The SMEs deserve adequate financial assistance and other structural help to sustain during the on-going crisis as well as to grow after the pandemic at a rapid pace
The theme of this article has been in focus of media, researchers, scholars, business community and the private sector think tanks for quite some time. Considering the gravity of the issue, the SME Foundation organized an international webinar in collaboration with the local chapter of German foundation Friedrich Ebert Stiftung (FES), on 24 September 2020. I was fortunate to be invited as one of the four discussants. Due to lack of enough time allocated for the discussants, some relevant issues remained unattended. I think I have an obligation to add more to the relevant issues as a specialist on small and medium enterprises (SME) and to fill the remaining gaps required to assist the policy-response process.
Prior to taking up the main theme, I digress a little to highlight some issues. These issues are important to put SMEs in their proper perspective and prepare a holistic policy for keeping the enterprises afloat during the on-going crisis of Covid-19.
Focusing on some selected SME issues
While most people tend to talk about SMEs casually, very few of them are aware of the SMEs they talk about. It is not their fault. The problem lies in the complexities involved in defining and identifying the SMEs in their proper perspective.
Some participants in the webinar raised the issue of SMEs definition and the controversies about it. Unfortunately, we have not yet been able to come to a national consensus on what terminology should be used to identify the sector. Is it SME or Micro, Small and Medium Enterprises (MSME) or Cottage, Micro, Small, and Medium Enterprises (CMSME)? This issue should be settled soon after consultation with all stakeholders. This is important to precisely identity the sector, accurately portray the SME landscape of Bangladesh and develop a comprehensive and authentic national data base on the sector. This is indispensable to pragmatic policy shaping and its effective implementation.
Another, notable aspect of the SMEs is their extremely heterogeneous characteristics. They can be identified in a wide array of business activities -- an artisan working in village, a coffee shop, an internet cafe in a small town, a tailor in a remote village, a sophisticated light engineering firm or a software firm selling their products in overseas markets and a medium-size parts and components manufacturer.
Apart from this characteristic, there are some common things of the SMEs, which need to be reckoned for clear understanding of their economic, social, psychological and organizational features.
These qualitative features are important to be noted (along with the quantitative indicators, i.e. employment, investment, and sales or turnover) to reflect on the strengths and weaknesses specific to small scale operations.
A few of them are discussed briefly below.
One of the leading qualitative aspects of SMEs is the strong link between the enterprise and the owner. The presence of the entrepreneurs is pre-eminent in the small enterprise activities, particularly in decision making. It adds to their greater flexibility in decision-making over the large firms. A very distinctive but unfavourable functional characteristic of the SMEs relates to their perennial financial constraints.
Due to scale barriers and market failures resulting from policy shortcomings as well as institutional rigidities, SMEs face restricted access to the sources of institutional finance. High barriers to entry into formal credit markets at affordable costs act as serious obstacles to their growth and expansion.
It is imperative that the SMEs deserve adequate financial assistance and other structural help to keep them afloat during the on-going crisis as well as to ensure their growth after the pandemic at a rapid pace.
Most speakers in the webinar talked about the economic significance of SMEs in the national economy, citing their contributions to GDP, employment creation, and income generation. Notably, the key-note speaker emphasized the need for enhancing overall SME assistance package, considering the sector's substantial contribution to our national economy. This is commendable of course, but little more also needs to be said in this regard. Unfortunately, there is no authentic estimate on the percentage of SMEs' contribution to the GDP. The available figure (varying between 25% - 28%) is generally sourced from ADB estimates from time to time. However, I guess this is an underestimate arising from various methodological deficiencies and information gaps.
Bangladesh Bureau of Statistics should soon come up with an authentically estimated figure required for the policy makers and other stakeholders dealing with SME issues. It is also regrettable that we do not have any separate information about SME contributions to national exports.
For unknown reasons, the Export Promotion Bureau (EPB) is reluctant to collect this important information despite repeated requests from the concerned stakeholders. This situation unfolds the serious information gap, affecting the important economic sector, which is the backbone of our national economy.
It has empirically documented that in almost all countries, including Bangladesh, the SMEs constitute over 90 percent of business enterprises, produce a substantial share of national output, employ an overwhelming majority (varying between 60%-80%) of the workforce and create livelihoods opportunities for millions.
SMEs are considered as 'engines of economic growth' world-wide as they stimulate competition, add to economic dynamism and renewal, innovation, entrepreneurial spirit, and diffusion of skills. They promote industrial decentralization through their wide geographical dispersal than the big companies. SMEs also promote a culture of entrepreneurship and an entrepreneurial society.
Enough empirical evidence are available all around nowadays to support the statements and hold SMEs in high esteem as the catalysts for achieving inclusive and sustainable national economic growth in all countries irrespective of their development stages.
Impacts of Covid-19
According to the surveys of leading international organizations such as the Organisation for Economic Cooperation and Development (OECD), the United Nations Industrial Development Organization (UNIDO) and the ILO Monitor, the pandemic has created major economic crisis through large-scale losses of life in most of the affected countries.
