Dr. B.M.S. Batagoda

1
Institutional Support to Create Thriving SMEs in
Sri Lanka

• Dr. B.M.S. Batagoda
• Deputy Secretary to the Treasury
• Ministry of Finance and Planning

2
Sri Lankan Economy and Achievements since 2009

• After the end of 30 years long conflict situation
  prevailed in the country the conflict country
  has now become a country with emerging economy
• The 2005 - 2010 period witnessed the ending of a
  26 year long terrorist insurgency placing the
  country on a path of peace, reconciliation and
  rapid development.
• Sri Lanka has emerged strongly as a middle
  income country with promising outlook.

3
Sri Lankan Economy
Key Achievements
Item Unit 2005 2010 2013
GDP USD bn 24.4 49.6 67.2
Per capita Income US 1,241 2,400 3,280
Inflation- GDP deflator 5.7 7.3 6.7
Exports US bn 6.3 8.3 10.4
Unemployment 7.2 4.9 4.4
Poverty 15.2 7.6 6.4
Literacy Rate 92.0 92.5 95.6
Literacy Rate- Computer 9.7 20.3 40
4
Sri Lankan Economy

• Impressive growth rate of 7.3 percent in 2013
  recovering robustly from the lower growth rate of
  3.5 percent recorded in 2009
• Per capita income increased to US 3,280 in 2013
  from US 2,057 in 2009

5
Sri Lankan Economy

• Strong performance in all three sectors of
  agriculture, manufacturing and services

6
Sri Lankan Economy

• Low Inflation at 6.7 percent in 2013
• Overall budget deficit was reduced to 5.9
• percent of GDP compared to the target the
  high
• deficit of 9.9 percent in 2009
• Unemployment rate declined to 4.4 percent
• in 2013 from 5.8 percent in 2009

7
Foreign Direct Investment -FDI
Year FDI Inflow (US Mn) FDI (as a of GDP)
1990 42 0.52
1995 16 0.12
2000 173 1.04
2005 287 1.18
2010 516 1.04
2015 2500 2.5
2020 7500 4.0
8
Macro Fiscal Targets and Socio Economic Outcomes
2013 - 2016
Indicator 2013 2014 2016
GDP (Rs. Bn) 8,513 9,790 12,799
Economic Growth 8 9 9
Per Capita Income (US ) 3,638 4,171 5,394
Inflation GDP Deflator 5 5 5
Budget Deficit as a of GDP 6 5 4
Total Government Debt as of GDP 78 76 75
Total Investment as a of GDP 30 31 33
Public Investment as a of GDP 7 7 7
Exports (US Bn) 12 14 15
International Trade Turnover (US Bn) 32 36 44
International Services Income (Net) (US Bn) 2 2 3
Earnings from Tourism (US Bn) 1 2 3
Remittances (US Bn) 6 6 7
Access to Electricity 100 100 100
Access to Telecommunication 93 95 100
Women in Labor Force 36 37 40
Unemployment Rate 4 3.7 3
9
Industry Related Key Targets by 2016
10
Key Development Strategies

• Create more conducive environment for investment
• Integrate into the Global economy through five
  hubs
• Empower the rural economy
• Diversification and growth of regional economies
• Urban -rural connectivity
• Revitalize the Agriculture sector
• Expand production, efficiency and quality of
  domestic industries
• Globally competitive industrial sector
• Meeting energy needs of the country
• Knowledge-based economy
• Strategic reorientation of state owned
  enterprises (SOEs)
• Environmentally friendly urban development
• Sports Economy

11
Comparative Advantage - Sri Lanka

• A functioning democracy
• Environmental superiority
• Locational advantage (Hub-status)
• Promising Human resources / skilled labor
• Capacity to feed the rest of the world
• AAA Economy (Agriculture, Aquaculture,
  Animal-husbandry)
• Capacity to brand Sri Lanka - tea, natural
  rubber, spices, gem and jewelry,IT, bio-diversity
  and tourism, apparel

12
Comparative Advantage - Sri Lanka
(Contd..)

• Potential heavy industries
• cement, steel, textile, sanitary-ware ceramics
• Prospects in food industries
• sugar, dairy, agri- processing, value chain
  activities, food and beverages
• Health Economy- best regional Medicare
• clinical trials/ research/ pharmaceuticals
• Emerging knowledge-hub
• medical, legal, accountancy and finance
  expertise
• Asias best tourist destination
• eco- friendly, bio diversity, best beaches

