Crunch time for SMEs
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Earlier this week a rental car driver related a tale of woe on how he had a small tourism business but had to close it and now works as a cab driver.“I was doing very well and on one occasion secured an income of Rs.100,000 for one round trip – driving tourists around the island. All that was lost due to the lopsided policies of the government as and when tourism was affected by the economic crisis,” he said, sadly. He now drives around, working for one of the two main rent-a-vehicle companies but satisfied that his daughter is a lawyer, while his son is in marketing. He owns two cars and a house, all through his work in tourism.
The economic outlook for the second half of 2022 is gloomy with small firms badly affected and vulnerable. Many have shut down or are nearing collapse. The economy is set to shrink by 8 per cent this year, the worst on record despite a forthcoming nearly US$3 billion bailout from the International Monetary Fund (IMF).
We keep returning to this topic because the situation of small firms is worsening by the day and as seen in many surveys undertaken by the government and the private sector. Another reason for discussing this issue was the conversation with Ruwanputha, the bright, young economist.
“While the IMF funds would help ease foreign exchange problems, they will not help in reviving economic growth,” he said, during a telephone call on Thursday morning.
“Why do you say that?” I asked.
“Well we are reporting three quarters of negative growth this year and the economy is expected to trend the same way in the last 2022 quarter. The IMF funds might help in some recovery only by next year with less pressure on foreign exchange needs. Furthermore, the first IMF tranche is likely only by December,” he said.
He was also of the view that political uncertainty with opposition and university groups bracing for another round of protests would mar economic progress, if any, this year. That was also the topic of conversation by the trio under the margosa tree.
“Kata katha thiyenawa vipakshaya thava virodatha ravumak salasum karanawa kiyala aanduwata viruddawa (There are rumours that another round of protests is being planned by opposition parties against the government),” said Kussi Amma Sera.
“Eka aragalayata wada naraka wewida (Will it be worse than the ‘aragalaya’),” asked Serapina.
“Mama hithanne nehe. Mokada aanduwa eva binda danna thama inne. Dan ithin pravanathvaya thiyenne virodatha-karuwanwa ath-adanguwata arang hirey dana eka-ne (I don’t think so because the government will crack down firmly. The trend now is to arrest protestors and jail them),” said Mabel Rasthiyadu.
“Mlechcha mardanayak novei kiyala mama balaporoththu wenawa (I hope it won’t be a brutal crackdown),” said a worried Serapina.
High interest rates are hurting the business sector, in particular small firms. Small businesses (SMEs) that would pay interest rates on their borrowings from banks and financial institutions at rates ranging from 14-18-20 per cent per annum earlier now have to pay rates of over 30 per cent and over. This is because deposit rates are at 20-22 per cent after the Central Bank hiked interest rates in April to help savers.
A recent Labour Department survey has revealed that business activities are slowing down and are expected to weaken further in the coming months amidst struggling private sector firms.
These firms are facing supply side uncertainties at present and most have been compelled to reduce employment by layoffs, non-renewal of employment contracts and halting of new recruitments, the survey has revealed.
While businesses are downsizing their operations amid the worst economic crisis the country has faced in recent times, the growth of textile and apparel sector companies is the only saving grace in the economy where exports have been growing.
The survey revealed that hundreds of thousands of workers have already lost their jobs in the construction sector, while “several small and medium enterprises have revealed that they cannot pay wages to thousands of workers”.
Small businesses are also facing liquidity issues due to a loss of revenue and difficulties in the importation of raw material due to the dollar crisis.
Another survey by the Ceylon Chamber of Commerce (CCC) has revealed that exporters are pessimistic over the outlook on the economy and export orders.
Its latest bi-annual Export Barometer Survey showed that exporters are increasingly concerned about the implications of the expected contraction of the Sri Lankan economy in the latter half of 2022 on export orders, with SMEs particularly vulnerable to the intensifying economic crisis.
A majority of the respondents in this survey were SME firms, with women-owned and/or -led firms accounting for 20 per cent.
Most exporters predict the economy to fall moderately to severely in the second half of 2022 and a sizable percentage anticipates a similar trend in export orders. The latter trend indicates a considerable shift in exporter sentiment since the previous survey in February/March 2022, the CCC said.
It said exporters continued to be resilient in the face of an intensifying economic crisis, particularly in the export of goods, which grew 14 per cent in the first half of 2022, compared to the same period in 2021. However, the survey highlighted that larger firms performed better in export revenue growth, capacity utilisation and sourcing of new export opportunities compared to SMEs.
It revealed that exporters across all categories of firms, including women-owned and/or -led businesses, faced challenges in meeting their existing orders due to fuel and power shortages, while increases in transport costs and policy uncertainty worsened the situation. Firms also highlighted that the current economic situation will
have a long-term negative impact on buyer confidence
in Sri Lankan exports.
Employment trends turned negative in the first half of 2022, with more firms looking at cost-cutting measures. Most firms were facing attrition led by employees migrating due to the current crisis. Nevertheless, 64 per cent of firms are not expecting a change in their workforce size in the second half of 2022, the survey noted, adding that political uncertainty was also an issue.
As I reflected on these developments and a gloomy economic outlook in the second half of 2022, Kussi Amma Sera brought my second mug of tea saying, “Thava virodatha nethi wewi kiyala mama balaporoththu wenawa (I hope there are no more protests).”
I nodded since another round of protests would in particular affect tourism which is gradually recovering.
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