- Says empowering SMEs a major theme of budget 2018
- With such support SMEs will become driver of export growth in the future
- Fails to provide any specifics in what form such support will be extended
- Research study suggests tax incentives to SMEs unwarranted and irrelevant
The 2018 budget will feature significant support for small and medium enterprises (SMEs) to compete in global markets, according to Finance and Mass Media Minister Mangala Samaraweera, whose ministry in an earlier occasion said Samaraweera would present a “designer budget” this November.
“For too long Sri Lanka’s exports have been dominated by corporate giants and we now are in the process of empowering the SME sector. In fact, it will be one of my major themes of the budget to be presented next week,” he said yesterday.
Samaraweera, who was speaking at the ‘Tech4Trade’ seminar organised by the Australian Department of Foreign Affairs and Trade and Ceylon Chamber of Commerce, said he hopes with this support, SMEs will become the driver of export growth in the future, in line with the government’s ‘Vision 2025’ plan.
However, Samaraweera did not specify in what form—by way of tax incentives or financing—these SME empowerment proposals will be incorporated into the upcoming budget. Former Central Bank Deputy Governor W.A. Wijewardena, who reviewed the ‘Tax Policy in Sri Lanka: Economic Perspectives’ publication of the Institute of Policy Studies (IPS), launched earlier this month, said that based on a research paper in the publication authored by Anushka Wijesinha and Raveen Ekanayake, 93 percent of the country’s SMEs do not pay tax.
“There is a belief that SMEs need tax incentives and Anushka and Raveen have disputed that. According to their survey results, 93 percent of SMEs don’t pay income tax. Therefore, even in the next budget, if Minister Mangala Samaraweera offers tax incentives to SMEs, it’s totally unwarranted and irrelevant,” Wijewardena said.
Both the 2016 and 2017 budgets had proposed tax incentives for SMEs, in addition to financing options for SMEs. However, these financing initiatives had run into major delays.
The World Bank had noted that low access to finance has created a ‘U’ shaped curve in the population of the country’s businesses, with a large number of small businesses and large corporates but very little medium-sized businesses.
Further, small enterprises tend to refrain from scaling up, according to Fraser Institute Michael Walker Chair of Economic Freedom Research Fred McMahon, who was recently in the country, as costs relating to tighter regulations kick in once they become medium-sized, which encourages small businesses to remain small.
He had also noted that SMEs are suffering in the current environment, since they do not know the top bureaucrats in regulatory agencies to smooth over obstacles or whom to bribe in government agencies or which regulations to manipulate, all of which benefit powerful firms.
According to another IPS publication, the SME sector comprises of approximately half of the country’s gross domestic product and total employment while making up over 75 percent of the total number of firms. However, it contributes less than 5 percent to the country’s exports.
Meanwhile, World Bank Senior Trade Facilitation Consultant Luciano Pugliatti, speaking at the Tech4Trade event, said that implementing the proposed National Single Window for Trade would in particular help SMEs to export, since they currently are facing difficulty in getting information related to trade and navigating government regulatory processes.
World Bank Country Director for Sri Lanka and the Maldives Idah Pswarayi-Riddihough noted there are too many regulators involved in trade.
“Reduce the number of institutions interfacing with traders. A recent assessment by our team found at least 22 agencies involved in issuing regulations and approvals related to trade. Another study by the Department of Commerce found 34 agencies involved in publishing regulations that affect trade,” she said.
Samaraweera said that the National Single Window for Trade, coming under his ministry, is in the process of being implemented.
Blockchain for trade facilitation
Implementation of technology for exports, particularly the blockchain technology, could help Sri Lanka’s trade facilitation, policymakers and experts advocated. “Financial transaction risk is a major barrier for SME access to markets. Blockchain technology can go a long way towards improving SME export protection,” Samaraweera said.
Blockchain, used famously by the crypto currency bitcoin, connects blocks of data or transactions, which are verified by each computer connected in a peer-to-peer network, according to Australia’s Commonwealth Scientific and Industrial Research Organisation Principal Research Scientist Dr. Ingo Weber.
He noted that while this makes confidentiality of data poor when using blockchain as a standalone system, the system is robust in terms of integrity and availability.
Such blockchain technology in the financial markets are currently not wholeheartedly accepted by Sri Lanka’s Central Bank and Central Bank Governor Dr. Indrajit Coomaraswamy has advocated a more measured approach to financial technology.
However, Dr. Weber said that unlike in financial technology where blockchains circumvent and replace a single source of trust such as the Central Bank, blockchain’s role in international trade is different.
“In international trade it’s not about replacing a single source of trust but integrating different sources of trust. I heard earlier that there are 35 agencies (regulating trade),” he said.
He noted that if blockchain technology is adopted, parties along the supply chain process have access to all the data, which allows better decisions to be taken.
Samaraweera highlighted further benefit of blockchains.
“This technology has the potential to revolutionize trade finance by drastically cutting down the time taken for transactions, reduce the costs of intermediation, whilst ensuring security and process integrity,” he said.
He added that regulators too could monitor supply chains in real time, trace suspicious transactions and identify problematic cargo in advance.