Empowering Sri Lanka’s economic future: Imperative of strengthening SMEs and entrepreneurship

Introduction

The recent electoral victory of the National People’s Power (NPP) party, with a two-thirds Parliamentary majority, marks a defining moment for Sri Lanka’s political and economic future. This significant mandate presents an unparalleled opportunity to introduce comprehensive policy reforms. Central to these reforms is the revitalisation of Small and Medium Enterprises (SMEs) and the promotion of entrepreneurship—key drivers for achieving sustainable economic growth and resilience.

Building on previous insights: A holistic perspective on SME development

The importance of fostering SMEs and entrepreneurship is not new to Sri Lanka. These topics have been at the forefront of discussions for years, as reflected in two of my previous articles:

1. “Enabling SME Ecosystem – Part 1: The Need for a Holistic Approach to Develop SMEs”

This article highlights the importance of integrated strategies addressing financial access, capacity building, regulatory reform, and market linkages, supported by collaboration between government, private sector, and international stakeholders.

2. “Enabling SME Ecosystem – Part 2: The Role of the Government Beyond Budgetary Reliefs”

This piece calls for long-term policy interventions, institutional support, and platforms that foster innovation and collaboration, urging governments to move beyond temporary financial relief measures.

This article builds upon these insights, urging the NPP Government to translate policy proposals into tangible actions that foster a thriving SME ecosystem.

The backbone of the economy: SMEs in Sri Lanka

SMEs are the cornerstone of Sri Lanka’s economy, accounting for over 75% of enterprises, providing 45% of employment, and contributing 52% of GDP. These businesses are essential for rural economies, reducing urban-rural economic disparities by offering local employment and fostering entrepreneurship.

Entrepreneurship and export revenue: Pathways to economic sustainability

Amid economic challenges, entrepreneurship and increased export revenue are vital strategies for rebuilding Sri Lanka’s sustainability. The NPP manifesto emphasises policies that promote innovation, improve financial access, and facilitate SME participation in global markets. Empowering entrepreneurs and enabling SMEs to scale operations can diversify exports, enhance foreign exchange earnings, and reduce economic vulnerabilities.

Current challenges and priorities for SMEs

Despite their significant contributions, Sri Lankan SMEs face numerous challenges that impede their growth and sustainability. These include:

1.Access to finance: Many SMEs struggle to secure adequate financing due to stringent collateral requirements, high-interest rates, and limited access to formal financial institutions. This financial constraint limits their ability to invest in technology, expand operations, or pursue innovation.

2. Regulatory hurdles: Complex and often overlapping regulatory frameworks create significant administrative burdens for SMEs. Navigating bureaucratic red tape is time-consuming and costly, diverting resources away from core business activities.

3. Market access: SMEs often face challenges in accessing both domestic and international markets due to inadequate branding, lack of market information, and inability to meet stringent quality standards. Limited marketing capabilities further restrict their potential.

4. Technological adoption: A significant portion of SMEs lags in adopting modern technologies due to high costs, lack of awareness, and insufficient digital literacy. This technological gap reduces productivity and competitiveness in an increasingly digital economy.

5. Human resource constraints: Many SMEs struggle with a shortage of skilled labour. Limited access to training programs and career development opportunities further impedes the operational efficiency and innovative capacity of these enterprises.

6. Infrastructure deficiencies: Rural SMEs, in particular, suffer from inadequate infrastructure, including unreliable electricity, poor transportation networks, and limited access to digital communication technologies. These deficiencies hinder their ability to scale operations and reach broader markets.

7. Impact of economic crises: The combined effects of the COVID-19 pandemic and Sri Lanka’s recent economic crises have severely affected SMEs. Reduced demand, disrupted supply chains, and rising operational costs have forced many businesses to downsize or close altogether.

8. Lack of policy support: SMEs often find themselves underserved by national economic policies. A lack of dedicated frameworks for SME support, coupled with inconsistent implementation of existing policies, hampers their growth and resilience.

9. Limited access to international collaborations: SMEs in Sri Lanka get limited exposure to international partnerships and collaborations that could provide opportunities for technology transfer, knowledge sharing, and market access.

10. Environmental and sustainability challenges: With increasing global emphasis on sustainable practices, SMEs face difficulties in transitioning to eco-friendly operations due to limited awareness, lack of funding for green initiatives, and insufficient support from governmental and non-governmental organisations.

Addressing these challenges requires coordinated policy reforms, capacity-building initiatives, and stakeholder engagement.

The need for immediate action: Turning words into results

Over the years, the importance of SMEs and entrepreneurship has been a recurring theme in the manifestos of successive governments in Sri Lanka. Yet, despite the extensive discussions, policy proposals, and political commitments, meaningful implementation has often fallen short. While the challenges facing SMEs are well-documented, progress has been hindered by fragmented efforts, inconsistent follow-through, and a lack of cohesive strategy. This status quo can no longer persist if Sri Lanka is to achieve economic sustainability and resilience.

The time for action is now, and the new NPP Government, with its strong mandate, has a unique opportunity to break away from the cycle of unfulfilled promises. To ensure tangible outcomes, I suggest the following key actions:

1. Appointing a Presidential Taskforce on SME and entrepreneurship development

A high-level Presidential Taskforce dedicated to SMEs and entrepreneurship could act as a central body to oversee and guide policy implementation. This taskforce should adopt a holistic view of the challenges and opportunities within the SME sector and present a prioritised action plan to the Government. 

