MSMEs and interest rates

The Central Bank is planning to establish priority lending targets for Micro, Small and Medium Enterprises (MSMEs) to assist them to recover from the pandemic and tap into fresh opportunities. But there are many other aspects that will need to be tackled at policy level to truly give this sector a leg up. 

SMEs contribute about 45% of Sri Lanka’s gross domestic product and provide about half of the country’s jobs. Yet, among SMEs, only 25% of entrepreneurs are women. Their lower capacity contributes to a $ 350 million gender credit gap, according to the ADB. Capitalising on entrepreneurship to economically empower women and generate inclusive growth in Sri Lanka will require reducing various bottlenecks, especially access to finance. Women face additional hurdles – gender-related and costly – outside the investment environment. 

The effort brings to focus the complex reasons why many SMEs are struggling in the pandemic and the need for initiatives that provide individuals with the necessary training and know-how to get their businesses off the ground. The Budget and other recent policy decisions have also sought to put SMEs at the centre of sustainable development and turning around persistently sluggish growth. Indeed the country still lags behind in relation to its regional neighbours when it comes to entrepreneurship.

In Vietnam, 19.6% of the working population are business owners or employers, while in Thailand, this number is even higher, at 27.5%. In countries with populations equal to Sri Lanka, the rate remains at a steady 10%. Sri Lanka by comparison has approximately 230,000 employers or business owners. As such it’s clear that the country dearly needs to increase the number of entrepreneurs in the country to realistically compete in the global economy and achieve its touted growth targets.

Low interest rates can help deal with one of the main issues that start-ups and entrepreneurs in Sri Lanka have – funding. However the other problem start-ups have is adequate mentoring and networks linking them to the market. This is especially true of IT and smart phone connectivity. Many also lack formal systems of accounting, which makes lending to them risky.    

Enterprise Sri Lanka provides the answers to one of these issues but does little to meet the other needs to mentoring and markets. For decades, the Government has rolled out numerous programs to foster entrepreneurship in Sri Lanka but many of these have become import substitution efforts rather than export-focused ventures. 

In today’s highly-competitive world, companies need to be ‘born global’ so they are able to link to global value chains and grow into competitive industries, though the process for supporting companies, linking them to potential investors, and targeting export opportunities is extremely difficult. 

This process is also closely linked to improving Sri Lanka’s overall ease of doing business environment, where successive governments have failed to make a significant mark. As the overall structural changes needed to make Sri Lanka’s economy more competitive lags behind, finding markets and supporting entrepreneurs becomes ever harder. 

Supporting SMEs is critical to job generation as COVID-19 heightens unemployment and can potentially boost social welfare support for vulnerable communities. The gendered nature of some SMEs also means that this policy focus can help fix other challenges such as the number of women in the formal workforce.   

Entrepreneurship is the golden promise that all countries run after and few achieve.