A perfect storm for SMEs
FROM PAGE B1
four-member family. But he always thought of returning to his factory.
The time did come in the middle of 2022 when he saw that Covid-19 caseloads receded drastically. The 42-year-old restarted his factory on a limited scale and started to receive work orders again.
But the economic slowdown caused by the Russia-Ukraine war and unprecedented inflationary pains compelled people to tighten their belts. This has hit the sales of small entrepreneurs like Ahmed.
He is not alone. There are millions of micro, small, and medium enterprises in Bangladesh that have been going through a tough period due to the twin shocks within a span of three years.
According to the United Nations Industrial Development Organisation, SMEs were impacted more than large, medium, and high-tech firms. In terms of employment, layoffs had been the highest at micro firms and SMEs.
M Abu Eusuf, a professor at the development studies department at the University of Dhaka, says since micro, cottage, and small industries have lower capacity to cope, they are more vulnerable to any shock.
“They were the main victim of the twin shocks.”
In a survey, the economist found that many companies laid off workers and some even shut down during the pandemic. This was mainly seen among women-headed entities.
The central bank introduced stimulus packages involving Tk 40,000 crore for the CMSME sector to help them ride out the unprecedented crisis. But it was the medium enterprises that benefitted from the assistance. This is mainly because banks prefer medium enterprises to lend.
The SME Foundation and the Palli Karma-Sahayak Foundation disbursed more than Tk 3,000 crore among SMEs, but the fund was found to be inadequate to support their recovery.
“So, the government should focus on differentiating micro, cottage and small from medium enterprises to incentivise small industries properly,” Prof Eusuf said.
Under the stimulus packages, the interest rate of the loan, which was given in the form of working capital that carries a repayment period of one year, was 4 per cent. Since the business of the borrowers did not fare well, they could not generate enough profits to pay back the loans.
But when the tenure went past a year, it became a term loan. As a result, the interest rate rose to 9 per cent, Prof Eusuf clarified.
“So, if the target is to incentivise small industries, a different policy is necessary for micro, cottage, and small entrepreneurs.”
How SMEs fared in recent years could not be known as only 12 companies are listed on the SME board of the Dhaka Stock Exchange.
DSE data showed 11 posted lower profits in 2019-20, while six companies logged lower profits in 2020-21 and five in 2021-22. The companies are yet to publish their financial data for the first half of 2022-23.
According to the last Economic Census 2013, the total number of establishments in the industrial sector was 78.18 lakh, of which 78.13 lakh, or 99.9 per cent, were CMSMEs. Of them, 87.5 per cent were cottage industries, 10.99 per cent were small, 1.33 per cent were micro, and 0.09 per cent were medium enterprises.
Due to their labour-intensive nature, more than 2.1 crore people were employed by CMSMEs.
Md Masudur Rahman, chairperson of the SME Foundation, says SMEs have been badly hurt by the unprecedented shocks stemming from the pandemic and the war.
“CMSMEs are particularly vulnerable to any shock since their capital is small and can’t avail stimulus loans easily.”
Because of the pandemic in 2020 and 2021, the sales of small businesses in five festivals were low as people were concerned about catching the virus, he said, adding that the festivals are the main selling season for many SMEs.
So, they fell into trouble. But many have bounced back after the pandemic, Rahman said.
“Now, because of the dollar crisis, inflationary pressure, the reduction in the disposal incomes, and the decreasing demand induced by the war have created a perfect storm for CMSMEs.”
He also called for policy support for the CMSME sector.
“Financing is the biggest problem facing CMSMEs, so a customised lending policy is necessary for them because many small firms don’t have proper documents and follow standard accounting practices.”
The chairman of the SME Foundation suggested the government reduce tax and value-added tax for CMSMEs.
“Especially, a local procurement law is necessary to make it mandatory for procurement agencies to buy at least 25 per cent of products from SMEs. This may give a boost to the SME sector.”
Md Ali Zaman, president of the SME Owners Association of Bangladesh, says SMEs run their operations on the back of their entrepreneurial spirit.
He thinks marketing products is more challenging for CMSMEs rather than mobilising funds.
“During the pandemic, almost all CMSMEs were impacted. Some companies were closed and many of them are still struggling to resume operations.”
Though the government has announced incentives for CMSMEs, it is the medium enterprises that can secure funds under the schemes.