A variety of policy support has been put in place by the countries to mitigate the economic impacts of the Corona crisis. The ILO Monitor has warned a meteoric rise in global unemployment of between 5.3 million to 24.7 million. Particularly, sustaining business operations of the SMEs globally will be a difficult task. Characteristically, SMEs are less resilient and less flexible in dealing with the problems of cash-flow, liquidity crisis, reduction of production costs, for example, shifting to e-commerce practices and digitalization of operations.
A study in the US suggests that 50 percent of SMEs are operating with fewer than 15 cash buffer days and with less than two months' cash reserves. Such information though critically important for formulating targeted measures to provide relief to the most affected segments of the SME sector, are yet to be generated in Bangladesh.
It requires a large sample survey of the SME sector in Bangladesh to identify the most affected categories in the sector and provide them with sustainable support services at a much quicker pace.
Scenario of SME sector in Bangladesh
Impacts of the Covid-19 crisis on the SMEs in Bangladesh are still unknown. Limited information about the ground realities has been gathered by two primary sample surveys carried so far by Light castle Partners and Sheba xyz in April and later, by Dhaka Chamber of Commerce and Industry (DCCI) and Business Initiative Leading Development (BUILD) jointly with UNIDO.
The surveys were based on samples of 230 and 227 enterprises respectively. The Light Castle survey reports 52 percent of the sample firms have shut down their operation. On the other hand, 28 percent have experienced a decrease in revenues between 50 percent and 90 percent, resulting in run-down of cash reserves.
Nearly 70 percent of the firms feared permanent shutdowns of their businesses if they had to experience prolonged lock-downs over four months. The DCCI-UNIDO study put more emphasis on the progress of reaching the benefits of stimulus packages to the intended beneficiaries.
This survey also reports some signs of concerns for the SME sector. For example, 58 percent of the CMSMEs feel threatened by the risk of shutdowns within three months and fall of cash reserves. More importantly, the disbursement of the stimulus package (of Tk40,120 crore) stood at only 20.5 percent for working capital among 11,183 poultry enterprises.
For low income groups, the scenario was equally grim. The disbursement stood at Tk1,060 crore (in instalment) to 2 lakh clients. Undoubtedly, these figures speak of slow release of funds as well as slow disbursements.
These studies are covering only fringes of the potential clients and the results thereby are only indicative of the selective aspects of the Covid-19 crisis confronting the SMEs.
Larger sample surveys need to be commissioned soon to collect enough information on the impacts of Covid-19 crisis. It is important to know what categories of SMEs need immediate help to sustain during the crisis period.
Some additional facets of the crisis affecting millions of MSMEs in Bangladesh also need to be brought into focus. They are indispensable to our race towards materialising the National Vision 2020-2021 and achieving the SDG goals.
Policies of other nations
Governments in different countries have adopted a wide array of policies divided broadly into three categories to help the SME sectors come out of the crisis. These include measures to keep business alive and operational during the Covid-19 containment period. The strongest initiatives are taken to sustain short-term liquidity position of the SMEs.
The initiatives include deferring income and profit tax payment, giving tax reliefs, easing debt repayment schedules and rent and utility charge payments.
Besides, arrangements for soft loans (working capital) at concessional interest rates and wage subsidies for employment protection are also included.
Next comes the measures to maintain employment levels during the Covid-19 containment crisis. The measures include introduction of temporary regulations to prevent large-scale lay-off, alternative work arrangements, including short-time leave, and cost-sharing through partial salary adjustments.
Then comes the measures to keep the businesses in operation, which include debt financing (loans and credit guarantees), employment retention support and tax reliefs.
Finally, comes the measures undertaken towards resilience building of the SMEs against future disruptions caused by Covid-19 like crisis. These are called structural or functional measures to reorient business, which include introducing new work process and new products, exploring new markets and new sales channels, practising e-commerce activities and promoting production networking systems. These will constitute the components of the strategies to strengthen the resilience building process.
We have learnt from both developed and emerging countries how to mitigate Covid-19 impacts and we do not really need to reinvent any magical formula for this. However, the most important thing is to generate enough knowledge and information about the sector, including their innate characteristics, intrinsic merits and contribution to our national economy and society. Another very pertinent issue is that the impacts of the pandemic will differ from nation to nation.
However, the pandemic will further intensify the persistent socio-economic inequality, poverty and unemployment. Businesses like SMEs, especially, in rural areas and informal sector are likely to suffer the most. The SMEs in general will be in dire straits with their limited cash- flows, constrained liquidity and fluctuating revenue earnings.
So ameliorative measures may include increased and extended lending facilities at concessional rates, disaster relief measures, easy access to various lending schemes, creation of credit guarantee funds and start-up funds, emergency budget provisions and non-financial structural adjustment measures.
Structural changes may include gradual digital transformation of the SME businesses by the entrepreneurs themselves. They can do it through switching to online channels, linking up with mobile wallets, mobile financial services and digital supply chain management.
Banks and Fintech companies can supply digital credit to SMEs and smaller clients. It will be helpful.
Available evidence and experiences suggest that a dedicated SME bank (like SIDBI in India) can handle the SME financing challenges.
In addition, setting up a separate MSME ministry in the country may really put the SME sector on a solid foundation. It will speed up the process of inclusive and sustainable development of Bangladesh.