13
Significance of SMEs in Sri Lanka
The Small and Medium Enterprises are the backbone
and the engine of the growth. Some robust
statistics indicating the significance of the SME
sector

• EMPLOYMENT 32 by SMIs
• VALUE ADDED - 27 by SMIs
• GDP Contribution - 52 by SMEs
• Establishments - 80 by SMEs

14
Significance of SMEs in Sri Lanka

• The small-holders in the plantation industry
  account for 70 percent of
• total tea production of the country.
• Similarly , 50 percent of the apparel and
  garment manufacturing is
• handled by individual entrepreneurs.
• Over 70 percent of the public transportation
  sector is being dominated by
• individually owned bus and lorry operators.
• About 80percent of domestic trade activities
  is done by sole
• proprietorships and partnerships.
• Around 45 percent of tourism and recreation
  services are handled by
• family entrepreneurs.
• At least 50 percent of the local construction
  industry is supported by small
• and medium enterprises.

15
Export Performance of SMEs
16
Key Elements for SME Development

• Ensuring proper access to finance
• Improving access to technology
• Improving access to market
• Facilitating backward forward linkages
• Maximum value addition and quality improvement
• Creating a skill labor force
• Simplified labor legislations and tax system

17
Existing Institutional Support System for SMEs
18
Ensuring Access to Finance

• Government implemented, is implementing several
  credit line projects to enhance the availability
  of the credit through existing banking network.
• 1. Donor Funded Projects
• Small and Medium Industry I IV project (SMI
  I-IV)
• - Status - Completed
• - Project Duration - 1979-1998
• - Funding - WB - 110 mn and ADB 45
  mn
• - Total Loan Granted - Rs. 7462.2 mn
  (15551 No of Loans)
• - Eligible Sectors - 20 Sectors
• - Project Area - Island wide
• - PFIs - BOC,PB,HNB,DFCC, CB, NDB,
  SB,Seylan,RRDBs

19
Ensuring Access to Finance
(Contd..)

• Small and Medium Sector Development Project
  (SMESDP)
• - Status - Completed
• - Project Duration - 2002 2007
• - Total Loan Granted - Rs. 5947.9mn
  (2020 No of Loans)
• - Eligible Sectors - 20 Sectors
• - Project Area - Island wide
• - PFIs - DFCC, CB, NDB, SB
• Small and Medium Enterprise Regional Development
  Project (SMERDP)
• - Status - Completed
• - Project Duration - 2008 2011
• - Total Loan Granted - Rs. 4261.8 mn
  (966 No of Loans)
• - Interest rate - Monthly AWDR
  Operational cost Margin
• - Eligible Sectors - 21 Sectors
• - Project Area - Out of Western Province
• - PFIs - DFCC, CB, NDB, SB

20
Ensuring Access to Finance
(Contd..)

• Small and Medium Enterprise Development Facility
  Project
• (SMEDeF) WB funded
• Status - On going
• Project Duration - 2010 2015
• Interest rate - Average Monthly AWDR
  2
• Eligible Sectors - 23 Sectors
• Project Area - Island wide
• PFIs - BOC,PB,NHB,CB,NDB,SB,RDB,DFCC
• EIB Loan Scheme European Investment Bank
• Status On going
• Project Area - Island wide
• Project Duration 2014-2015
• Project Cost Euro 90 mn
• PFIs DFCC,CB,RDB

21
Ensuring Access to Finance
(Conted..)

• New Comprehensive Rural Credit Scheme
• - Status - On going
• - Project Duration - 1994 up to date
• - Interest rate - Farmer 8 (6
  interest subsidy)
• - Eligible Sectors - 32 crops
• - Project Area - Island wide
• - PFIs - BOC,PB,NHB,CB,Seylan
  Bank,SB,RDB,

22
Ensuring Access to Finance
(Conted..)

• 2. Local Funded Projects
• Krushinavodaya
• Status - Completed
• Project Duration - 2007 2010
• Interest rate - 8 percent for borrower
  and 9 percent interest subsidy per annum
• Eligible Sectors - Cultivation loans for Small
  farmers
• Project Area - Island wide
• PFIs - BOC,PB,NHB,CB,SDB,SB,RDB,LDB
• Agro Livestock Development Loan Scheme (ALDL)
• Status - Completed
• Project Duration - 2008 2012
• Interest rate - Small dairy farmers 8
  (6 interest subsidy)
• Investors 12
  (2 interest subsidy)
• Eligible Sectors - Agriculture and
  Dairy farming, Livestock, milk processing
• Project Area - Island wide
• PFIs - BOC,PB,NHB,CB,NDB,SB,RDB,DFCC,SD
  B,UB

