Nightmare on ‘Made in Sri Lanka’

In Sri Lanka, 74% of business entities are operating in rural areas whereas 25% are operating in urban areas. Majority of rural enterprises are micro and small scale while many large firms are established in urban areas of the country. More than 70% of businesses are established under trade and services sector, indicating the strong correlation between local development and globalisation – Pic by Shehan Gunasekara

 Saturday, 6 June 2020 

The world was hit hard by the first wave of coronavirus, as lockdowns and social distancing have stopped the domestic business activities and firms simultaneously. Since the engine of the growth is almost at a halt, both household and firms are waiting for a silver lining in global economy, whereas policy makers tend to facilitate enabling environment for opportunities.

Governments around the world are eager to protect their domestic business as a part of their contingency measures. Sri Lankan government also introduced some relief packages to protect business entities. Due to prevailing state, many countries have taken measures to protect and strengthen the backward linkages of economies. Consequently, on the process of increasing the provision of inputs for production, strengthening the Micro, Small and Medium-sized enterprises (MSMEs) are considered to be the centre of attention for policymakers.

(MSMEs) are said to be the lifeline of an economy, where MSMEs represent the largest share of the business around the world providing job opportunities for majority of the population. Larger share of MSMEs are distributed among trade and services sector in both developed and developing countries, where it accounts for a significant proportion of employees (more than 50% of worldwide employment). A recent study shows that 95% of all enterprises in 17 OECD (Organization for Economic Co-operation and Development) countries consists of MSMEs.

Stated numbers are considered to be higher in developing economies. According to IFC’s (International Finance Corporation) MSME Country Indicators, 80% of total MSMEs in developing countries are Micro enterprises, where majority of them are operating under informal sector. Also, a recent estimate by ILO (International Labour Organization) revealed that 74% of worldwide MSMEs are constituted under informal sector. Accordingly, it indicates the importance of developing resilience of MSMEs to face disaster situations in every country which is reflected with the recent COVID-19 pandemic.

Many countries have responded on their policy front by giving a special attention towards MSMEs. The Secretary General of UN also highlighted the importance of protecting the informal sector against this pandemic in his letter to G-20 virtual summit on COVID-19. Majority of policy measures that were introduced by the administrations were containing actions to support business during the pandemic, where it can be summarised as in form of;

MSMEs relief packages. (E.g. Malaysia introduced RM 20 billion economic stimulus package aiming to ease cashflow affected business and tourism sector, Philippines has increased spending for the tourism sector which accounted for 0.03% of GDP.)

Varieties of tax breaks in terms of exemptions and extensions. (E.g. Indonesia announced tax deferment facilities and raft of tax breaks worth IDR 22.9 trillion. VAT exemption for Hubei province and overall reduction from 3% to 1% for other provinces in Mainland China)

Credit easing programs including reduction of policy rates, special loan funds and amendments for banking sector (E.g. Exemptions for commercial banks from the Competition Act in South Africa, Incentives for banking sector in Argentina)

Expected breakthrough 

Global supply chains have disrupted due to COVID-19, resulting in new shifts in supply chains. For instance, modern day food value chains display some complexity due to bolstering logistics capacity and intricate policies of different regions. Consequently, many countries have met some difficulties under the current pandemic due to such densities.

Further, there is a trend of companies from Japan, Taiwan, US, to realign supply chains by relocating to other ASEAN countries. The given challenges and strategies for diversification, would create two opportunities for developing countries such as Sri Lanka. First is to attract FDIs and the second is the most pliability pillar, which is ‘Going Local’. Under the context of enhancing local production, MSMEs in Sri Lanka would be the levers of growth.

According to the Global Competitiveness Index by World Economic Forum (WEF), Sri Lanka ranked under early phase of efficiency driven stage. As per WEF, key drivers of the stated stage would be education, training, market efficiency, accessibility to credit and technological readiness. Thus, local business development also ought to be initiated by adopting specified drivers.

MSME sector in Sri Lanka

The Sri Lankan business environment comprises 92% of Micro, 7% of Small and 1% of Medium enterprises. Majority share of the advertisements published on the media is paid by only 0.2% of large firms in the country. Although, Micro business is in abundance in Sri Lanka, contribution to the economy is less significant in terms of value addition and turnover comparatively to SMEs.

In Sri Lanka, 74% of business entities are operating in rural areas whereas 25% are operating in urban areas. Majority of rural enterprises are micro and small scale while many large firms are established in urban areas of the country. More than 70% of businesses are established under trade and services sector, indicating the strong correlation between local development and globalisation. Sole ownership is dominant in both micro and small-scale enterprises and in to some extent of medium scale firms as well. But if Sri Lanka is directing to attain a sustainable higher growth rate, majority of sole ownership is required to be transformed in to other legal states such as Private Limited Company. Only 25% of Micro and 74% of Small establishments are recording their financial transactions, which is a somewhat burden to the government in terms of revenue collection and alike business would likely to mislay benefits from the administrative system.

In order to intensify the ‘Made in Sri Lanka’ brand name, Sri Lanka needs a solidarity approach on transforming selected percentage of Micro enterprises in to SMEs, preferably in to Small enterprise stage. Although, there are numerous constraints associated with stopping MSMEs from growing ventures. The common glitches identified over various studies and surveys are;

Narrow scope under MSMEs growth and transformation; Proposals for the sector heightening were only focused on MSMEs without addressing the issues of the industry as whole. Ex. Absence of market facilitation, weak industrial linkages, value chain related bottlenecks, lack of skills and knowledge on technology adoption, business management, etc.

