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EKONOMI IRAVAYNI
Dec. 2012/ Jan. 2013
 

A People's Bank Publication

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ΟIARY
Ďecember, 2012
O5th In the annual Global Corruption Perception Inde: released by Transparency International (TI), Sri Lanka score 40 points and was placed, in the 79th position among 17 countries. Among the South Asian Countries Sri Lanka rank second above India, Nepal, Pakistan and Bangladesh.
O4 Typhoon Bopha slammed into the southern island C Mindanao, Philippines, toppling trees and blowing awa homes with 210-kilometre per hour gusts. A total of abolú 900 people died and hundreds were missing in th mountainous Mindanao.
O7th A visiting high level delegation of permanen representatives to the United Nations on mission to observ the progress on the implementation of the Lessons Learn and Reconciliation. Commission (LLRC) recommendations an other post-war developments in Sri Lanka, held discussion with President Mahinda Rajapaksa at Temple Trees.
O8th. The Wall Street Journal reported that the United State granted 180-day waivers on Iran sanctions which impose for reducing imports of Iranian oil, to Sri Lanka, China, Indi and a number of other countries, in exchange for their cuttin purchases of oil from Iran.
The high level delegation of permanent representatives t the United Nations visited the former Tamil Tiger terroris stronghold of Kilinochchi. They observed the progress mad on reconciliation in the North, three years after the conflic ended and received an update on the Army's role and it contribution to the development in the region. 17th Visiting Australian Foreign Minister Bob Carr calle on Sri Larikan. President Mahinda Rajapaksa at Temple Tree The discussion between the President and visiting ministe touched on a range, of issues, including illegal immigration the Commonwealth Heads of Government Meeting - 2013 an economic relations between the two countries.
30th Achieving another remarkable milestone in the country booming tourism industry, Sri Lanka Tourism welcomed th arrival of the recorded 1,000,000th tourist in 2012 at th Bandaranaike International Airport. 's
. General Facts/)
Sri Lanka* ♥፡”
o Sri Lanka has a diverse group of enterprises. It is estin operate in urban areas and over 600,000 in rural areas, It is noteworthy to see that 41% of these enterprises a SMEs constitute 80-90% of total establishments and 2C It accounts for 70% of employment generated in the bul However the large scale Industries contribute 80% of tc SMEs in Sri Lanka operate either as individual enterpri industrial estates set up mostly by the Government. e Altogether, there are around 60 industrial estates run
Development Board, Urban Development Authority and o Large number of naturally formed SME clusters of diffe natural resource base of the region. Few of the cluster
Brass industries in Kandy area, Beliatte, and Jaffn Blacksmith, silversmith villages in Webada, Kothma Coir clusters in different parts of Sri Lanka Wood working in Moratuwa Cane products clusters Handicraft and related metal finishing clusters in K Rice milling clusters in Ampara, Polonnaruwa, Anul Clay based product clusters (Tile, Pottery, Ornament
* According to the recent (2006/07) Banking Survey done
Source: WWW treasury.gov.lk, June 2010 Europe
o 23 million enterprises o 75 million employ o More than 80% employees in specific industrial sector: Source: Fonte: Eurostat, Commission Communica India
o 45% 9fmanufacturing output o 40% total export O 59 million people employed 6,000+ products
Source: Development and SMEs: Synergize to Sustain, Dr.

4.
OF EVENTS
January, 2013
o8th The Divineguma Bill was in Parliament with
more than a two thirds majority. The Bill has been legislatec to absorb 27,000 Samurdhi Development Officers into th: Public Service and this Act was designed to empower 1.8 million poor families in all parts of the country to overcom. economic difficulties in theggyerinent's attempt to realiz the aim of making 'Sri Lanka the Miracle of Asia.
11th Chinese government media said that a landslide killes at least 36 people, when it smashed into a remote village i. southwestern China.
13 Sri Lanka Disaster Management Centre said duringth 器 of one month from mid December, the death toll fron oods, earth slips, lightning activity and other mishaps it the wake of torrential rains countrywide rose to 52. It furthe said the number of families affected by inclement weathe during this period rose to 137,776.
Russian President Vladimir Putin met the prime minister o Bangladesh for talks that included the signature of a $1 billip arms contract. Bangladesh has recently been expanding it: defence capabilities, building a new airbase close t neighbouring Myanmar and adding frigates to its navy.
18 Indonesian disaster agency said the floods i. Indonesia's capital Jakarta left at least 11 people dead, a murky brown waters submerged parts of the city's busines. district, causing chaos. This massive flood, the capital's wors floods in five years, have also forced 18,000 people to fle from their homes.
༣.ས་ .ینهt" 27of Ån Aŭstralian parliamentary delegation led by Deput Leagler of the Opposition Julie Bishop arrived in Sri Lanka t discuss the issue of people smuggling from Sri Lankat l, Australia. The group will meet with senior government official d and others for discussions on curbing people smuggling
activities.
31. Visiting UK Minister Alistair Burt went to the North o the country on the first day of his visit to Sri Lanka, holdin; a range of meetings and opening a youth project designed t facilitate countrywide reconciliation.
Profile - SME sector
lated that around 16,000 manufacturing enterprises
'e engaged in production. % of industrial value addition.
siness sector. tal value addition in the Industrial sector. ses or in groups / clusters. Some of them operate in
by Board of Investment, Ministry of Industries, Industrial private sector.
rent sectors exists in Sri Lanka, connected with the s are listed below:
Э le and Puwakdandawa
andy area. adhapura and Tissamaharama all items and Brick)
by IFC of the SME Market in Sri Lanka
eş (55% privatę sector) 99% of European companie
(textile, building and furniture) 2.13 European 器
ion om “Modern. PMI policy for Growth and Employment” (2009)
S e 26 million units and services
Ipshita Basu Guha , Nov 2011

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EOCONOMO
REVIEW
Published by: Research Department, People's Bank, Head Office, Sir Chittampalam A. Gardiner Mawatha, Colombo O2, Sri Lanka.
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CONSULTANT EDITOR
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CO-ORDINATING EDTOR
. . Femacana Senior Research Officer
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Small
THE ECONOMIC REVIEW is intended to promote knowledge and interest in the economy and economic development process by a many sided presentation of Views and reportage, facts and eates. FEECONOMIC REVIEW is a community service project of the People's Bank. Its contents OYever are he reSUI oli e editorial considerations only and do mot necessarily reflect | EBank Policies or the officia viewpoint, Signed feature articles also are the personal VGVS of the authors and GO not represent the institutions to which they are attached.
Similar contributions as well
as comments and view points are welcome. THE ECONOMIC REVEW is published bi-monthly and is aVailable both on Subcription and on direct sale.
E-maill:ecorevG2peoples bank. Ik
Dr. B. Nishantha
Dr. Seetha I. Wickren
Anushka Wijesinha Nipuni Perera
Wickrama Narayana
Dr. S. P. Premaratna Daminda Niroshini
Rekha M.P. Hewaliyar.
Dr. N. K. Silva
Lakshman Wijeyewar
o Regional Dev
Print
 
 
 

Nos. 9 & 10 Dec. 2012/Jan. 2013
C O N T ENTS
Features
ananthan 41 Economic Drivers of Post-War Cities
in Eastern Sri Lanka
Students' Page
49 Macroeconomic Policies: Monetary
Policy
L
Special Report
and Medium Enterprises
3 Reasons for Starting Businesses, Perceived Success Factors and Barriers for Sri Lankan Entrepreneurs in the SME Sector
hasinghe 7 Small and Medium Enterprises: Innovation System. Approach towards their Development and Sustainability
12 Access to Finance for SMEs in Sri Lanka: Challenges and Policy Options
19 Financing SMEs -Key Challenges and
Issues for Bankers
22 SME Access to International Markets:
Issues and Remedies
age 26 Global Value Chains & Export - Oriented SMEs — Sri Lankan Perspective
33 Emerging Challenges for SMEs in
Sri Lanka
idena 37 Flourishing Entrepreneurial Culture in
the Country
Next issue
elopment
Cover Design : P.D Sewwandi Dilrukshi
dat People's Bank, Printing Services Dept. *

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soME HIGHLIGHTs oN sMAL
Definitions/Classi
Enterprise category
Medium
Small
Micro
European Commission
Headcount Annual Turnover Annual Bal
(Euro) sheet total
<250 50 millioIn 43 million
<5O 10 million 10 million
US$2mn Bank
Large Enterprises 0 6%9 مه
Medium Enterprises 5-10% >US$ 500,000 L
Small Enterprise 20% > US$ 5,000 Lo
Connections
Micro Enterprises 65.75% > USS O Microfi
Source: http://beyondprofit.com/data-sme-financing-gap-9
 
 
 
 
 
 

