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Thursday December 1st, 2022

Strategies to revive Sri Lankan SMEs amidst Covid-19 

The Pandemiconomic Impact: Insights from ACCA finance professionals

Sri Lanka’s SME sector, as is elsewhere, is too big to fail but can easily be overlooked by larger strategically important corporations during a crisis. However, ACCA Member and Chairman of Sarvodaya Development Finance, Channa de Silva recommends that small businesses, banks and the state need to change strategy to survive the economic fallout of Covid-19.

Access to bank credit is a challenge for SMEs world over. When they do have the access, they must borrow at a premium, or the alternative is borrowing from sub-prime lenders at a much higher rate of interest. In Sri Lanka, the problem of access and the cost of borrowing is acute.

Over the past 30 years, small and medium businesses in Sri Lanka have paid 20% per annum as interest on their loans, de Silva estimates, which is not very sustainable. In India, SMEs have paid interest at half that rate.

Sri Lankan SMEs are compelled to borrow from informal lenders at exorbitant rates as much as 10% a month. This is because most SMEs don’t have balance sheets or sound assets that can satisfy conservative bankers.

With limited access to finance and high-interest payment requirements, the SMEs sector has not been able to build savings and liquidity for a rainy day. “Unfortunately, what we have now is a perfect storm due to the recession caused by the coronavirus pandemic, threatening to blow the roof off the SME sector,” says ACCA Member Channa de Silva, Chairman of Sarvodaya Development Finance.

The outbreak of COVID-19 has triggered the worst global recession since the Great Depression a century ago, according to the IMF. The global economy will contract 3% in 2020 losing $9 trillion to the Covid-19 pandemic over the next three years, it says. No country is spared.

According to a global survey conducted by ACCA, the global private economic output could fall 10% due to the lockdowns. According to the Asian Development Bank, the impact of the virus will cost Sri Lanka’s economy 1.5% of the GDP.

De Silva says the first casualties of a recession or any economic shock—and the hardest hit—are SMEs. Servicing high-interest banking loans challenging at best of times is now debilitating with revenues drying up with the economy in virtual lockdown. Selling off assets like land or vehicles to generate enough liquidity to finance liabilities will be difficult at this time unless they are sold at steep discounts, which many people will be reluctant to do. “Defaulting on interest payments will hurt credit scores which will make it even harder to access finance in the future”.

De Silva suggests that the government will have an important role to play. SMEs provide jobs to 45% of the country’s working population and generates over half of Sri Lanka’s Gross Domestic Product.

The state has announced several fiscal and monetary relief measures but must ensure they reach SMEs. “For instance, it must ensure the concessionary credit line it offered to banks reach small businesses spread across the country, and not exploited by a few big corporations,” de Silva says.

SME’s are the backbone of the economy but they can be easily overlooked over larger corporations. The process of obtaining concessionary bank loans and applying for debt moratoriums must not be complex, tedious or time-consuming, de Silva insists.

Entrepreneurship is one of the four basic factors of production, so it’s critical to keep this spirit alive. “Therefore, the government needs to devote additional resources to ensure the relief measures are deployed effectively, if not such schemes will only bring disappointment and despair to the already broken SME sector”.

De Silva favours a more outward-looking approach to dealing with the economic crisis.

Many top diplomatic positions in key countries are now vacant. These must be filled by competent professionals who can negotiate large credit lines to the country’s banks that carry concessionary interest rates and long grace periods which can then be lent to the SME sector. “Sri Lanka also must invigorate foreign relations, negotiating new trade deals especially with China, Japan and ASEAN countries,” de Silva says.

According to ACCA’s global survey, one in three respondents were unsure about the effectiveness of economic stimuli packages offered by governments around the world.

“The most important role of government is to retain economic confidence, to be positive and hopeful while this storm lasts,” he says. “Thereafter it must commit to providing the necessary impetus for every segment of the economy to reset, strengthen fundamentals and pursue excellence with commitment and passion”.

“A full economic recovery could take two years and not before we have a Covid-19 vaccine. Survival is going to be everyone’s priority which is why SMEs has to be at the heart of any strategy to revive the economy and then grow”.

The UK based global accounting body ACCA recommends the three A’s of crisis planning and response: Act to respond in a sustainable manner and focus on employees and stakeholders; Analyse the different information sources to secure your organisation; Anticipate the business impact and future trends so that organisations can look to innovate. These are relevant to Sri Lankan SMEs, de Silva says.

De Silva takes a step further and suggests SME’s need to consider four aspects when responding to this crisis: First, SMEs have little choice but significantly lower costs. They can do this by renegotiating terms with employees, lending institutions, lessors and the entire supply chain including suppliers of raw materials and services. Every one of these factors of production will have to be sensitive to the challenges ahead and be flexible with their demands.

Second, SMEs will have to readjust business and marketing strategies fast to generate revenue in a recessionary environment. For instance, SME exporters who have relied on Western markets will have to quickly shift to China and ASEAN which will come out of the pandemic-related global economic slump faster.

Third, prompted by the lockdowns and social distancing, Sri Lanka is taking larger steps towards a digital economy. Entrepreneurs should be brave enough to invest in technology especially to connect with a growing e-commerce industry. Investing time and effort to integrate IT for production, operational and marketing efficiency in a digital economy will be critical for the future survival of SMEs.

Fourth, SMEs must improve boards and governance structures. Boards must not comprise family-members entirely and need to include professionals representing finance, marketing, production and technology. This will ensure competent governance structures are in place to withstand economic shocks.

“A review of the capital structure may be useful to attract equity investors and infuse capital,” de Silva says. Many foreign funds are interested in making a social, economic or environmental impact so SMEs must make a continuous effort towards sustainability and even improve gender representation so that they will become attractive to these funds.