Why can’t they get their fair share in our budget?
In Bangladesh, while the pandemic has impacted businesses of all sizes, plus life and livelihood, evidence is mounting that the enterprises that employ between 1 and 249 workers—officially the micro, small and medium enterprises—are bearing the brunt of the economic slowdown. According to a recent World Bank survey, "micro, small, and medium enterprises (MSMEs) are hit especially hard due to pre-existing vulnerabilities and their lower resilience." Before our country took a hard knock from the pandemic, over 7.8 million SMEs were contributing to 25 percent of the country's GDP and 36 percent of jobs. The government had already planned to enhance their contribution to 32 percent of the GDP by 2024 to generate more employment. Hence, a crucial component for the revival of our employment, income, and economic vibrancy is the resuscitation of the MSMEs. That is why as we observe June 27 as MSME Day, it is important to raise public awareness of their contribution to sustainable development and the global economy.
Since 2017, the world has observed "MSME" Day in recognition of the significance of MSMEs in reaching economic growth and SDG targets, promoting innovation and creativity, and producing jobs globally. The MSME Day 2021 is being observed amid the coronavirus pandemic and subsequent lockdown globally which have had a far-reaching effect on small enterprises.
MSMEs play an important role in most national economies, particularly in developing countries. The definition of MSME varies and so do the statistical data. Formal MSMEs contribute up to 45 percent of total employment and up to 33 percent of Gross Domestic Product (GDP) in emerging market economies. These numbers would be significantly higher when informal MSMEs, including the cottage industries, are included. In Bangladesh, MSMEs in service, trade and small industries can be considered the backbone of the economy.
In the case of Bangladesh, regardless of the tons of statistics that attest to the contribution of MSMEs to investment, employment, income generation, eradication of poverty, empowerment of women, and reduction of inequality, it would not be an exaggeration to assert that the national budget, financial institutions, and many governmental programmes, including the recently inaugurated stimulus programmes, regularly bypass these units. They sometimes receive lip service from the political leaders during election time but when it comes to any real effort to provide subsidised loans, tax benefits, or grants, there is hardly any evidence that these small and marginal units fare any better than the proverbial "step-child". Only the other day, our industries minister called for a radical change in our approach to MSMEs to better serve their needs. It comes at an opportune moment since for some time our policymakers at the top level have been aware of the shortcomings in our economic policy framework, and we have in the past heard many promises of changes in the rules and programmes to benefit the MSMEs. Alas, to no avail.
It would not be an exaggeration to state that the pandemic-induced economic shock as well as the lack of financial support from the national government has taken the wind out of the sails of our SMSEs, and they are gasping for air. A recent study says 80 percent of SMEs failed to continue their business operations.
In the first stimulus package, the Bangladesh government allocated Tk 20,000 crore to finance a low-interest loan facility to provide working capital to the micro, cottage, small, and medium enterprises. However, according to the finance ministry, while 75 percent of this money has been loaned out, only 10.8 percent of this went to low-income farmers and small businesses. On the other hand, Bangladesh Bank (BB) data shows that of the Tk 15,000 crore earmarked for the MSMEs, the largest share has gone to those engaged in manufacturing and service. Very few small enterprises in manufacturing or trading have received these loans. It may be noted that Bangladesh Small and Cottage Industries Corporation, SME Foundation, Palli Karma-Sahayak Foundation and other state-owned entities have found a growing demand for subsidised loans. BB policy requires 40 percent of bank loans be earmarked for MSMEs, but the actual disbursement has fallen far short of this target. Many advocates including BUILD and others have spoken out demanding direct support to MSMEs both in rural and urban areas as an alternative to regular banking channels.
The industries minister recently acknowledged that the definition of medium enterprises should be changed to ensure required funds for MSMEs are channelled towards the micro and small enterprises since medium enterprises ate up the major portion of such funds. "A new policy was required to address the issues, including the definition of medium enterprises, a database of enterprises and mortgages", he said. His views are in line with those of international lending agencies. In a similar vein, only a few months ago, the IFC Country Manager for Bangladesh, Nepal and Bhutan, Wendy Werner, said that MSMEs in Bangladesh were "already in a precarious position as they were operating on slim margins even before the pandemic hit."
To recap, the problems that MSMEs faced during the pandemic were compounded by certain pre-existing ailments afflicting them. These include lack of operational cash flow, low customer demand, business closures due to state lockdown policies, reduced opportunities to meet new clients, and others. The enterprises run by women were seriously affected.
In the context of SDGs, the World Bank and the OECD had already identified multiple reasons why MSME development is critical for achieving the targets, including creation of additional jobs, poverty reduction, and inclusive economic growth. MSMEs are particularly important for poverty reduction, especially in rural areas and amongst women and other socially disadvantaged groups. Because of their role and place in national economies, MSMEs were taking a lead in helping to meet most of the economic-related SDGs, including promoting inclusive and sustainable economic growth, increasing employment opportunities and decent work especially for the poor, advancing sustainable industrialisation and innovation, and creating a positive push for a higher quality of life, better education and good health for all.
The recently announced budget for 2021-22 has not brought any welcome news for the MSMEs. It has been hailed in certain quarters as "business friendly", but the MSMEs have not received any tax breaks, nor any major financial incentives. Time after time, the experts have suggested that Bangladesh Bank provide a nudge to financial institutions to make it easier for MSMEs to borrow. Currently, there is very little institutional coordination and no strategic vision or overarching policy framework to support MSMEs. The productivity challenge for micro and small enterprises is substantial. Evidence from the manufacturing sector suggests that the micro and small enterprises tend to have low value-added per worker and low average wages; average labour productivity in micro and small manufacturing is barely above the low productivity of the agriculture sector.
Looking forward, the government is borrowing USD 250 billion from the World Bank for employment generation programmes. It is expected this loan will support informal micro-entrepreneurs in recovering by extending micro-finance facilities. In the 2021-22 budget, it is worth noting that applicable duties have been raised on the import of some finished products to protect small and medium industries while duty-free access for some of the raw material imports of the endangered conch industry. But the initiatives in support of SMEs do not meet and match expectations.
Let me end this note with a word of wisdom from MIT Professor Susanne Berger, who studies small and medium enterprises and their role in the supply chain. She recently wrote that governments need to strengthen "countless small and medium-sized firms you have never heard of" rather than throw money at major companies during a crisis. For Bangladeshis, the tone of this homily should sound familiar, and welcome.
Dr Abdullah Shibli is an economist, currently serving as a Senior Research Fellow at the International Sustainable Development Institute (ISDI), a think-tank based in Boston, USA.