AND MEDIUM. ENTERPRISES
fications on SME'
Central Bank of Sri Lanka
El Ce SME : Enterprises with annual turnover less (Euro) than Rs.600 min
Source: Central Bank of Sri Lanka, Bank Supervision. Department Guidelines of the Operations of the Investment Fund Account
The International Finance Corporation definition on Sri Lanka" s SME
- For the purpose of implementing the recent (2006/07) Banking Survey on SME market in Sri Lanka. The International Finance Corporation used following classification:
ales
(i) Small Enterprise: LKR 10 million to 100
million asset value )
(ii) Medium Enterprise: LKR 100 million to 400
million asset value ΟΙΩ
Source: աՆՍա.treaՏառԱ.gov.1K, Մաne 2010
SME Contribution to Employment and GDP (median values)
%
70%
60%
Employment w 50%德· GDP 3.
40%
30%;
20% . . .
10%
countries i n с о. m e 1.
countries COUl
Source: World Bark
Enterprise - A Case Study in India
and Size
's, International Commercial Finance
ocal Banks subsidized domestic/ International funds
cal Banks, Informal financial Institutions, Personal
nance Institutions, Loan Sharks, Personal Connections
5E2%80%93-a-lucrative-one-to-fill/, 2010
Economic Review: Oct/Nov. 2012 -

Page 5
Reasons for Sta1 Perceived. Success E for Sri Lankan Entre
Sector
Abstract
his paper examines the notivations for business ouriership, perceived success factors and problems faced by Sri Lankcan entrepreneurs engaged in the in SME sector. Forty seven entrepreneurs in Colombo district uvere surveyed for this purpose. The primary reasons for starting a business are to increase incorre, to obtain job security, and to secure personal freedom. The most important business success variables are good product at a competitive price α για hard uvork. Friendliness and reputation for honesty were also cited as critical success factors. The most serious problem faced by small entrepreneurs in Colombo district Is the un reliable employees. Other important problems include the uveak economy and high interest rate.
Introduction
Small and medium-sized
enterprises (SMEs) are playing a crucial role in Sri Lankan economy
in terms of employment generation, poverty reduction and regional development.
Entrepreneurship is strongly linked to small and medium sized enterprises, which are one of the main developing forces of developing economies. SMEs encompass establishments Operating in agriculture, manufacturing, mining, constructions, and service sectors.
"The industry s nearly 90% cor represents appro: GDP ( Wikermasi
In the aftermath decade civil war, has given prior higher economic this context, more government targ development in country includin, eastern Provinces. is currently im impressive development prog the resettlemen Displaced People this the opportuni the private sector the opening of vas land, accessibility Sri Lanka's Coasta resources, includ: best natural beac Pasikuda). Hence prospects for putt to work, generati) contributing to the society.
According to the Sri Lanka (1998), c scale industries comprises of the S an important Iro development thro employment mobilization of dic poverty allevia distribution, regio) and training of entrepreneurs. On SMEs do not exist the rest of the eco:
- - Economic Review:Dec,2012/Jan. 2013

ting Businesses, actors and Barriers preneurs in the SME
actor, of which Sists of SMEs kimately 26% of nghe, 2011).”
of the three - the government ity to achieve growth. Within specifically, the gets balanced all parts of the g Northern and The government plementing an infrastructure rams along with t of Internally (IDPs). Within ties available for will range from st areas Offertile to two thirds of l line, and ocean ting some of the nes (eg. Nilaveli, SMEs can offer ing people back ng incomes and rebuilding of the
Central Bank of ottage and small
sector, which ME sector, plays le in economic ugh creation of opportunities, lmestic savings, tion, in come hal development, workers and the other hand, in isolation from lomy, since they
Dr. B. Nishantha
Senior Lecturer Department of Management & Organization Studies University of Colombo
are integral part of the supply chains, with large enterprises, as suppliers, customers, Ο Ι. complementary producers.
After independence in 1948, almost all successive governments have taken various measures to uplift this sector, but still the level of development of this sector is very low. In terms of growth, most of the SMEs have stagnated or have achieved only a slow growth. In this situation, it is important to know which factors are motivating individuals to enter the entrepreneurial career, what are the perceived success factors and what are the prevailing barriers for their growth? This article is based on an empirical study conducted by the author through interviewing 47 entrepreneurs who are running small enterprises in the Colombo district. Initially, 50 entrepreneurs were randomly selected for this study from the list Of entrepreneurs who registered at Open University to follow the Certificate in Entrepreneurship and Small Business Management course. Three entrepreneurs declined to answer the survey or ended the survey prematurely. Out Of the 50 entrepreneurs in the sample 47 entrepreneurs answered the survey questions. There is no
3

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generally accepted one definition for SMEs in Sri Lanka and the white paper prepared by the taskforce for SME development (2002) has agreed upon the concept of (a) Small scale enterprises - as those with asset values not exceeding Rs.20 million and (b) medium scale enterprises - as those with assets values not exceeding Rs. 50 Imillion, excluding land and buildings. This definition is adopted for our study since it is felt to be IY. ΟΙ Θε adequately comprehensive.
Motivators/ Reasons for Entering in to al Entrepreneurial Career
Impact Of entrepreneurs motivation, on entering into an entrepreneurial career is a widely known topic in developed countries and number of studies was conducted in developed countries but such studies are very rare in developing countries such as Sri Lanka. Substantial number of researchers in developed countries have taken various approaches to explain important motivators of entrepreneurs that have influenced them to start their own businesses (Stefanovic et al. 2010). According to some researchers, motivation for an entrepreneurial career is determined by inner personality traits such as the need for achievement, a desire to innovate, propensity for risk taking, and a preference for locus of control. (Benzing and Chu 2009). Simultaneously, some researchers believe that external/situational factors are more important than personality factors. Situational factors are classified in to two sub factors namely, "push factors” and "pull factors". Pull factors such as desire to be one’s own boss, personal satisfaction, change life style, increasing wealth and getting the advantages of prior work experience are attracting individuals to enter to an entrepreneurial career. “Pull motivation” seems to be associated with the individual having a reasonably strong positive internal
desire to start a External negativ as unemploymer a low paying job mobility also attı enter in to an career and thos considered as pu
Table 1 Motiva an Ent
Motivational Fa
1. To be my ow.
2. To be able
experience a
. To prove I ca
. To increase 1
3
4.
5. To provide members
б. For пny own
growth
7. So I always
8
9
. To build abu
. To maintai
freedom
10. To have fun
The author use likert scale (l= n 5= extremely understand motivations an were asked to . extent the giver important to th entrepreneurial shows the giv factors, mean va. deviations. entrepreneurs h own businesses income and tha highest motivati into an entrep: Around 53 perce in our sample “extremely imp their career dec working in an salaried work receiving a stabl income levels
- 4

business venture. ; conditions such t, losing job and with little upward act individuals to entrepreneurial e situations are sh factors.
tional Factors for Entering in to
entrepreneurs are increasing. Some previous studies have found that entrepreneurs in developed countries are motivated by independence and self-fulfillment more than income (Cromie 1987).”Countries that have higher GDP per capita tend to produce entrepreneurs who are motivated
by higher order
o needs that repreneurial Career "pull” the ctors Mean I Standard individuals into
Deviation entre
p I e neurial
Calee, The
in boss 3.40 1.45 second highest motivational
黑 နှီးခွံ past 3.75 1.58 factor is ability m a. in t a in
in do it 3.87 1.26 p e r s on a 1 freedom. As Sri
ny income 4.26 O.99 Lanka was a o western colony jobs for family 2.11 1.26 for many years, satisfaction and 3.81 1.24 organizations in the government
navejob security 4.06 O9 sector are still follow in g
usiness to pass on 3.29 52 bureaucratic characteristics
in my personal 4.21 O.98 which have been introduced
2.43 1.59 by British for
:d the five point ot very important, important) to entrepreneurial d entrepreneurs mention to what 10 factors were Lem to select an career. Table 1 2n motivational lues and standard Majority Of ave started their to increase their it factor was the DIn factor to enter eneurial career. nt of respondents erceived it as an rtant factor" for ision. Obviously, organization as a er, people are 2 income while the
of successful
Economic Review: Dec.2012/Jan. 2013
· d a y - to - d ay administration. If an individual select salaried employment option, he or she needs to workin a highly formalized environment and those who do not prefer such formalized working conditions are enter into an entrepreneurial career. "To have job security” is the third most important motivator, because people start their own businesses to create their own employment opportunity. In our sample, 45 percent of the entrepreneurs cited “to have job security” as an extremely important motivating factor. Entrepreneurs in our sample cited providing jobs for family members and 'starting business as a fun' as the least important motivation to enter into an entrepreneurial career.
Perceived. Success Factors
There is no single agreed-upon definition of business success, but

