SMEs are universally regarded as the back-bone of the economy, and the basis sustained growth of same. Irrespective of the stage of development or size of the economy of a country, MSMEs are the arteries of the economy, particularly in the case of a developing country. They are resilient during hard times, and flourish during better times. For a businesses to thrive in a dynamic and uncertain socio-economic landscape, survival depends on the ability to adapt fast and continue to innovate. One factor behind the resilience of SME Industry as a whole could be that it is a hive of innovation. Another is that their size gives them the necessary agility to survive even the most sever economic times. A key advantage is their intricate and informal information network which serves as a lifeline providing business intelligence. As a result, SMEs become versatile navigators in rough seas, as their size allows flexibility to make the required leap. In the case of an individual SME, its ability to survive is always checked by the response time to external factors. This results in many casualties in the long-haul, but for those that make the exit, new SMEs rush in to fill the void.

In Sri Lanka, while successive governments have acknowledged their importance, they have failed to come up with the action necessary to overcome the many stumbling blocks faced by the industrial sector. While there have been isolated attempts to solve issues in a fragmented approach by different institutions, there has not been a coordinated national approach with a unified vision, actionable goals with responsibilities and accountability.

In an effort to boost the SME sector, in 2001 Budget reforms, Sri Lanka introduced tax write-off for SMEs (unpaid tax liabilities up to March 2009 of all enterprises with a turnover below Rs. 100 million). SMEs were also exempted from Economic Service Charges, Income tax was reduced by 10%, Provincial Turnover Tax was removed (but VAT extended to local level). In addition, there was a simplification of the VAT Suspension Scheme to encourage SMEs to graduate to the VAT system over 10 years.

In 2016, the Sri Lankan Cabinet approved a $100 million Line of Credit for Small to Medium Enterprises from the Asian Development Bank (ADB). The Ministry of Finance aims to strengthen the Small and Medium scale enterprises by granting them loan facilities which can be utilised to launch an enterprise or to expand an existing enterprise subject to a maximum of Rs. 50 million and a repayment period of 10 years.

In Sri Lanka, approximately 70% of all enterprises are SMEs (Ministry of Finance & Planning) and 91% of industrial establishments are SMEs (Annual Survey of Industries 2008). Of the 4,700 exporters, nearly 80% are SME suppliers (Export Development Board). Not only do they form the non replaceable supply chain to larger businesses and industries, they also employ more than 45 percent of the country’s workforce, and earn 52 percent of the GDP. in 2013, they brought in 32% of the production value and 20% of export earnings.

The Institute of Policy Studies of Sri Lanka, the apex economic policy research institute in Sri Lanka, has identified the key challenges faced by our SMEs, which could be observed as common hurdles for SME growth worldwide; lack of widespread Business Development Services (BDS) providers, constraints in access to finance (both demand and supply- side issues), SME owners need better managerial capability, strengthen entrepreneurial potential, productivity improvement and access to technology, improved access to markets (better linkages in with local and foreign value chains – subcontracting, etc. For micro industries these challenges are faced even more acutely.