It would serve as a think tank to identify gaps, streamline processes, and ensure alignment across all stakeholders, setting a strong foundation for sustainable growth. Additionally, it should monitor progress, encourage innovation, and foster public-private partnerships, ensuring dynamic responses to emerging trends and promoting resilience within the entrepreneurial ecosystem.

2. Introducing a dedicated ministry or an authority for SMEs and entrepreneurship development

The establishment of a dedicated ministry or an authority is vital to address the unique needs of SMEs and entrepreneurs. This ministry or authority should have a focused mandate to craft and implement policies that promote innovation, enhance market access, and provide targeted financial support. 

By consolidating responsibilities under a single umbrella, the Government can ensure that SMEs receive the attention and resources they deserve. The Government may review the mandates of existing institutions and restructure one of them with a broader scope to cover this area.

3. Reviewing and rationalising institutional structures

At present, multiple departments and governmental institutions are engaged in activities related to SMEs and entrepreneurship, operating under various ministries. This often results in overlapping responsibilities, duplication of efforts, and inefficiencies. A comprehensive review of these institutions is imperative to streamline their functions, eliminate redundancies, and establish a more cohesive and efficient operational framework. 

Each institution must be assigned a well-defined scope of responsibilities to ensure that all critical aspects of the entrepreneurial ecosystem are effectively addressed. This approach should consider the entire entrepreneur lifecycle, from idea generation to international expansion, providing seamless support at every stage. By fostering clarity in roles and responsibilities, institutions can work collaboratively to eliminate bottlenecks and facilitate a smooth journey for entrepreneurs, empowering them to focus on innovation and growth. This structured framework will create an environment where entrepreneurs can thrive, contributing to a robust and dynamic economy.

4. Creating a centralised “one-stop-shop” for SME and entrepreneurship services

Establishing a centralised hub for SMEs and entrepreneurship can simplify access to resources, streamline processes, and enhance support. Drawing from global models like Singapore’s Enterprise Singapore and South Korea’s SME Ministry, this platform can integrate services such as business registration, financing, and advisory into one cohesive system. Strategies include conducting a needs assessment, integrating services, and fostering stakeholder collaboration. Technological solutions like digital portals, mobile apps, and AI-driven tools ensure accessibility, while data analytics and user feedback enable continuous improvement. A secure, user-friendly hub can drive innovation, reduce inefficiencies, and strengthen the SME ecosystem.

5. Strengthening regional entrepreneurial ecosystems

A robust SME sector relies on thriving regional entrepreneurial ecosystems that address local needs while contributing to national economic growth. Successful models from countries like Germany’s Mittelstand and India’s Startup Districts highlight the importance of decentralisation. The Government should prioritise developing infrastructure, fostering innovation hubs, and establishing regional financial mechanisms tailored to support local entrepreneurs. 

Creating networks among universities, businesses, industry chambers and local governments can enhance knowledge-sharing and innovation. Targeted capacity-building programs and mentorship networks can address region-specific challenges while empowering entrepreneurs. By fostering collaboration among stakeholders, these ecosystems can become engines of sustainable growth, innovation, and economic resilience.

6. Enhancing R&D and quality testing facilities for SMEs

SMEs often lack the financial resources to invest in advanced research and development (R&D) or access quality testing facilities, which limits their ability to innovate and meet market standards. Governments can address this by establishing regional R&D centres and quality testing facilities. These centres, modelled on successful initiatives like Germany’s Fraunhofer Institutes, can provide affordable access to cutting-edge technologies, testing services, and technical expertise. 

Public-private partnerships can further enhance these facilities by leveraging industry expertise. Such initiatives empower SMEs to improve product quality, meet global standards, and drive innovation, fostering competitiveness and sustainable growth across regions.

7. Sustainable capital raising and lending schemes for SMEs

Governments must implement long-term capital-raising plans and lending schemes tailored to SMEs’ needs across their life cycle, supported by the National Credit Guarantee Institution (NCGI). This ensures consistent access to funding, unlike politically motivated, short-term campaigns that fade with regime changes. Best practices include Japan’s Credit Guarantee Corporation, which offers comprehensive, lifecycle-focused support, and Germany’s KfW Bank, providing SMEs with subsidised loans and guarantees. This may also require revisiting existing banking regulations, including the Parate Execution Law, to ensure the provision of hassle-free and supportive services for SMEs.

Although this list could be extended further, I will conclude here to leave room for additional contributions from stakeholders and the proposed Presidential Taskforce. Partnerships with the private sector and international agencies are vital to SME development. By leveraging private-sector innovation and resources, along with international expertise and funding, the government can drive growth. Models like Singapore’s trade collaborations and India’s skill-development initiatives demonstrate the potential of such alliances. Public-private partnerships (PPPs) and global agency support, like that of the World Bank, can enhance technology adoption, market access, and infrastructure.

With its strong mandate, the NPP Government must act decisively to translate plans into measurable outcomes, empowering SMEs and strengthening Sri Lanka’s economy. The nation cannot afford to delay any longer—the time to act is now! 

(The writer, a Senior Chartered Accountant, Management Consultant, and Business Advisor, is a passionate advocate for SME and entrepreneurship development. He is also the founder and president of Asia Pacific Institute of Money and Entrepreneurship Development (IMED). He can be reached at [email protected] or [email protected].)