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researchers generally use continued viability or longevity as a Surrogate for business success. Entrepreneurs have understanding on which factors would improve their prospects for business success and many small entrepreneurs would argue there is no one concrete recipe for success, but many successful small entrepreneurs have in common certain characteristics that have contributed to the rise of their companies. Prior research on entrepreneurs in different countries has concentrated on three types of success factors: (1) the psychological and behavioural traits of entrepreneurs; (2) the Inanagerial skills of entrepreneurs and (3) the external environment (Benzing et al. 2005). The goal was the current study to determine the extent to which entrepreneurs perceive Imanagement skills and the external environment as instrumental to business success.
The author used likert scale (1= u extremely importal the perceived suci entrepreneurs wei extent the given
important to them the perceived su Small entrepreneu their mean value deviations. Entre "good product at c as the most imp factor. Around 79 Ire spondents in perceived it as
important factoIII Success. As sh( "hard work” was among the elemen building a flouris and 81 percent o perceived hard extremely impor business success. the business is a this type of busine has to
Table 2 Mean Score for Variables Contributing ti
Business Success
Success Factors Mean Std.
Deviation
Good Management Skills 4.40 1.06
Charisma: Friendliness 4.74 O.53
Satisfactory Government Support 2.74 1.44
Appropriate Training 4,43 0.74
Access to Capital 4.04 O8
Previous Business Experience 3.81 1.36
Support from Family and Friends 4.08 1.08
Marketing/Sales promotion 4.38 O.94
Good Product at Competitive Price 4.77 O.48
Customer Service 4.68 O.86
Hard Work 4.75 O.57
Position in Society 4.64 Ο-7Ο
Maintenance of Accurate Records 4.5l O.75
Ability to Manage Personnel 4.5 O.80 Social Skills 4.64 O.82
Political Involvement 2.06 1.32
Reputation for Honesty 4.72 O.77
- - - - Economic Review: Dec.2012 (Jan. 2013

the five point nimportant, 5= t) to understand ess factors and 2 asked to what 9 factors were Table 2 shows cess factors of s in our sample, and standard preneurs rated impetitive price” Drtant Success percent of the our sample an “extremely for business wn in Table 2, ranked second ts necessary for hing enterprise entrepreneurs work is an ant factor for As the owner of core-worker in esses, he or she work hard and this phenomenon o implies the l a b o u r intensive - ness of this S e C t O I . Charisma or friendliness, reputation for honesty, Cu St O In er service, position in society, and social skills were also cited by e'n tre preneuS aS important factors for bus in e s s
Su C C e S S . T h e S e f a c to r s c o mlm o nly Ca be categorized aS social capital and is In a l l entrepreneurs sh o u l d commit to build and maintain social capital to succeed in their
entrepreneurial
life. It is interesting to note that Small entrepreneurs in our sample gave least importance to "political involvement” and “satisfactory government support” and among the respondents, only 6 percent perceived political involvement as an extremely important factor for business success.
Prevailing Barriers for Growth
Barriers or problems can be defined as the individuals’ perceived difference between a Current and a desired state of reality. Organizational problems can be classified into different categories namely, human relations and technical issues, organizational inputs and outputs or as strategic and operational issues. At the macro level, the problems facing entrepreneurs in Sri Lankan SME sector are similar to those facing entrepreneurs in other emerging economies. First, entrepreneurs in emerging countries face an un stable, highly bureaucratic business environment. The laws governing private enterprise, especially business registration and taxation systems, are overly complex and difficult to understand. As highlighted in the white paper on SMEs development in Sri Lanka (2002), Sri Lankan SMEs are facing number of problems or constraints in areas Such as access to credit, information technology and markets. The author used the five point likert scale (1= Not a problem, 5 = Very serious problem) to understand the perceived problems and entrepreneurs were asked to what extent the given 14 factors were Irelevant to them. As shown by the mean scores in Table 3, the most critical problems faced by the small entrepreneurs are (1) inability to attract and retain good employees; (2) weak economy; (3) high interest rates; (4) unable to obtain long term finance and (5) too much competition. Substantial number of entrepreneurs (40 percent in our sample) agree that attracting and retaining good employees is a “very serious problem” and another 34 percent chose it as a 'serious’ problem. In terms of unable to obtain long term finance, 40 percent of our respondents chose it as a 'serious’ problem and 19 percent of respondents chose it as a 'very serious' problein . Besides the current study, many of the
5 ___w

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previous studies also have found that inability to obtain long term finance is one of the crucial problems faced by Sri Lankan small entrepreneurs. Substantial number of entrepreneurs (34 percent) cited high interest rate as a 'very serious problem for SME development. Due to the inherent high risk of this type of enterprises, they have to pay higher interest rates.
C.
Individuals are entrepreneurial c to increase incor stability for the makers need to fi such as simplif providing tax h start-up business time period to il income and encol development. P. and job security
Table 3 Problems Faced by SMEs
Barriers Mean Std.
Devia
Unreliable employees 4. O.89
Too much competition 3.49 1.16
Unable to obtain short term finance 3.38 O.97
Unable to obtain long term finance 3.66 O.98
Too much government regulations 3.36 .24
I have to look after everything 3.27 1.36
Weak economy 3.89 1.00
Lack of management training 3.44 13.
Lack of marketing training 3.44 l.16
Lack of accounting records 3.59 139
Complex tax structure 3.38 39
High interest 3.81 1.07
Poor transport 3.25 45
Difficult at finding raw material 3.36 1.37
Responding entrepreneurs did not consider poor transport as a serious problem.
Conclusion
This paper investigated the motivations for entering in to an entrepreneurial career, perceived success factors and problems faced by small and medium enterprises through analyzing the data collected from 47 practising entrepreneurs in SME sector.
Through our empirical study, it was found that the most important reason for deciding to own a business in the SME sector in Sri Lanka is "to increase income”, which is probably a common situation in developing countries.
“hard work”. S organizations II e a SULII Se S tO S " services to suppo addition of their they could corr enterprises. Wit problems, Sri entrepreneurs r attract and employees” as til problem. As a problem, the gov strengthen ter institutions to labour so that I demand. In addi related problem: high interest ra obtain long terr finance also a] serious probl
-- 6

bushed” in to an areer by the need e and create job mselves. Policy nd possible ways, ing registration, olidays for new for areasonable crease business rage further SME rsonal freedom' were the second and third important motivators. It confirms t h e importance of financial and nonfinancial factors for ent ering individuals into small bu, sin e s s ownership. It was also found that the most important f a c to r contributing t Ο perceived b u sin e s s success of S In a l l e n t II e - preneurs is * g o O d product at competitive price" and s e c on d r a n k e d factor is ME supportive have to take trengthen their It SMEs for value products so that pete with large h respect to the Lankan Small ank “inability to retain reliable heir most serious solution for this ernment needs to tiary education supply trained atch with labour tion to the labour , weak economy, te and unable to l and short term e considered as ims. "Financial
ion
policies have an important impact on capital mobilization and development of enterprises (Harvie 2004).” The government and other supportive organizations need to take measures to expand financial markets so that entrepreneurs. could access right amount of finance at right time at minimum CO St.
The empirical part of this article identified two major limitations. The first is the geographical limitations associated with focusing only on the Colombo district. Sri Lanka consists with 25 districts organized with 9 provinces and drawing broad generalizations from this study is difficult. Second, with a sample size of 47 entrepreneurs, these findings should be considered preliminary.
References
Benzing, C. and H.M. Chu. 2009. “A comparison of the motivations of small business owners in Africa.” Journal of Small Business and Enterprise Development l6(1):60-77.
Benzing, Cynthia, Hung Manh Chu and Gerard Calanan. 2005. "A regional comparison of the motivation
and problems of Vietnamese entrepreneurs.” journal of developmental entrepreneurship
10(O1):3-27.
Cromie, Stanley. 1987. “Motivations of aspiring male and female entrepreneurs.” Journal of ಙ್ಗmizational Behaviour 8(3):25l
Harvie, Charles. 2004. “The contribution of SMEs in the economic transition of Vietnam.” Journal for
International Business and Entrepreneurship Development 2(2):1-16.
Stefanovic, Ivan, Sloboda Prokic and Ljubo drag Rankovic. 2O1 O. "Motivational and success factors of entrepreneurs: the evidence from a ಕ್ಲಿಕ್ಹ countrv.ʼ Zb. Irad. Ekon. fak. Rij 28:251-269.
Task Force for Small 8, Medium Enterprise Sector Development Program 2002. “White paper: National strategy for small and medium enterprise sector development in Sri Lanka.” Ministry of Enterprise Development, Industrial Policy and Investment Promotion, Colombo.
Wickermasinghe, S., I. წჭot; The Status of SMEs in Sri Lanka and Promotion of their innovation output; Through networking of S&T Institutions, Asia-Pasific Teach Monitor (JUL-AUG), 11-19.
Contact details
Dr. B. Nishantha
Email: nishanthaG)fmf.cmb.ac.lk
Economic Review: )ec.2012/Jan. 2013 -