Scarcity of incentives to formalise and dynamics of formalisation; there are higher tangible and intangible costs associated with post registration such as licensing, registration, permits, labour, government laws and regulations. For an example, according to many locals, registration fee charge by DS office or local authority which is around Rs. 2,500 is higher than their expectations and they do not see any benefit by registering their Micro enterprise. Further, wildly spread phobia of income taxes, where such liability considered as a burden to their business.

Limited government capacity; Since Sri Lanka is dealing with higher debt-to-GDP ratio, fall in government revenue and other implication on public finance, government spending on business expansion and intervention would be limited.

Political influence and coordination challenges; MSMEs are not treating same as large firms under local administrations. It is observable that there are many informal ways that public officials are dealing with Micro scale enterprise owners, especially under tax and regulatory related matters. In addition, lack of coordination among Divisional Secretariats and national level departments due to complex hierarchy and authority level would adversely impact on national level decision making.

Women empowerment; There are only 26% of female decision makers owning Micro scale enterprises, which indicates the absence of women entrepreneurship development, weakening women chambers and demotivation among women groups.

Access to credit; Micro and small-scale entrepreneurs are cladded with various snags on credit lines, fulfilling collateral requirements, subsidiary ceilings, complex lending and appraisal methods by commercial banks and lack of loan schemes for Women and Youth entrepreneurship development.

Infrastructure facilities and R&D; limited access to resources, no MSME specific industrial zones, issues with land ownerships, difficulties on acquiring technology would dampening the development of MSMEs. In addition, no innovation centred business environment and frail linkages between applied research institutes and commercial enterprises would make it difficult integrate with ever growing global technology for growth of MSMEs.

Climate related disasters; Sri Lanka has experienced many climate related disasters on recent times. Losses to Micro and Small-scale business from such events were increasingly high due to unauthorised structures, no record keepings, no process to assess damages, inability to purchase insurance premiums and lack of awareness regarding climate change.

Now the problem is clear, if administrations would address above implications, it will routinely integrate the efficiency enhancers introduced by WEF and enabled MSMEs growth. However, recent KPI (Key performance indicators to measure MSME growth) related studies expressed that there is no significant growth in MSMEs at macro scale on previous years whereas Sri Lankan economy also somewhat stagnated during last five years. There are some hidden forces operating behind to prevent MSME from growing entities in the country. If the government would not discourse these issues, ‘Made in Sri Lanka’ would be a nightmare.

Still holding off with veiled forces

“Now it’s time to open the books”. There are over 20 ministries providing services and perform regulatory function to MSMEs at national level. Similarly, provincial governments also have ministries and other agencies to support MSMEs growth. All the relevant data and information regarding limitations of the sectorial growth have been recorded and documented by particular authorities. Formally documented national strategy for SME development was published on 2002 as a white paper.

Global supply chains have disrupted due to COVID-19, resulting in new shifts in supply chains. For instance, modern day food value chains display some complexity due to bolstering logistics capacity and intricate policies of different regions. Consequently, many countries have met some difficulties under the current pandemic due to such densities.

Further, there is a trend of companies from Japan, Taiwan, US, to realign supply chains by relocating to other ASEAN countries. The given challenges and strategies for diversification, would create two opportunities for developing countries such as Sri Lanka. First is to attract FDIs and the second is the most pliability pillar, which is ‘Going Local’. Under the context of enhancing local production, MSMEs in Sri Lanka would be the levers of growth

In 2016, Ministry of Industry and Commerce has prepared an Action Plan for national policy framework on MSME sector expansion. Stated Action Plan consists of implementing solutions for every single constraint to have an enabling environment and better guidance for MSME sector in the country. But it’s still yet to be deployed. BBB (Built Back Better) guidelines prepared by Ministry of Industry and Commerce for the MSME sector also covered with route causes for staples on formalising Micro and Small-scale enterprises.

In addition, private firms, NGOs and other agencies have documented similar bottlenecks and provided recommendations for the development of this sector which already inquired lot of time and cost. But sadly, such materials only remained on their shelves.

“Cost of decision making”. Every individual decision has consequences and trade-offs. Administrations from local level to national level would require an understanding of externalities on decision making to choose the best options. Alike acumen would entail decision maker to evaluate objectives, external and internal factors, available information and uncertainties.

However, many public administrations of the country have divided their activities and acting on their personal interests, whereas it had reflected with the sluggish growth of the MSMEs sector during previous decade. Due to such conflict of interests between national level departments to take a decision would inquire unforeseen costs and bearers would be the MSME sector of the country. Sri Lanka need a national level single decision maker that can be act as an apex body to make the decisions, for an example, SME advisory council proposed under Action Plan. Such requirement had amplified mainly due to the diversity of responsibilities among authorities to take actions for the development of MSMEs sector in the country.

“Management challenges”. There are many projects that have been executed during previous years to enhance the business dynamics of the country. Many activities and tasks have been initiated, planned and implemented over such projects. But still, authorities have been unable to evaluate the outcome and even they are not aware about the nature of the activities performed under similar projects. Unavailability of timely data and information would upsurge costs for implementing agencies, since they are proposing same materials by narrowing scope to attain novel issues of the sector. Thus, centralised database is a priority for MSME sector under such ambience.

Further, no proper coordination within national level departments also would make it difficult to implement solutions for sectorial enhancement due to pending decisions, higher costs and other matters.

The sector diagnosis not only consists of examined issues, but also of many other complications. Majority is predicting that COVID-19 will change the world economy as like aftermaths of the great depression in the 1930s. To adopt such changes the government should address all the gaps on the MSME sector in order to enhance the domestic production. Otherwise, ‘Made in Sri Lanka’ slogan will be just a dream.

(The writer is currently working at a major donor-funded project and could be reached via email at mpbhadraja@gmail.com.)