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Institutional Support to Create Thriving SMEs in Sri Lanka

Institutional Support to Create Thriving SMEs in Sri Lanka. Dr. B.M.S. Batagoda Deputy Secretary to the Treasury Ministry of Finance and Planning. Sri Lankan Economy and Achievements since 2009.

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Institutional Support to Create Thriving SMEs in Sri Lanka

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  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 countrywith promising outlook.

  3. Sri Lankan Economy … Key Achievements

  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

  8. Macro Fiscal Targets and Socio Economic Outcomes 2013 - 2016

  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. (Contd…..) Comparative Advantage - Sri Lanka • 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 • Asia’s 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. (Contd…..) Ensuring Access to Finance • 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. (Contd…..) Ensuring Access to Finance • 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. (Conted…..) Ensuring Access to Finance • 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. (Conted…..) Ensuring Access to Finance 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,SDB,UB

  23. (Contd…..) Ensuring Access to Finance 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), People’s Bank (PB) and Regional Development Bank (RDB) – Budget 2012

  24. (Contd…..) Ensuring Access to Finance Loans granted by Sectors – 2013

  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 Lanka’s 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. 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 (Contd…..)

  29. 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 (Contd…..)

  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

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