Page 9
Small and
Me di
Innovation System Their Development a
1. Introduction
he Small and Medium
Enterprise (SME) sector is well recognized for its contribution to employment, innovation and economic dynamism and is also considered as an engine of growth providing an essential part of a healthy economy. This sector provides industrial leaders of the future, improves the competitive edge of the economy by maximising the range of choices available through market provision, and also challenges the dominance of existing large industrial units thereby forcing them to innovate. SMEs have been the chief source of creating new jobs in many countries and are found in all sectors of the economy, primary, secondary and tertiary and provide employment for persons of different skills viz., skilled, semiskilled and unskilled. It would not be an exaggeration to mention that the overall health of the economy depends, to a large extent, on the SME sector of the developing countries. Various studies conducted on the importance of Small firms demonstrate that the bulk of new jobs are emanated from small enterprises. For example, in the United Kingdom, during the period of 1995-99, new businesses had created 2.3 million jobs, 85 per cent of which were provided by micro, small and medium sized enterprises (Kirby & Watson, 2003).
Sri Lanka, like many other developing countries, aimed at replicating the industrial development success achieved by the so-called newly industrialised economies in Asia during the early 1980s. In addition, the contribution of SMEs to the generation of high
economic growth un employment, poverty has been r successive govern Country gained I) 1948. According 1 Survey (2006/07) c SME Market, in S constitute 8 Oestablishments industrial valu accounts for 70% generated in the (Ministry of Finant 2010).
2. S.M.E. Contrib Employment Go Value added Sri Lanka
It is important te role, played by thi economic growth a especially when th restrictions wi management un certainties, in public accepta technological pro and policies a development. Als fewer financial res in new techn compared to companies. Acc Annual Industry Su Department of Statistics, 50 per million jobs cr business sector (Table 1).
3. Development Lanka - Policy
Sri Lanka is the
South Asia to ope the late1970s wh market-oriented against an impo trade policy. As
Economic Review:Dec.2012/Jan. 2013

um Enterprises: Approach towards und Sustainability
and reducing inequality and ecognized by the ments since the hdependence in o the Banking one by IFC of the ri Lanka, SMEs 9 O% of total
and 20% of 2 addition. It
of employment business sector ce and Planning,
ution towards eneration and Products in
o recognize the e SMEs towards nd development, .ere are capacity th regard to risked and areas Such as
ance of bio ducts, markets bout future
so, SMEs have ources to invest ologies when multinational ording to the rvey 2003 of the Census and cent of the one eated in the were by SMEs
of SMEs in Sri
nitiatives:
first country in in its economy in en it adopted a economy as rt substitution a part of this
Dr. Seetha I. Wickremasinghe
Head Science and Technology Policy Research Division National Science Foundation
strategy, investment and trade liberalisation was given high priority in the policy reforms that took place in the 1980s and 1990s. The successive governments have articulated their policies and strategies to accelerate economic growth and development and to reduce regional imbalances and poverty on a sustainable basis in a number of policy documents: National Employment Policy for Sri Lanka (2002); Business Incubation Programme (2002); White paper on SME Sector (2002); Poverty Reduction Strategy Paper (2002); Mahinda Chintana-Rata Perata (GOSL, 2004) and the Country's Annual Budget Speeches. These documents have discussed the importance of SMEs.
The White Paper produced by a Task Force appointed to study the local SME sector is a comprehensive document reviewing the SME sector in Sri Lanka (GOSL, 2002). This document highlighted many recommendations based on the principle of "maximum support but minimurn interuention in order to develop a policy frameworkfor SME development in the country. However, there is no evidence to indicate whether such recommendations were actually implemented, except for a few cases. The present government that came in to power in November 2005 also gave high priority to the SME sector. To implement its
7 maux

Page 10
Table 1 Share of SMIs in total number of Establis
2OO6
Type of Industry Establishm (2-Digit Level) Small || Medi
Mining 91. 6.3
Food, beverage and tobacco products 63.6 3O3:
Textile, apparel and leather products 53.1 35.2
Wood and wood products 85.5 14.5
Paper and paper products 36.4 46.8
Chemical, petroleum, rubber 8, plastics 62.9 21.7
Non-metallic mineral products 80.8 15.5
Basic metal products 42 34.4
Fabricated metal products, etc. 73.8 19.6
Manufactures n, e. c. 4.7 27.8
Average % 63.O9 25.2
Source: Adapted from Industry Survey 2006, Depart
policies, a special SME Bank was established in 2005, followed by a National Enterprise Development Agency (NEDA), both of which were under the then Ministry of Enterprise Development and Investment Promotion. As quoted in the Annual Report of the Central Bank of Sri Lanka (2012): " the government continued its efforts to promote the Small and Medium Enterprise (SME) sector creating employment and income generating opportunities. The National Enterprise Development Authority (NEDA) continued its efforts in formulating policies for the development of this sector. The World Bank continued to support in strengthening the SME sector under the Pilot Crisis Response Facility (PCRF) during 2010. The PCRF scheme facilitates licensed commercial banks in offering SME sector financing through refinancing, partial credit guarantee of loans and technical assistance. Budget 2011 has also proposed to provide relief to SMEs that were adversely affected during the global financial crisis by exempting SMEs operating on subcontract basis from Economic Service Charge (ESC) and by providing a concessionary income tax rate of 10 per cent)”.
Despite many i inertia is one important rea constrained th development of S. the economic introduced duri) period, repeated the significance foreign direct attractive incent part of this stra and trade libera high priority in pc in the 1980s establishment Investment (BO shop to help obtaining admini and infrastructu. another policy in post-liberalisatic policy reform. p. however, were policy prescrip institutional su say that suc enterprise devel usually biased t enterprises.
As highlighted i document of ) Resource an
- 8

hments, Employment and Value added in Sri Lanka
ent (%) Employment (%) Value-added (%) - || Large | Small || Medi- || Large | Small i Medi- || Large
um U
2.6 46.9 14.3 38.9 59.8 ll 29.2
5 5.96 17.2 38.55 44.25 6.75 29.6 63.7
1.7 12.5 33.2 54.3 3.3 18.3 78.3
41.9 58. - 45.7 || 543 || .م
16.9 8.9 45 46.2 2.2 25.15 72.7
15.4 9.8 23.7 66.5 3.7 28.3 68
3.7 31.2 31.8 37 18.4 37.6 || 44
23.6 7.1 31.8 61 O.7 30 69.2
6.6 25.3 38.9 35.8 23.9 37.5 38.6
30.5 || 22.16 || 26.3 | 51.5 19.7 29.6 50.7
ment of Census and Statistics
nitiatives, policy e of the most sons that has he growth and MEs. For example, policy reforms, ng the post 1977 ly emphasised on of export-oriented investment with lve packages. As a ategy, investment lisation was given licy reform agenda and 1990s. The of the Board of I) as a 'one stop
large firms in istrative clearance re support was yet itiative during the on period. In this rocess the SMEs, left with ad-hoc )tions and weak pport. Needless to h policies and ppment have been Owards large-scale
n the most recent National Human d Employment
Economic Review: Dec.2012/Jan. 2013
Policy (NHREP,2012), there are SMEs in the agri-business sector engaged in growing spices, fruits and vegetables and in the manufacturing sector engaged in numerous industrial activities accounting for about 20 percent of industrial establishments. In the service sector SMEs accounts for more than 90 percent of business establishments. SMEs are an essential source of employment opportunities and are estimated to contribute to about 35 percent of employment. Several important points of policy relevance regarding employment in SMEs have also been identified in the NHREP which are given below:
• There is a gender bias in SME employment. Workers employed in SMEs are predominantly men. Good equal employment practices are needed to correct the above bias and to attract, recruit, retain and promote women in SME employment.
SME entrepreneurs do not have sufficient knowledge and experience of personnel management practices. Most entrepreneurs do not like to

Page 11
provide training, health and welfare facilities for employees due to the resulting increase of cost of production.
• A common feature found in SMEs is the high degree of absenteeism among SME workers. This causes losses in productivity and in staff morale. Attendance improvement policies and programs require to be implemented.
e SMEs suffer from a lack of information exchange, leading to conflict, dissonance and
other industrial relation issues.
4. Concept of National
Innovation System (NIS)
The concept of a NIS has been used globally for more than fifteen years now to understand the dynamics underlying innovation at the national context from the perspective of historical and comparative analyses. Besides, the development and transformation of the national innovation systems within the new perspectives of science policy, is an important landmark for the governments to promote competitiveness of industries and services.
NIS has been useful to explore the networks of institutions in the public and private sectors whose activities and interactions initiate, support, modify and diffuse new technologies. Based on the NIS perspectives, various studies have drawn attention to the differences between the nations in the way they create and adopt innovations, and also in the skills and capabilities that exist in bringing about, technological change, when a network is identified and
established. emphasized tha working protoco Sector II e Search services, which is is essential for ec but also many o involved in thi highlighted by R challenges many norms and assum sector Research a (R&D) planning w. that research
scientists delive) which though ex transfers further ( farmers or entrepr The process stop (Figure 1) and fror farmers / entrepr look after all iss sustainability of S
The NIS concept
many countries Lanka, even thoug that has bee throughout withou Its contribution tow socio-economic de gained attention
(1987) and Lundwa forward their disc idea of innovati operates as a COIn phenomenon. Acc this system ope networks Of entrepreneurship a interacting to prodh knowledge. In ci earlier conceptions technology polici large measure we the R&D, as : perspective of NIS to various other iu and agencies in t up, which have a cr in the dynamics O other words, whil
GOVernment
Institutes Officers entrepreneurs
--Ministry -- Department ap-R&D -
Public sector responsibility
Figure 1 Linear Model of the Public Sector Opera
- Economic Review: Dec.2012/Jan. 203

