Tackling An ‘F’ and Two T’s in Sri Lanka’s SME Development Drive

Sri Lanka has been talking about SME development for a long time. And trying to do something about it for most of that time too. Yet, the focus is too narrow, and a lot more refinement in the strategy is needed. Since leaving IPS I don’t work on SME issues as much as I used to, but still actively keep up with research and reading on the topic. So, a forum this week gave me the opportunity to link back to some of that work. The Konrad Adenauer Stiftung and the Pathfinder Foundation organized a one-day roundtable on ‘Social Market Economy in South Asia: German Experience and Fostering Small and Medium Enterprises in Sri Lanka’.

In my presentation to the group, I drew on several pieces of published research I was involved with on growth and competitiveness of SMEs and challenges faced. I focussed on 3 main issues – access to finance, taxation, and technology transfer.

My main messages were:

  • Finance: The role of ‘availability’ is overemphasised, while the role of ‘bankability’ is underemphasised. There has been an over reliance on rounds and rounds of concessionary loan schemes refinanced by donors as a ‘magic bullet fix’ for all SME problems. I argued that we need to a) focus more on addressing what I call SMEs’ ‘intrinsic weaknesses’ that hurt their access to finance, and b) improve banks’ SME lending competencies and products

 

  • Taxation: While it is a relatively under explored topic, some issues are becoming clear. Tax compliance among SMEs is low for multiple reasons (explained in the slides). The Government may need to consider revising tax-free threshold or at least make tax registration compulsory. Meanwhile, VAT needs better messaging among SMEs to help them understand the benefits of VAT registration (e.g. input credit). Compliance procedures/costs were found to be  burdensome and need fixing.

 

  • Technology: There is a dire need to support to access technology (primarily tech transfer) for SMEs, even before focussing on R&D (which takes more time and money). In this, both access to an ecosystem and access financing need addressing. I advocated for setting up a ‘clearing house’ for SME technology access like Steinbeis in Germany.

 

View the full slide set below:

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