The Micro, small and medium enterprises (MSME) sector in Sri Lanka serves as a catalyst for economic growth, employment creation, innovation, and social development.
Its significance lies not only in its economic contributions but also in its ability to foster inclusive growth, regional development, and entrepreneurial dynamism.
Nurturing and empowering SMEs through targeted policies and support mechanisms will continue to be imperative for Sri Lanka’s currently distressed economic growth.
According to statistics, MSMEs account for approximately 70 percent of all enterprises in Sri Lanka, making up a significant portion of its economy. An Asian Development Bank Institute paper published in 2021 reveals that out of three million personnel in the workforce, over 70 percent (2.2 million) are engaged in MSME sector businesses.
Employment opportunities can be found in all economic sectors, including the primary, secondary, and tertiary ones, and they offer jobs to people with a variety of talents, including skilled, semi-skilled, and unskilled workers.
It should be stressed that while the percentage of SME enterprises in the industrial sector is 20 percent, it is over 90 percent in the service sector. Additionally, SMEs, which are projected to account for over 50 percent of economic contribution, are a crucial source in the country.
The Central Bank of Sri Lanka, in its 2021 annual report, named the sector as a growth driver for development and said that a considerable body of literature provides statistical evidence to prove a positive relationship between the existence of MSMEs and the overall economic growth of a country.
According to the report, successful MSMEs invariably evolve into corporations, making a greater contribution to the overall economy.
The common feeling of MSME entrepreneurs is that, despite playing such an important and key role in the development process, seemingly, the focus on the Government to resolve many issues confronted by the sector is not adequately addressed. Constant and continuous pleas by the sector have so far fallen into deaf ears, according to entrepreneurs.
The most common obstacle for MSMEs in Sri Lanka is the absence of proper financial assistance from lenders. Most MSMEs, despite being capable of innovation and growth, are unable to reach their true potential due to limitations in finances.
For the past several decades, access to adequate financial resources has remained a primary concern for SMEs in Sri Lanka. Many SMEs struggle to obtain loans or credit facilities from banks due to complexities such as stringent lending criteria, high interest rates, unjustifiable collateral requirements, and many other lending policies. Limited access to financing hampers their ability to expand operations, invest in technology, and innovate.
According to studies, due to low financial literacy and complications in formal systems, many Sri Lankan MSMEs, particularly micro-level businesses, seek the services of informal and unregulated money lenders who provide money at extremely high interest rates.
Threatening
This can invariably lead to high production and operational costs, making the product or service uncompetitive in the market and threatening the viability of their businesses.
Another key issue that must be addressed is the limited management knowledge and business skills of the typical Sri Lankan small business entrepreneur. Lack or insufficient expertise in finance, accounting, marketing, and human management can hamper the overall operation. Regrettably, the daring risk-takers who start up a small business can fail in the absence of management expertise and administrative skills. Most small and medium-scale entrepreneurs pay little or no attention to learning or improving their knowledge while in business.
Lack of adequate business knowledge can also lead to skill gaps within the workforce, whether they are large or small. By nature, small and medium enterprises operate with limited funds. Therefore, they are unable to allocate funds for training or education to their workforce sufficiently, which can create high employment turnover.
As a result, many such businesses tend to be managed and run by the owners themselves. Nevertheless, a knowledgeable entrepreneur can always manage such situations and retain the required staff, particularly by motivating them effectively.
MSMEs in developing countries across the globe confront challenges in market access. Due to this phenomenon, global competition is also fierce, and SMEs struggle to access international markets. Even domestically, they face strong competition from larger organisations.
In a relatively small and limited domestic market, exports can play a crucial role in stimulating growth if small companies are given adequate assistance by way of finance and marketing.
Hence, the key success factors, in addition to competitive pricing structure, such as market intelligence, capacity for learning and adaptation, and minimal barriers to regulations, must be introduced by authorities. The Export Development Board (EDB) can play a crucial role in gaining market access. However, the views from SME sector entrepreneurs on EDB engagement in supporting new entrants are not very encouraging currently.
Expertise
Lack of marketing expertise and limited resources for market expansion constrain growth opportunities. This can be due to multiple reasons, such as the inability to spend on large advertising budgets, limited networking channels, inadequate use of social media, limited online presence, and weaknesses in adopting new technology, leading to comparatively lower market access. The sector must study and develop strategies to penetrate new markets and compete effectively, which is crucial for SME survival.
Most often, MSMEs are vulnerable to external shocks such as economic downturns, natural disasters, changing regulatory policies, and even global crises.
The limited resources and less space for flexibility make MSMEs more susceptible to unforeseen snags, leading to disruptions in operations. For example, imposing additional import taxes on raw materials can totally disrupt the cost, and a product can appear completely uncompetitive in the market.
Another weakness in Sri Lanka’s industrial sector is its overdependence on the import of raw materials and other inputs. Although clear records of the raw material requirements of industries in Sri Lanka are not available, random representations are being made by certain segments, on and off.
The exact nature of the precise requirements of the nature of such raw material imports or monetary figures has not been introduced thus far by experts.
Hence, it is time to collect data on this important aspect and prepare for the future.
The Government must focus on recognising the significance of SMEs, and policymakers need to formulate and implement conducive and supportive policies, including easier access to finance, streamlined regulations, skill development programs, and incentives to encourage growth and sustainability.
Also, special attention must be given to ensuring access to resources, such as finance, technology, markets, and skills, which is crucial for the SME sector’s continued growth and competitiveness.
At this crucial juncture, the country needs all its resources to be gathered towards the common goal. Reviving the troubled SME sector is perhaps one of the most important tasks of the Government at this point.
There is no doubt that SMEs can ease the pressure from households by continuing to provide employment that is currently under severe threat. On the other hand, SMEs’ contribution to the overall economy is crucial to easing the current economic hardships.
Micro, small, and medium enterprises are instrumental in shaping the economic landscape of the country.
Indispensable
Their ability to innovate, generate employment, and contribute to regional development makes them indispensable. Despite many challenges, the growth potential of MSMEs remains open.
By fostering an environment encouraging their development and understanding the intricacies of sector growth, MSMEs will make a better contribution to achieving sustainable and inclusive economic growth in Sri Lanka.