Inu St bo e not only the of the public and extension a linear model, onomic growth, her actors are process. As aina (2004), it if the accepted ptions of public
here the view is oy laboratory s technologies ension officers own the line to 2neurs to adopt. s at that level h there onwards eneurs need to les relevant to MEs.
is still novel to including Sri h it is a process n happening tour realization. 7ards a country's velopment first when Freeman ll (1992) brought ussions on the on and how it plex system of a Ording to them, rates through research, and other actors uce and use new ontrast to the s of science and es, which in a ce equated with a whole, the draws attention important actors he national setucial role to play f innovation. In e R&D is quite
Crucial to any form of success, it is now seen as one important actor among other actors in the NIS. It relates to the role of Science and technology policies and the commitment of political actors, the strength of universities and other knowledge institutions, the role and status of business enterprises and their technological capabilities etc. What is also important from the NIS perspective is the ‘system based interdependency and interaction of actors in the process of technical change and innovation or in taking the idea from the bench and laboratory level to the field or farmers or to the level of its commercial success in the market or industry or use by a client (Wickremasinghe & Krishna, 2007).This view also agrees with Nelson (1993), who observed that NIS is a set of actors and institutions whose interactions determine the innovative performance of national firms such as SMEs. Edquist (1997) stressed that NIS can evolve through knowledge, capabilities, linkages, networks, and changes in the institutional arrangements that may change from time to time with new technology based results and supportive policy regimes that are of equal importance. Application of the innovation systems approach has been further explored by the Organization for Economic Cooperation and Development (OECD, 1997), the United National Commission on Trade and Development, the European Commission, and more recently, by the World Bank along with many other policy researchers in various parts of the world.
One of the positive features of adopting an innovation system perspective in the Sri Lankan context has been to explore how
Dealers
-- Extension -- Farmers /
4.
Public service inst.
SMEs responsibility
tion

Page 12
micro, small and medium enterprises operate as a system towards sustainability and contribute to socio-economic development of the country and how science and technology could contribute in this context, According to Wickremasinghe (2006), the NIS concept that deals with important elements such as innovation and learning, is still not
------------ Funding Agencies
4. 4. 0.
Research Collaboration
Govt. Departments
Research Funding
Government
must be made transfer and technologies fro. and research Innovations fo: development and productivity and products are e. future of SMES it changing market preferences.
(S&T Policy)
Public Secto
Industries ---------
SAWES
Yx Research
Collaboration
Y Tech Transfer Research Funding
- - - - - - - - - - - - Funding Agencies
Figure 2 Conceptual
Research م* Collaboration محمي
Framework
-
showing
different actors involved in the NIS concept up to technology transfer
familiar to Sri Lanka, where the interaction among various actors and institutions involved in technological innovation is vital. She highlights how the entities such as government policy framework, R&D activities, education system, culture, history, traditions etc., can also play their roles in this system of network towards socio-economic development of Sri Lanka. In general, small and medium enterprises in most countries still suffer from several inadequacies including technological backwardness, low production efficiency and poor quality of products. In order to make them technologically competent and enable them to manufacture products based on the new edge technologies, a consistent effort
actors in the sys draw out policy fostering a s innovation in context. Figure
conceptual fram common to SMEs
5. Suggeste di System Mode: Sri Lanka
According to mo policy researche systems, the abo be adapted and a of small and in expanding it to 1 Such studies community driv are Inost S sustainable W community
ακρωα
10
 
 
 
 
 
 
 
 
 
 
 

for facilitating diffusion of m the academic institutions. r new product improvement of uality of existing ssential for the o keep pace with conditions and
Given the multiplicity of definitions and perspectives, as briefly referred to above, the relevance and use of NIS is also limited: (a) to trace the growth and significance of S&T policies and political actors; (b) to understand the institutional setup, status and Structure of Science and tech no logy institutions, univer siti es, bu S in e s s enterprises etc.; and (c) to explore the extent to which various tem interact and implications for ystemic based the Sri Lankan 2 illustrates this ework of the NIS s in any Country.
Innovation for SMEs in
st recent work of irs on innovation ve framework can pplied to any type editum enterprise market and sales.
suggest that en developments
uccessful and hen the rural (farmers/
Economic Review: Dec.2012/Jan. 2013
entrepreneurs) is encouraged to contribute directly to the initiatives where they are made full partners in managing their jobs. Hence, new strategic initiatives taken in this directive are crucial to achieve growth in livelihoods, increased incomes and to ensure provision of essential services to the poor. It iš important to maintain mutual dependencies among actors and networks as well as breaking the usual linear model that has been in existence in the past.
The conventional public sector R&D linear model has not explored the involvement or the role played by input dealers / processors and the public service agencies. The linear model of the government had not worked successfully in most developing countries and as a result, farmers and village entrepreneurs are moving away from agriculture and SMEsrespectively, due to poor incomes they receive.
The proposed innovation model indicated below for SME entrepreneurs has been worked out based on the above framework involving the following actors:
Rural community/SME entrepreneurs: Rural community or small and medium entrepreneurs is the most important actor in the proposed model as they needto be involved in the learning and innovation process and create their own vision for development of the enterprise.
The government: Policy, strategies and implementation
Knowledge providers: Universities and R&D institutions.
Service providers: Industrial Development Board (EDB), Export Development Board (EDB), Sri Lanka Standard Institution (SLSI) etc.
Vocational Training Centers: To provide training at vocational capacity. ܠ ܐ
Market Value added products of SMEs need to be sold at a good price.

Page 13
... Govt. policy. * Maihindar Chirmthina: -
:Maganaguna Gamas meguma
Other Govt Entities.
fDB i. EDB, . iii. Ministry of Economic ... Development. iv. IT . . . . . .
1 Local banks.
... Financial loans; Ni to entrepreneurs :
1 Market.
:: Private sector:
Figure 3
Innovation System model developed fo
medium enterprisesin Sri Lanka towar
growth
Banks: The State/private banks need to provide loans at low interest rates to rural entrepreneurs.
Non Governmental Organizations (NGOs): To disseminate knowledge, and extend other services.
The model further shows the importance of actor-oriented approach and the institutional arrangements that are useful to support a viable innovation systern in a small and medium Scale enterprise. Most of the entrepreneurs are not involved in making value added products of SMEs due to inadequate knowledge in such product preparations, lack of funds for initiation and lack of knowledge in finding market for their products. The policy interventions promoting public private partnership is a must. For example, the government institutions that are involved in the above tasks must publicize their functions and improve links with the small and medium entrepreneurs and other actors who play significant roles in the network.
6. Conclusion Recommendation
As discussed in 1 actors and institu in the above model a system to upli development and s the small and med in Sri Lanka. The a be applied to any emphasized tha institutions and th involvement will val to another. This is system evolves i based on the gov framework, R&D a demand, educa geography, histor culture, traditi mentioned previou recommended that may consider work framework for SME the above model
coordinating bod authority to facili link all actors a relevant to any SM development and
References
Central Bank of S Annual Report, C
Economic Review: Dec,2012/Jan. 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Nisconcept F approach 3. . °olicy researchers
cation schools. . . . . Universities
or small and ds economic
and
S
this paper, all tions identified should work as ft the status, sustainability of ium enterprises bove model can SME, but it is it all actors, e extent of their y from one SME S because each independently ernment policy ctivities, Market tion system, y demography, ons etc., as sly. Finally, it is the government ing out a policy Es as suitable to and appoint a y that has the tate, assist and (nd institutions Es towards their sustainability.
Sri Lanka (2012) entral Bank of
Sri Lanka,
Janadhipathi Mawatha, Colombol.
Edquist, C. ed. (1997). Systems of innovation approaches: ណែe institutions, and organizations. London, UK: Pinter, Cassell Academic. 432 pp.
Freeman, C. ed. (1987). Technology and economic performance: lessons from Japan. London, UK:Pinter. 342 p.
GOSL (2002). "White Paper on National Strategy for small and medium enterprise sector development in Sri Lanka", Task Force Report submitted to Ministry of Enterprise Development, Industrial Policy and Investment Promotion, Government of Sri Lanka
GOSL (2004). “Mahinda Chinthana — Rata Perata, Government Policy Document, Ministry of Planning and Implementation, Government of Sri Lanka.
Kirby, David A. & Anna Watson, eds. Small Firms and Economic
evelopment in Developed and Transition Economies: A Reader, Ashgate Pub. Ltd.
Lundwall, B.A. ed. (1992). National Systern of Innovation and Interactive Learning. London, UK: Printer. 161 P.
General Treasury (2010) http:// www.treasury.gov.lk/FPPFM/ddf/ pdfdocs/envirment-voll.pdfMinistry of Finance and Planning, Colombo, Sri Lanka
Nelson, R. (1993). National Innovation Systems. A comparative Analysis. Oxford University Press, New York/ Oxford.
NHREP (2012). National Human Resources and Employment PolicyGovernment of Sri L a, Secretariat for Senior Ministers, 356 B, Galle Road, Colombo 03. ギ
OECD (1997), National Innovation Systems. Organization for Economic Cooperation and Development, Paris.
Raina R.S. 2004. Technological and Institutional Innovation: a case study of pomegranate production and marketing. In: Innovations in Innovation- reflections on partnership, institutions and : (Eds. A.J. Hall, et al.), Patancheru 502 324, Andhra Pradesh, India and Library Avenue, Pusa, New Delhi 110 012, India.
Wickremasinghe, Seetha I. (2006). "National Innovation System: a wa forward to stimulate innovation”, Vidya Newsletter 8 (2) National Science Foundation, Maitland Place, Colombo 07, Sri Lanka.
Wickremasinghe, Seetha I. 8, V.V. Krishna (2007). S&T policy and the Sri Lankan ational System of Innovation: the role of public research systems, In: Science, Technology Policy and the diffusion o Knoulledge (eds..Tim Turpin and V.V. Krishna), Edward Elgar Publishing, Ltd., Glensanda House, Cheltenham, U.K.
1 -

