A Comprehensive Analysis of Sri Lanka's MSMEs and Policy Recommendations

Introduction

The economic landscape of Sri Lanka has undergone significant challenges over the past few years, primarily driven by the Covid-19 pandemic and subsequent economic crises in 2022. The impact on micro-, small-, and medium-sized enterprises (MSMEs) has been profound, affecting their business operations, employment rates, and overall sustainability. A recent report by the International Labour Organisation (ILO) sheds light on the nature of these impacts and suggests policy interventions to revive and strengthen the MSME sector.

Impact of Crises on MSMEs

The ILO report highlights that nearly 80% of surviving MSMEs in Sri Lanka were severely impacted by the Covid-19 pandemic, and 89% faced challenges during the economic crisis of 2022. This resulted in a contraction of employment by one-fifth, leading to downsizing among small- and medium-sized enterprises. The migration of skilled and unskilled workers, coupled with the inability of many enterprises to pay competitive wages, further exacerbated the employment situation.

Vulnerabilities of MSMEs

Despite comprising 99% of all enterprises and being the primary source of employment for 75% of the country's workforce in 2013, MSMEs in Sri Lanka are inherently vulnerable to shocks. Limited financial resources and borrowing capacity make them susceptible to crises, as observed in the report. The director of the ILO Country Office for Sri Lanka and the Maldives, Simrin Singh, attributes these vulnerabilities to long-unaddressed institutional weaknesses, particularly those related to governance.

Survival Strategies and Digitalization

The study examined the response of MSMEs to the crises, categorizing their behavior into adaptive and passive strategies, dynamic capabilities, and digitalization. Surviving MSMEs demonstrated more adaptive behaviors, with proactive responses to the changing business environment. Digitalization, albeit at a basic level, played a role in their adaptive strategies, primarily through the use of social media for information searching.

Lack of Support and Governance Issues

One striking revelation from the report is that an overwhelming majority of MSMEs did not receive support from institutions dedicated to their development. The government's stimulus packages, though smaller than in neighboring countries, seemingly bypassed many MSMEs. The report suggests that political and economic factors influenced the distribution of support. Additionally, financial institutions dedicated to supporting MSMEs neglected them, despite posting substantial profits during economic contractions. The report emphasizes the need for effective reforms to address long-standing governance-related issues.

Policy Interventions for Recovery

The ILO report offers a set of policy interventions at both national and sectoral levels to revive and strengthen MSMEs. Recommendations include addressing constraints to enterprise growth, building adaptive entrepreneurship development systems, and implementing serious reforms focusing on good governance, transparency, and accountability. The urgency of eradicating corruption is stressed, alongside the promotion of a conducive business environment, skills development, and access to finance.

Conclusion

As Sri Lanka faces significant economic challenges in 2023 and beyond, the ILO report provides a roadmap for policymakers to navigate the recovery of MSMEs. Implementing these recommendations will not only revitalize the MSME sector but also contribute to overall economic stability, employment growth, and the creation of an enabling macroeconomic environment. The report underscores the importance of timely and tailored progress monitoring to ensure the effectiveness of policy interventions in this critical period of economic recovery.