July, 15, 2020
The development of SME clusters in Sri Lanka is an uphill task. Lankan SMEs face multiple challenges but immediately meeting just two of them can help them to go a long way, said the Confederation of Micro, Small and Medium Industries (COSMI) on July 9.
“SME cluster approach is not new to Sri Lanka. Sectors of tea, rubber, gems & jewelry, tourism, spices, ICT, coir and ceramics were among well-known clusters. There are many challenges for cluster development in Sri Lanka, but I will focus on the two key challenges that our SME clusters are facing. Sri Lanka SME cluster development is challenged by many aspects. However, I believe resolving two factors among them can help the SMEs greatly-they are facilitating export market access and providing financial and credit assistance” said COSMI President Nawaz Rajabdeen on July 9.
Representing Lankan SMEs at this pioneering global leadership session by India’s 4500 member-strong Confederation of Indian Micro, Small and Medium Enterprises (CIMSME) titled “Indo Sri Lanka International Trade, Investment, Technology Transfer Cooperation” and issuing a siren call to Indian SME counterparts for sustainable cross-border joint ventures in the sectors of metal, food processing, coconuts, tea, rubber and plastic, Rajabdeen was making his official COSMI statement on the theme ‘Cluster Development and its Challenges’ to the CIMSME global forum on July 9.
“Despite Sri Lanka becoming an open market economy in 1977 and becoming export driven, the export oriented multi sectoral development has been somewhat unequal across the country. As a result the population across the country is yet to reap dividends in an equal manner. Positioning for exports brings its own challenges to SME cluster development. Exports is the best that can happen to SME clusters but equally brings some key challenges. For our SME clusters the main challenge is in market access, or rather, the difficulty in gaining market access” said Rajabdeen and added: “Almost all trade experts say exports should be increased and Sri Lanka is suffering from low exports. This is the case for many other South Asian countries as well. Within this sub-region itself Sri Lanka is still struggling to expand its trade. A major barrier for local cluster development is not the products coming from African or East Asian countries but competition coming from South Asian region’s own exports. From a global market point of view, many products made in South Asian production clusters are similar to each other and as a result, these countries are compelled to compete with each other rather than collaborate and win. One reason for severe competition among the South Asian neighboring countries is the host of global tariff and non-tariff trade barriers they have to overcome. Most tariff barriers can be overcome through Free Trade Agreements."
"However, non-tariff barriers have become a serious issue for the development of clusters that are keen to get to exports. Standards and regulations such as conformity assessment procedures, inspecting, testing, and certifying for exports safeguard global consumers and their health but today, these procedures have turned to become nontariff barriers (NTBs) on Sri Lankan exporters, especially of SME levels, and the effects are stressful on our SME production clusters.Bilateral Free Trade Agreements are seen as one way to overcome NTBs between trade partners. However, that too is not always fruitful. For example the utilization of India Sri Lanka Free Trade Agreement (ISFTA). The use of ISFTA by Sri Lankan exporters is only 65%. The reason is that even trade under the free trade agreement is locked with barriers. Non-tariff barriers likely hindering the prospect of free trade agreements. Studies have identified Import policy barriers, standards, testing, packaging, and certification requirements, Anti-dumping and countervailing measures, export subsidies and domestic support and Government participation in trade as Non Tariff Barriers that block bilateral FTA trade. Even aside from FTA stipulations, administrative procedures are hindering exports. For example the Rules of Origin (ROO) -In case goods are not under ROO criteria, ISFTA requires a combination of 35% Domestic Value Addition (DVA) and Change of Tariff Heading (CTH). Value Addition in exporting country should not be less than 35% of freight on board (FOB) value of the finished product. Such requirements hamper them from the very start. For Sri Lankan SME clusters, the great opportunity of Free Trade based Exports has also become their greatest obstacle, " he said.
"Forget for a moment the international export linkage call by Sri Lankan SME clusters-unfortunately many SME clusters find it difficult to forge links with even their own country's large scale companies! For example a common and recurring complaint by small and medium scale furniture and wooden products manufacturing cluster of Sri Lanka is their lack of access to bigger furniture companies within Sri Lanka itself! Another major challenge for Sri Lankan SME clusters is the lack of finance and lack of access to credit. While this is true for SMEs in many other countries, in Sri Lanka’s case, it is acute, especially when the macro-economic credit conditions tighten. I would even say that this is not another major challenge faced by our SMEs but it is THE major challenge faced by our SMEs. According to the 2018 Ernst and Young (EY) SME Survey commissioned by the Ministry of Industry and Commerce, ‘Access to Finance’ was the foremost issue faced by Sri Lankan SMEs in doing business. 59% of the respondents in the Survey said the SMEs were hampered by finances, " he added.
"Due to insistence by banking institutions for collateral from SMEs, credit availability has become the biggest obstacle for their development. The banking system's suspicious approach towards SME enterprises is found equally in SME clusters as well. Almost all clusters across all industries in Sri Lanka voice this -with very few exceptions. A real taste of how Sri Lankan SMEs struggle in this regard was stated by the Central Bank in its own words, amply demonstrates the calamity. In page xiii and page 10 of its December 2019 Financial System Stability Review, the Bank states: “..high-risk segments of borrowers who are important stakeholders of economic growth such as small and medium enterprises, experienced greater rejection in loan applications...the private credit to GDP gap, which was positive since March 2018, narrowed by December 2018 and turned negative in April 2019, with the tight credit conditions spreading to all sectors of the economy…Small and Medium Enterprises (SMEs) were hard hit and suffered from lower access to credit…the number of rejected loan applications toward the SME and retail sectors also increased notably during the third quarter. Non-performing Loans increased notably in the SME and retail categories..”
"Sri Lanka’s Confederation of Micro, Small and Medium Industries (COSMI) of which I am the President, was formed in 2019. We aim to revive and foster the MSME and industry sectors of Sri Lanka. I believe we can create fresh solutions for issues faced by SMEs and can even experiment various solutions. Just before COVID19 pandemic began, we started to create a comprehensive database of all MSMEs in Sri Lanka and now in the process of registering them. At present we as SMEs are closely watching how fast the promised credit reliefs extended by the government to our SMEs due to COVID19 will arrive. I wish to praise our President HE Goabaya Rajapakse and Prime Minister Mahinda Rajapakse for speedy relief given to our SMEs. We at COSMI are exploring closer links with international SME federations to strengthen the capacity of our SMEs, and in turn facilitate them to access our SME outputs," he further stated.
Sri Lankan exports to India have increased substantially in the past 18 years since 2000 –the year Indo-Sri Lanka FTA came into force. Exports from India to Sri Lanka surged from US $600 million in 2001 to $4495 million in 2018. Last year, overall trade (both exports and imports) between India and Sri Lanka totaled to US $ 4.59 billion. India is Sri Lanka’s fourth largest export destination.
The Confederation of Micro, Small and Medium Industries (COSMI) was formed in 2019, and aims to revive and foster the MSME and industry sectors of Sri Lanka.
PHOTO - Nawaz Rajabdeen (President, COSMI) addresses the online Forum “Indo Sri Lanka International Trade, Investment, Technology Transfer Cooperation by India’s CIMSMI on July 9 joined (at bottom right) by Ajith D Perera (Secretary General /CEO of Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL), Ayanthi Gurusinghe (Chairperson, GCPIT, Sri Lanka), Ashwani Kumar (Chairman (Northern Region) Federation of Indian Export Organisations (FlEO) India, and President’s Counsel and lawyer Thisath Wijayagunawardane.
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