Page 14
Access to Finance fi Challenges and Poli
Introduction
mall and Medium S Enterprises (SMEs), though known to be an integral component of Sri Lanka's economic and social fabric, is still faced with a myriad of constraints which impede their ability to grow. Even though the sector has received much attention from successive
governments aS well aS international donor agencies, the sector is still faced with these challenges that need to be addressed in a comprehensive manner. Among them is the critical issue of the difficulty in accessing finance. This article aims to dissect this issue to better understand the drivers of access to finance, provide the latest insights from a new SME survey in Sri Lanka, and put forward some potential solutions to address the problem, including highlighting mechanisms in other countries which may serve as Inodels for Sri Lanka's own efforts.
Context
Historically, SMEs around the world have frequently had difficulties in accessing finance. The recent global financial crisis, however, intensified this challenge. According to the Economist Intelligence Unit (EIU) survey report on access to finance among SMEs- Surviving the Drought, 45 per cent of respondents from the AsiaPacific region say that the availability of finance has deteriorated in the aftermath of the crisis. According to the IMF, lending to the sector has fallen much more sharply than it has to larger companies?. The stresses and pains of SMEs owing to the lack
- 12
of finance seem t with the tighte regulations in th global financial
A Irecent IFC St severity of the fin by SMEs, partic markets. Approx cent of formal S markets were fou (i.e., they need have access to il cent were found (i.e., they have Credit but still id a constraint). concludes that or 32 per cent of s and middle in ( respectively, had line of credit institutions, corresponding income countries Further the res. Bank Enterprise that SMEs in dev are more likely developed coul access to final obstacle for thei
Findings from Survey
Adding to this b is a recent surve Lanka conductec of Policy Studies ChambeI of C Lanka. The surv in late 2012 via questionnaire. " randomly select database of SME common feature
that they were a chamber and fo businesses.

Dr SMEs in Sri Lanka: cy Options
o have augmented ning of financial e aftermath of the crisis.
udy revealed the ancing issue faced alarly in emerging imately 45-55 per MEs in emerging nd to be unserved credit but do not ) while 21-24 per to be underserued acce SS to Some entify financing as The survey also nly 17 per cent and Inall firms in low come countries, access to a loan/ from financial while the figure for high was 50 per cent“. its of the World Surveys indicate feloping countries 7 than SMEs in ntries to report nce as a major r developments.
IPS-NCCSL SME
ody of knowledge ty of SMEs in Sri 1 by the Institute with the National ommerce of Sri ey was conducted a semi-structured The sample was ed using NCCSL E members". The of the sample was (l members of the rmally registered Although all
Economic Review: Dec.2012/Jan. 2013
Anushka Wijesinha
Research Econonist Institute of Policy Studies of Sri Lankca
Nipuni Perera
Research Assistant Institute of Policy Studies of Sri Lanka
Irespondents come from this same enterprise cohort, any selection bias is unlikely owing the strongly heterogeneous nature of the enterprises surveyed. The authors looked closely at the nature of the business that each respondent was engaged in to ensure that the results aren't skewed towards any one business type (i.e., wood work, food processing, etc). This was deemed not to be the case.
Table 1. Distribution of Respondents by Province
Eastern 9
Central 24
North Western 24
Uva 11
Southern O
North Central Province 12
Sabaraganuwa 4.
Western V 4
Northern 3
The survey received 101 responses, covering all provinces in Sri Lanka (see Table 1). At the outset, the

Page 15
focus in the sampling was on enterprises outside the Western Province, taking the argument that SME development in other regions is particularly difficult. As such, 96 per cent of respondents were from regions outside the Western Province.
The aim of the survey was to identify the key issues faced by SMEs in Sri Lanka. According to the findings of this survey, 91 per cent of respondents considered access to finance as one of the top five constraints on their businesses, while half of all respondents considered it as their most significant constraint (see Figure l).
The most significant reason for inadequate access to finance experienced by most of the survey respondents was attributed to the inability of financing development/ expansion plans. Of the respondents who reported they had inadequate access to finance, 69 per cent said they had more difficulty in accessing finance for development/expansion, while
Lack of Access to finance 49%
罗 ترجم ‘‘... 8 * Lack of Lack of
Access to Business technology Development 1 O%
Sevices lack of Access 3% to markets and
information 11%
Figure 1 Most significant
constraint O busines ses aS perceived by SMEs
Source: Wijesinha et al.
(for th co m in g ), *Revitalizing Sri Lanka's SME Sector
those who state difficult to access were relatively fewe cent).
According to the
financial TeS tr contributed to th other constraints of the business. Of that participated more than one-t whose employees h any training Credi finances as the na
The majority of resp cent) noted that fo were their main sou (37 per cent) of wh banks were the pr
O
Government bank
Local pvt bank
Foreign pvt bank
Dvipt bank Rural bank
Local money lenders
Friends/relatives
Other Businesses
Other
Figure 2 Currer to Fin
Source: Wijesir Sector
Informal SO acknowledged by ne
of all respondents : financing options, w coming from friend local money lender:
The most commo using Such sources high interestrates a to provide collatera formal banking in seemingly little
- Economic Review: Dec.2012/Jan. 2013
 
 

it was more working capital (around 31 per
survey results, .ctions also tightening of on the working the individuals in the survey, hird of those ad not received ed insufficient in reason for it.
ondents (60 per Irmal channels rce of financing ich government eferred option.
development banks. The unwillingness of formal banking institutions to serve SME clients, for a number of reasons, was another significant motive for using alternatives. However, the survey further revealed that 75 per cent of those currently using informal sources declared that they would prefer using formal financing sources instead.
The survey also explored the respondents' thoughts on what the state can do to address this access to finance challenge. As the results in Figure 3 show, 60 per cent of respondents sought the provision of concessionary loans and other forms of government aid/support, while 11 per cent observed the
10
%
20 25 30 35 40
X.
at Sources of Finance for SMEs Reporting Access ance as Most significant Constraint
lha et al. (forthcoming), Revitalizing Sri Lanka's SME
Ι. Ο θεS were arly 40 per cent as part of their rith the majority s/relatives and s (Figure 2).
In reasons for s were listed as und the inability all requested by stitutions, with
relief from
need for better institutional mechanisms in providing access to finance. 12 percent noted that measures to address the difficulty of collateral are important while 7 per cent sought tax concessions and other relief in the absence of better access to finance.
This issue isn't new, and has been rightly identified in earlier policy documents as well. For instance, the National Strategy for Small and
13 -

Page 16
Medium Enterprise Sector Development in Sri Lanka, White paper (2002) identifies problems related to finance as the foremost impediment to SME growth in the country. The report further states that the lack of SME access to
Take measures Did not Proulide tax
to address the respond concessions/
issue of lack of 10% relief for the
SME
Provide/Improve the institutions/ institutional mechanism of providing finance to SIMES
五丑%
Figure 3 R e s p on d e in ts' Suggestions for G. o v e r n n e in t Support in
Addres sing Access to Finance
Source: Wijesinha et al. (forth com in g ), *Revitalizing Si
Lanka's SME Sector
finance results in a vicious circle linking financing problems with the performance and progress of SMEs, as the lack of finance in turn results in undesirable outcomes such as the use of outdated technology, absence of quality control, and weakening profitability".
Unpacking the Problem
The problem of low access to finance broadly includes four sub sets of problems, namely, availability of funds and other credit instruments, access to equity and loan capital, cost of
borrowing and finances. The availability of ful partly to inhere: within SMEs a under develope Lanka's financial of venture cap financing options said to compel
mostly on banklc of poor SME acce to attribute to fa inability of SM collateral with lack of developm the part of both development bar. of proper skills
make bankable ] The third probler is said to attribu high risk credit which inevitab interest rates be: segment, while management off attribute to : including insuffic high cost offinan business accel financial manage non-separation
private exper expenditure on Such as cars, : policy changes.
Sri Lanka curre spread network most of the rur: country. In 201 branches were C Lanka”. Hence tł SME access to
reasons that go b having access existing banking become clear thi access to credit Lanka stems from supply side fact conducted in-de) interviews (KIs senior officials
financial insti Country, to uncC on this issue
- 14
 

