Colombo: Manila-based Asian Development Bank (ADB) on March 18, 2024, has approved a $100 million loan to provide small and medium-sized enterprises (SMEs) in Sri Lanka more access to finance and build their resilience to external shocks, such as the economic crisis and climate change.   

ADB will establish a $50 million line of credit for underserved SMEs in the manufacturing, export, tourism, technology, and agricultural sectors through partnering financial institutions. A $500,000 special facility will be established to ensure subsidies for small and medium-sized enterprises managed by women. A gender gap assessment will be carried out to increase women's financial access.

ADB Senior Financial Sector Specialist Manohari Gunawardhena says, “SMEs play a critical role in Sri Lanka’s economy, contributing 52% to the country’s gross domestic product and employing 45% of the population. It is therefore important to provide SMEs, particularly women-led enterprises, with the necessary support to sustain and grow the sector’s contribution to the economy. This project will provide working capital and improve SMEs’ access to finance, helping them expand operations and prepare for the changing environment.” 

Through the National Credit Guarantee Institution Limited (NCGI), which offers SMEs partial credit guarantees on loans, the government would increase its equity contribution to the project.

ADB will assist the NCGI in implementing policies for guaranteed recovery operations, risk management and risk-based pricing, and guarantee underwriting to efficiently support SMEs. With the help of SMEs' mitigation and adaptation strategies to the climate, the initiative will include green finance components.

Economic Crisis of Sri Lanka

Source of the images – Wall Street Journal

Sri Lanka has been going through a major economic crisis since 2019. There are various causes of the crisis which were built and deepened over the years. Tax cuts & money creation, external debt, debt trap, fall of foreign remittances, tourism, agricultural crisis, Russo-Ukrainian War, Corruption and impunity are to name some of the main causes which worked as fuel to deepen the crisis fire.

The biggest economic catastrophe to hit Sri Lanka in 73 years was officially announced by the government in 2021. A food emergency was declared in August of 2021. Food shortages, however, were disputed by the administration. Udaya Gammanpila, Sri Lanka's Minister of Energy, admitted that the situation might cause a financial catastrophe. Nandalal Weerasinghe took over as the new governor of the Central Bank of Sri Lanka at the beginning of April 2022, replacing Ajith Nivard Cabraal.

The IMF Executive Board authorized $3 billion for Sri Lanka in March 2023 as part of a new Extended Fund Facility (EFF) arrangement. The World Bank, the Asian Development Bank, and other lenders are anticipated to disburse an extra $3.75 billion after the initial $330 million tranche was released. Several reforms were implemented by the Wickremesinghe administration to satisfy the IMF requirements for the bailout. This includes both the highly unpopular debt restructuring and significant tax increases.

With a growth forecast of 1.8% in 2024, Sri Lanka expects a steady economic rebound, indicating cautious optimism amid its efforts to emerge from a severe economic depression. This prediction is reinforced by a combination of monetary and fiscal policies aimed at reviving important economic areas. Supporting small and medium-sized businesses (SMEs), which are essential to the nation's economic structure, and enacting major social and educational reforms meant to promote long-term economic resilience and growth are two of these initiatives.

Impact on the SMEs

Given the circumstances, it is essential to recognize that Sri Lanka's economy is going through a critical period and that maintaining SMEs will have a significant impact on GDP. According to the study's findings, inflation and perceived political ties have a big influence on sustainability. Because SMEs are not able to discover answers on their own, the government must play a major role in managing the crisis scenario.

Better business opportunities and strategic planning, as well as monitoring, guidance, and assistance to sustain, as well as policy changes to support SME business owners, might therefore be taken into consideration. Ministries that deal with SMEs and groups that assist them ought to endeavour to keep SMEs in a safe, encouraging, and long-lasting atmosphere so they can weather the current crisis.

Sri Lanka's share of SME-owned businesses is lower than that of its neighbours in the area. SMEs account for 95–99% of all firms in India, Malaysia, and Singapore, but just 80% of businesses in Sri Lanka. SMEs in Sri Lanka still make up a small portion of total national exports despite their significant economic contribution, indicating a fundamental gap between their aspiration and capacity to grow outside of their home market. The story of the expansion of SMEs needs to change.

The foundation of the economy are SMEs, yet they require assistance to expand. The growth of SMEs is impeded by regulatory limitations and inadequate access to information. The business sector in Sri Lanka is served by more than 20 ministries, each of which has numerous departments, authorities, and councils.

This causes government fragmentation, information gaps, and poor private-public synergy. Startups and SMEs are more dependent on their business ecosystem and more prone to market failures, policy inefficiencies, and inconsistencies owing to internal constraints.

About the Asian Development Bank

Founded on December 19, 1966, the Asian Development Bank (ADB) is a regional development bank with its main office located at 6 ADB Avenue, Mandaluyong, Metro Manila 1550, Philippines. Additionally, the bank keeps 31 field offices globally to support Asia's social and economic development. The UN Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly the Economic Commission for Asia and the Far East, or ECAFE) members as well as non-regional developed nations are eligible to apply to the bank. ADB was founded with 31 members; as of right moment, it has 68 members.

As of 31 December 2020, Japan and the United States each hold the largest proportion of shares at 15.571%. China holds 6.429%, India holds 6.317%, and Australia holds 5.773%.

Sources – ADB Press Release, Wikipedia, International Labour Organisation Research Publication (Impact of Multiple Crises on Sri Lana’s Micro, Small, Medium-sized Enterprises), Conference Paper by Waruni Eranga Dahanayake on Sustainability of small and medium enterprises in Sri Lanka: Impact of Economic Crisis.