.

Fourthly, the issue of access to finance must be addressed. This can only be done if financial rigour is being practiced by the SMEs so that when it comes to documentation required for one to take a loan, things are in order. Maybe the newly-structured Regional Development Bank can have a unit that helps SMEs structure their documentation in a way that access to finance is possible even if the cost of the capital is not as attractive.

The logic being that even if interest rates are reduced to levels that are very attractive, if financial discipline is not being practiced by an SME, access to finance will still remain an issue.

Finally, maybe we need to drive industrial estates in different parts of the country but be sector specific just like in India so that there is greater focus and stronger networking that leads to the industry as a whole becoming very competitive. Currently there are discussions on the leather industry to have such a facility in Mannar in the near future. This can also help drive specific technology that can be shared by the different competitors as well as the employment that can be targeted by sector.

Conclusion

Whilst we have experienced the current year as the turnaround year for the Western Province with the booming stock exchange and corporate profits growing by 268% as per the listed company survey, with a focus on SMEs we can develop the rest of the regions. This will also help bring in the peace dividends to the North East and thereby ensure that Sri Lanka enjoys sustainable peace.

If a robust strategy of developing SMEs is being followed, it will cut regional disparities and thereby correct the poverty issues but more importantly it will quicken the pace at which Sri Lanka crosses the 4,000 dollar per capita income as well drive the country to achieve eight per cent plus GDP growth. The challenge is how each of us can contribute to this developmental agenda.

(Rohantha Athukorala is a business economist by training. He headed Sri Lanka’s National Council for Economic Development under the Presidential Secretariat when the country averaged 7.4% GDP growth. He is a business professional by practice, winning twice the Marketing Achiever Award, Business Achiever Award from Alumni PIM, University of Sri Jayewardenepura, whilst also winning a Global Leadership Award from Johnson Lever. Rohantha is actively involved in the growth agenda of the Sri Lankan economy.)