management of
problem of lds is said to owe nt characteristics ld partly to the di nature of Sri markets. The lack ital and equity for Sri Lanka are SMEs to depend hans. The problem ss to funds is said ctors such as the IEs to produce roper titles, the 2nt orientation on commercial and ks, and the lack among SMEs to project proposals. n of cost of funds te mainly to the profile of SMEs ly lead to high ing offered to the the problem of inances is said to several factors xient equity base, ce, over ambitious eration, lack of ment experience, of business and
nditure, Ο νεΙ -- status symbols and unexpected
ntly has a wide of banks covering all corners of the li allone 194 new pened across Sri he problem of low credit is due to beyond merely not to the country's g network. It has at the weak SME
: situation in Sri both demand and Cors. The authors pth key informant ), especially with of banking and itutions in the ver more insights The following
Economic Review:Dec.2012/Jan. 2013
sections take a closer look at the findings of this:
Demand-side Factors: SMEs'
Inherent Limitations
When considering the demand side factors, the lack of collateral seems to be the most significant constraint on SME access to credit. Financial sector institutions surveyed observed that the high non-performing loans (NPL) ratio of SME customers have prompted them to demand higher collateral when giving out SME loans, in order to cover potential default losses. Banks assert that although they have tried alternatives to collateral-based lending, like cash flow-based and risk-based lending, the NPL ratio was higher for such lending and felt that collateral is necessary in order to exert pressure on SME customers to repay their loans. The banks also expressed a concern that effective credit guarantee schemes, which would ease high default risks of the SME segment, were not available in Sri Lanka, but if introduced would improve the SME credit climate by allowing banks to lend collateral-free.
The lack of transparency and financial discipline among SMEs was considered as the second most significant demand-side factor. Tax implications appear to be causing reluctance among SMEs to disclose proper financial accounts to banks. The lack of proper financial data makes it virtually impossible for banks to evaluate the Creditworthiness of SMEs and has thus constrained the amount of credit given to the sector.
The lack of access to markets, market information, and effective supply chains has been considered as an inherent characteristic constraining SME growth. This in turn has an impact on SMEs access to finance. The interviews revealed that this lack of access to markets, market information and Supply chains have prevented SMEs from

Page 17
making better evaluations of critical business criteria such as their respective market size and market trends. This in turn has made SME business plans less feasible prompting banks to refrain from lending to SMEs due to inadequate and/or poorly-prepared business plans. The lack of sufficient knowledge of business practices such as the effective financial Inanagement, business planning, book-keeping, etc., prevent SMEs from making bankable business proposals. , Banks have begun making efforts to address this issue by conducting training programs and establishing special SME centers to assist SMEs in preparing proposals. However, certain banks expressed concern that SME entrepreneurs were reluctant and unmotivated to gain such skills despite of their clear importance. Moreover, the banks also believe that there is a strong need for government attention on this matter, remarking that the banking sector alone cannot help address the challenge sufficiently. The findings of the interviews also Ieveal that inherent characteristics within SMEs such as the lack of proper technology, poor quality products and labour issues not Only impose Inajor challenges on SME growth but also make SMEs riskier than other segments for banks to serve. This in turn makes banks hesitant to lend to SMEs. Necessary measures need to be taken to overcome such
weaknesses in order to minimize the risk profile of SMEs and thus Imake banks keener on serving the SectOr.
The interviews also highlighted the fact that administrative delays and difficulties in obtaining permits and licences from government institutions enforces problems for SMEs in obtaining credit because the banks are unable to provide Credit without proper documentation, Mostbanks believe that bureaucratic procedures need to be reformed so that a speedier
service can be prov Sector when obt: licences.
Our findings sugg of proper insurar the SME segmen critical factor limi Banks feel that
providers of Sri
have given very lio the SME segment have been unable
insurance coverag profile of SMEs hesitant to lend t not have properins
The lack of proper I leadership plans v yet another shortcoming con access to credit. family run busine seems to be no Imanagement for th (especially when th SME owner are Ire up the business). not in a position t without a prc ImanageInent as an entrepreneur woul to the business, le a loss.
Supply-side Limitations withi Sector
The KIs reve constraints withil Sector itself tha access to credit. banks interviewed
of effective gover and/or incentive banking sector for
lending as a key
SME credit. The ba the extremely risk SME market make banks to serve th that, incentives w make it worthwhi serve such arisky in a surprising obser number of concessi specific loan scher
- Economic Review: Dec.2012 (Jan. 2013

ded for the SME ining permitS/
st that the lack ce coverage for is yet another ing SME credit. the insurance Lanka seem to tle emphasis to as most SMEs o obtain proper 2. The high risk make banks SMEs that do
urance coverage.
hanagement and 7as found to be lemand side straining SME Most SIMES are sses and there second line of nese businesses e children of the luctant to take The banks are o lend to SMEs per line of y mishap to the di mark an end :aving banks at
Factors: in the Banking
alled several in the financial t hinder SME Majority of the stated the lack nment support s given to the promoting SME factor limiting anks stated that y nature of the s it difficult for e segment and vere needed to le for them to market. This was vation given the onary and SMEnes available in
the market, particularly those refinanced by the Central Bank of Sri Lanka or international development agencies. Banks expressed their disappointment in the current refinance facilities provided by the government as they were found to be ineffective and unprofitable for banks. They also felt that the government needs to take a more proactive role in providing necessary credit lines for SME lending.
The lack of Staff who are skilled in SME lending emerged as a critical supply-side constraint. SME lending is a service that calls for a different kind of banking approach. A more analytical, patient, and small business-oriented banking attitude is required for SME lending. It was highlighted that staff in branches rarely have time to attend to SME customers as they are preoccupied with achieving strict monthly targets. Hence, there seems to be a lack of staff in banks that can and are willing to attend specifically to SME customers and provide a specialized service to them.
The findings also underscored that financing facilities provided for the SME segment in Sri Lanka seemed to be limited predominantly to loans, leasing and pawning. The lack of diverse and innovative banking products and services aimed at start-ups and small businesses are limited, often nonexistent, in Sri Lanka's financial markets. The limited range of SMEfocused or SME-friendly financial products offered seems to be a factor constraining SME credit.
The banks also expressed concerns about the policies adopted by the government with regard to financial markets such as imposing Credit ceilings and high interest rates as a constraint on SME lending. The banks believe that a favourable financial environment with less interruption is needed so that they will be at a position to follow strategic plans to promote the SME
15 -

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sector. The cost and time taken to deal with policy changes are said to take away time and effort from serving the SME market, as most often than not, banks are found to be preoccupied responding to adhoc policy changes rather than following systematic plans:
Hence the fin dings of our interviews Suggest that shortcomings within both SMEs and financial markets need to be addressed in order to overcome the problem of low SME access to credit.
Given the severity of the issue of low SME access to credit in Sri Lanka, it is crucial that is it addressed if Sri Lanka is to revitalize the SME sector. Bearing these issues in mind, let us look at some of the following options available for Sri Lanka to overcome this challenge - SME-oriented banking, SME credit scoring, and credit guarantee systems.
SME-oriented Banking
Even though there has been a recent shift in the focus of banks (especially in Sri Lanka), from large corporates to a newer, smaller, but yet lucrative, segment of SMEs, the banking procedures and practices carried out by Sri Lankan banks seemed to have not changed accordingly to best suit the new SME focus. Nanayakkara (2011) reckons that the traditional banking functions practised in Sri Lanka involving SME financing do not help in promoting SME lendingo.
banking process
succeed beyondt process (see Fig. rate of failure of
at the project via to owe mainly t bank staff in acc the business pr lack entrepren assess the proje applicants are s prior financial s SMEs lack the n to prove their fina remains questi should be evalua Same criterial traditional bankil
Given the in: traditional banki meet the dema clientele, the ne Sri Lanka’s bank best Suit SME essential. It is w that Budget 2C special SME ban more commonly centers) to be set bank in all distri these measures v right direction, th it is un certa conducted by I banks unveiled faced by such ban SIME centers. The state banks) reve constrained by th and human resol SME centers.
International su banks that hav effectively targeti
SME X Bမျိိုးဒ) viabilis)> FinancinX
Plan
SME Risks E
Figure 4 Banker's Traditional Interest in SME I
Source: Nanayakkara (2011)
Nanayakkara (2011) goes on to state that SMEs, who are most often than not, unskilled in preparing business plans find themselves unable to complete even the first step of the traditional
brings to light no of innovative ban also the lack oft scoring/rating registries/bur guarantee sche
- 16

