Challenges facing SMEs during pandemic

In Bangladesh, small and medium enterprises (SMEs) have heterogeneous characteristics, which are evident from their diverse business activities. However, the discussion on SMEs has a fundamental problem related to the definition and scope.

As the term SMEs is more popular, often MSMEs are also referred to include micro-enterprises. There are also references to CSMEs to include cottage industries. These definitional anomalies create problems in undertaking the right policies and programmes for the betterment of these sectors.

Furthermore, the nature and depth of challenges faced by the cottage, micro and small enterprises are more acute than those of medium enterprises. Therefore, there is a valid argument of separating medium industries to have a focused discussion on the problems and needs of the micro, cottage, and small enterprises.

Keeping in mind the definitional debates, in the article, we will continue to use the term SMEs where small will mean micro, cottage and small enterprises.

SMEs play a critical role in the economic development of a country. Their functions concerning production, employment generation, contribution to exports and facilitating equitable income distribution are vital.

Experiences from East and Southeast Asia suggest that SMEs can significantly contribute to economic growth by stimulating competition, innovation, entrepreneurship, and skill dissemination. However, in Bangladesh, we haven't yet been able to acquire the full potential of SMEs.

There is an absence of any consistent data on the contribution of SMEs to the national economy in Bangladesh. However, according to some reasonable estimates, SMEs contribute around 25 per cent to GDP and 35-40 per cent to employment.

A prime aspect of the contribution of SMEs in the economy is their role in the different segments of the value chains of goods and services. And a large part of the activities of SMEs is informal.

Micro and small enterprises, among the SMEs, enjoy low entry barriers due to their informality and small size. However, the low entry barrier does not necessarily mean low entry and exit costs for these enterprises in proportion to their business sizes. Therefore, a pandemic like Covid-19 can permanently force many micro and small enterprises out of the business operation.

There are three areas of challenges for SMEs in Bangladesh: financing, infrastructure and skill. These problems are common to many businesses. However, these problems become more acute for SMEs, especially micro and small enterprises.

The financing challenges for SMEs are enormous. SMEs have limited access to institutional finance due to scale obstacles and market failures stemming from policy deficiencies and institutional rigidities. Therefore, formal financing processes, through the banking channels, are not readily available for them. Banks consider financing SMEs costly and risky.

The high entry barriers into the formal financing processes at affordable costs function as significant impediments to SME growth and expansion. Though, as per the instructions of the central bank, 20 per cent of all bank loans must go to SMEs, in reality, SME entrepreneurs are not getting that amount of loans.

This compels SMEs to take loans through informal channels at higher interest rates.

SMEs face several supply-side constraints related to insufficient infrastructural facilities and difficulties in accessing appropriate technologies and information. Due to their small scale, it is costly and challenging to solve the infrastructural-related supply-side problems if SMEs work in isolation. A cluster-based approach is, therefore, needed to solve the infrastructural deficiencies of SMEs.

The clustering of SMEs can generate external economies of scale. The whole idea of having an industrial park for SMEs, like the BSCIC industrial park, is very consistent with promoting external economies of scale.

However, the BSCIC industrial park initiative remained unsuccessful due to various reasons. The prime reason is the failure to integrate SME development policy in the broad industrial policy and generate necessary policy and programmatic supports to make the estate successful. 

SMEs also have challenges related to inexperience in business, lack of technical knowledge, poor managerial skills, lack of planning skills, and market research skills.

The ongoing pandemic has had some intense impacts on the SME sector.

According to the quarterly firm-level surveys conducted by the South Asian Network on Economic Modeling (SANEM) since June 2020, SMEs in Bangladesh have been more affected than large enterprises. In particular, the impacts are devastating for micro and small enterprises.

Also, the business environment has been turning out to be more unfavourable for SMEs during the pandemic.

The survey in April 2021 also found that the SMEs were seriously lagging larger enterprises in terms of economic recovery. While, on average, by April 2021, large firms made a recovery of 77.3 per cent of their businesses to their pre-pandemic states, medium firms managed to record a 63.6 per cent recovery, and micro and small firms registered a 46.9 per cent recovery.

Large firms also received more stimulus packages than micro, small and medium firms. While 46 per cent of the surveyed large firms received stimulus packages, this rate was 30 per cent for medium firms and only 9 per cent for micro and small firms.

The adjustment costs induced by the lockdown and "strict" restrictions are very high for SMEs. Many SMEs have lost their businesses during the crisis.

Given the difficulty of obtaining loans and other forms of assistance through established means, the recovery path for many SMEs is likely to be uncertain. However, the resonant performance of SMEs is critical for the recovery of the overall economy.

While lockdown and "strict" restrictions contain the spread of the virus, they hamper the livelihood of poor people and small businesses. The economy is unable to afford the long-term suspension of economic activities. Though more than a year has passed since the start of the pandemic, there have not been any health-related area and sector-specific effective protocols, which can substitute lockdown and "strict" restrictions, to maintain economic activities.

The governments should undertake several policies and support measures to help the SME sector come out of the crisis.

Examples of these support measures include deferring income and profit tax payments, providing tax reliefs, easing debt repayment schedules and rent and utility charge payments, providing soft loans (working capital) at low-interest rates, ensuring salary subsidies for job protection, introducing temporary regulations to prevent large-scale lay-off, and allowing alternative work arrangements.

As is observed in the SANEM's survey, SMEs are least successful in availing stimulus packages compared to larger counterparts. Therefore, the barriers to access to stimulus packages by the small and medium firms need to be identified and solved.

The author is executive director of the South Asian Network on Economic Modeling.