23
Ensuring Access to Finance
(Contd..)

• Investment Fund Account (IFA) SME Bank Branches
  
• The steps were taken to establish an IFA by
  reducing tax on profit from 37 to 28 percent in
  each bank.
• 10 percent out of IFA to be lent to each
  agriculture and SME sectors Budget 2012
• setup a special SME bank branch by district under
  the Bank of Ceylon (BOC), Peoples Bank (PB) and
  Regional Development Bank (RDB) Budget 2012
•  

Bank SME Branches IFA Balance
Bank of Ceylon 12 6.9 billion
Peoples Bank 15 6.1 billion
RDB SME unites were established in each regional office 633 million
24
Ensuring Access to Finance
(Contd..)
Loans granted by Sectors 2013
Sector Total (Rs. mn) Total (Rs. mn)
Sector Amount
Agriculture 663.3 3.1
SME 3,472.1 16.6
Infrastructure 13,045.1 61.9
Hotels 2,470.0 11.7
Other 1,420.8 6.7
Total 21,071.3 100.0
25
Improving Access to Technology
National Enterprise Development Authority (NEDA)
was established

• Prime Objectives
• Providing policy and institutional support to
  encourage promote and facilitate enterprise
  development within Sri Lanka (With special
  emphasis on the Small and Medium Enterprise
  Sector of the country).
• Stimulating the growth, expansion and development
  of Sri Lankas economy by encouraging, promoting
  and facilitating small and medium enterprise
  development within Sri Lanka.
• Formulate policies, plans, promotional incentives
  appropriately designed and effectively support
  and promote trade and development in industry,
  agriculture services.
• Empowerment of people of human capital
  development with technical skills as an integral
  component of enterprise development.
• Development infrastructure facilities required to
  make the development needs.

26
(Contd..)

• Facilitate the access to finances to
  entrepreneurs for enterprise development and
  operations.
• Establish a technology development fund to
  promote research and development, product
  development, technological enhancement and
  commercialization of patents.
• Facilitate regional economic development.

27
Tax and related concessions

• Income tax was reduced to 10
• Steps were taken to shield the sector from unfair
  import competition
• Steps were also taken to increase bank loans and
  reduce interest rates
• Propose to amend tax laws to permit SMEs, whose
  turnover does not exceed Rs. 500 million, to
  deduct expenditure of the year prior to the
  commencement of the enterprise, from the income
  of the first year in which tax become payable
• Small enterprise engaged in the collection of
  fresh milk, green tea leaves, cinnamon, latex
  will be exempted from Nation Building Tax

28
(Contd..)

• SMEs with a quarterly turnover of less than Rs.
  500 million to be exempted from having to pay
  Economic Service Charge, up to Rs. 100 million
• Reduce taxes on the importation of machinery and
  equipment, where such items are not manufactured
  in Sri Lanka to promote the modernization of such
  factories
• Bank of Ceylon, Peoples Bank and Regional
  Development Bank will each set up a special SME
  bank branch in all districts
• Reduce prevailing income tax from 28 to 24 for
  the interest income from such banking and other
  fee levying activities

29
(Contd..)

• A 50 Government guarantee will be given for
  those banks providing loans to restructure SMEs
  to restructure their performance
• Increase the threshold income of the Economic
  Service Change for rs.25 million to Rs.50
  million and thereby simplify the application of
  such tax.
• Ministry of Technology and Research provides
  their service to their service to the SME sector
  at a rate of 40.
• The Ministry bares 60 of the cost of service
  regarding Research and development

30
(Contd..)
Threshold for the registration for VAT Threshold
of registration for VAT was increased by the VAT
(Amendment) Act No.17 of 2013 with effective from
01.01.2013 from Rs.650,000/- per quarter or 2.5
million per 12 months to Rs.3 million per
quarter or Rs. 12 million per 12
months. Accordingly SMEs with less than above
threshold are not required register for
VAT Similar amendment was introduced to NBT also
31
Thank You