and often do not e first step of the re 4). The high ME applications ility stage is said the inability of urately assessing oposals as they :urial skills to its... Most loan art-ups with no :atements, thus 2cessary records incial strength. It )nable if SMEs ed based on the imposed by g procedures.
ability of the ng procedure to lds of the SME ed to streamline ing procedure to customers is with this in mindi 12 proposed a k branch (known y Inow as 'SME up by each state cts. Even though vere taken in the e effectiveness of in Interviews PS with leading the difficulties ks in establishing banks (including aled that they are e lack of financial roces to run these
Liccess stories of e Succeeded in ng the SME sector
ending
only the absence king practices but rols such as credit
models, credit allu S, credit mes, etc., which
Economic Review: Dec.2012/Jan. 2013
contribute toward building an enabling credit environment in the country. Let's explore a couple of these in detail.
SME Credit Scoring
IFC (2010) defines credit scoring as a mathematical technique that uses historic credit data to predict a future outcome, typically the probability of default. Wells Fargo, a leading bank in the United States, pioneered the use of credit scoring systems for SMEs in 1992. The automated credit reports and scoring enabled the bank to provide a cost-effective Service to its SME clientee. Credit scoring involves the process of granting a score to an individual/ individual business based on parameters such as length of time in business, nature of business, length of time with bank etc. The traditional banking process as depicted in Figure 4, typically involves banks evaluating the creditworthiness of SMEs based on financial data. As discussed in the previous sections of the chapter, asymmetric information due to the lack of proper financial data with regard to SMEs make it impossible to evaluate their creditworthiness based on traditional appraisal methods. Hence the credit scoring method can be used to evaluate the Creditworthiness of SMEs and can help in overcoming information asymmetry. Even though it is unlikely that Sri Lankan banks would rely solely on a credit score to make a lending decision, these models can be deployed as a prescreening tool to determine which applications to investigate more thoroughly and which applications to reject completely. They could reduce the average time spent on processing applications and the cost of acquisition - two key factors that limit banks from lending to the SME segment.
These models are already prevalent in the East and South East Asian region. A study showed that more than 70 per cent of firhan cial

Page 19
institutions surveyed in ASEAN economies have implemented some form of rating or scoring for SME loans. Banks in some ASEAN economies were able to increase loans to the SME sector by 61 per cent by 1995 since the introduction of credit scoring in 1992.
The KIIs conducted with banking sector officials in Sri Lanka underlined the fact that the top management of banks was aware of such innovative tools. Yet, what seemed to be lacking was the confidence to courageously embark on such schemes due to the typical risk-averse nature of Sri Lankan banks.
However, it should be kept in mind that several challenges which are unique to developing countries make the execution of credit scoring challenging. The Access Finance' Newsletter (World Bank, 2006) identifies four challenges in adopting Small Business Credit Scoring (SBCS) in Developing Countriesis:
1. Limited availability of timely, accurate and reliable data in credit bureaus and similar data registries
2. Poor record management and MIS systems in financial institutions
3. Significant investment cost to
develop SBCS tools
4. Bank's reluctance to share information on SME customers
among peers
A possible jump start developing countries can employ is the pooled-data model, by obtaining detailed SME portfolio data from a number of lenders. This Imethod is a low cost alternative to custom built models. Recent research by the World Bank and the Fair Isaac & Company in several Latin American countries such as Colombia and Mexico, demonstrates the feasibility of such pooled data SBCS solutions.
In terms of struc rating scheme, Sri from neighbourin Performance and Scheme, a prog small scale ir formulated in cons Small Industries A Indian Banks' A various credit r. including Credi Information Ser (CRISIL), Investm and Credit Rating Limited (IICRA Indi Bradstreet. The I combine an eva. performance and c of the enterpris parameters th operational, fi) business and mar Eventhough each responsible for pa “small-scale indus each credit ratin Ministry of Mic Medium Enterprise per cent of the fee c the Ministry funds Create awareness a about the S weaknesses of
operations and pr opportunity to organizational s ratings have imp banking finance by cent of Irated client requirements have per cent ofrated c
Credit Guarantee
Credit guarantee been regarded as a enables SMEs 1 limitations impose of adequate collat Banker survey fou do not value infor trends and clients nearly as much a flow statements, transaction hist Lanka, inadequat serious issue for
because banks ar.
Economic Review: Dec.2012/Jan. 2013

turing a credit Lanka can learn g India. India's Credit Rating am that rates dustries was altation with the ssociations, the ssociation and ating agencies E Rating and vices of India 2nt Information Agency of India a), and Dun and ating agencies luation of the redit worthiness 2 and include
at eaSle nancial, and agement risks. enterprise is ying the special tries fee set by lg agency, the ro SInall and es subsidizes 75 harged. Further, an initiative to mongst MSMEs trength and their existing ovides them an senhance their trengths. The oved access to ir at least 20 per s, and collateral decreased by 10 ases°.
: Systems
schemes have mechanism that to bypass the di due to the lack eral. The IFAC/ und that lenders nation industry business plans as they do cash
collateral and tories 7. In Sri e collateral is a the SME sector, e traditional and
risk averse in their lending, and are strongly collateral conscious. Credit Guarantee Schemes (CGS) have the objective of absorbing part of the loss resulting from the default of a bank loan. It reduces the risk of a lender, serves to improve the supply of credit and facilitates the smooth operation of the loan market.
The interviews conducted by IPS with the banking sector of Sri Lanka underpinned the idea that the banking sector is very much dissatisfied by the credit guarantee schemes (CGSs) which have been introduced so far. But they remain hopeful that a profitable CGS would soon be introduced in the context of Sri Lanka as CGSs as a concept promises optimism for bolstering SME access to credit. It is useful to look at some examples from the Asian region.
In Malaysia, the Credit Guarantee System offered by the Credit Guarantee Corporation (CGC) enables viable SMEs without or with minimal collateral and no track record, to gain access to financing from financial institutions. Further, the SME Credit Bureau established in 2008 by the CGC enables SMEs to be aware of their own credit standing and identify critical areas for improvement that will enhance their credit worthiness provides trade information and probability of default of a company. In Thailand, the Small Business Credit Guarantee Corporation (SBCG) is responsible for the Small Industry Credit Guarantee Fund that provides credit guarantees to unsecured parts of a loan. Three guarantee schemes are functional - a normal scheme which guarantees unsecured loans between 10-40 million baht, a risk diversification scheme where financial institutions and SBCG share the risk of loans provided, and a loan guarantee scheme which guarantees up to 10 million baht and payment of up to 10 million
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baht for a term of 7 years. In India, the Small Industries Development Bank (SIDB) has a credit guarantee scheme that provides financial and deferred payment guarantees to its MSME customers. SIDBI, together with India's Ministry of MSMEs has Created the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This fund encourages lending institutions to emphasize the firm’s project viability and extend credit based on primary as sets rather than secondary collatera. Thus, CGTMSE covers collateral free loans up to 1 crore (approx. US$ 200,000) to new and existing SMEs and also provides rehabilitation assistance to the lender, should factors beyond management’s control.
Oehring (1995) suggests that credit guarantee schemes will only function successfully if they are part of the national private sector (including banks), if there are no restrictions regarding the origin of funds used for the scheme, income from fees and investments cover the cost of running the scheme, guarantees are granted only to financially sound projects and companies and the schemes consist of backup programs that provide training, professional advice, and other services. Bearing all this in mind policy Inakers should focus on introducing effective CGSs to Sri Lanka as it will undoubtedly help in bridging the SME financing gap.
Conclusion
The issue of weak access to finance for SMEs in Sri Lanka is an ongoing challenge - is one that calls for urgent policy responses if the sector is to survive, grow, and contribute fully to national output. Eventhough the steps taken in recent times by both the Government and SME len der S themselves are steps in the right direction it appears that much more needs to be done. As this
article has
dynamics drivin many and arise and demand S
In USt. be simultaneously. together with th should creat environment for country through of Credit Guara Credit Scoringir banking sector adopt SME-fr Meanwhile, S) supported to ea limitations wh weakened posi formal finance.
References
Economist II ACCA and CPA Access to Financ Medium sized
evidence and CC
International (IMF). 2012. Outlook.
International Corporation (IFC up SME access t in the Developir
ibid
5 ibid
6 Task for SI Enterprise sec program. 2002. for Small and M sector Developm White paper.
7 ibid
8 bid
9 Central Bank ( Economic and Sri Lanka 2012.
' Nanayakka Enhancing the c shaping develop Association
Bankers, A Professional Ba
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discussed, the (g the problem are from both supply ide factors. Both
addressed The Government, le financial sector, e an enabling SME lending in the the establishment
ntee Schemes and litiatives, while the needs to boldly iendly banking. MEs need to be ase their inherent ich lead to their tion in accessing
ntelligence Unit, Australia. 2009. :e for the Small and enterprise sector )nclusions.
Monetary Fund World Economic
l Finance 3). 2010. Scalingo financial services ng World.
mall 8, Medium tor Development
National Strategy Aedium Enterprise nent in Sri Lanka,
of Sri Lanka. 2012. Social statistics of
ara, G, ... 2 O ll l . capacity of banks to ment of SMEs. In: of professional SSociation of ankers Sri Lanka.
Economic Review: )ec.2012/Jan. 2013
23Anniversary Convention 2011: Banking fore sight- shaping integrated development.
ll bid
IFC. 2010. Scaling-up SME access to financial services in the Developing World.
13 Ibid.
United Nations, 2001, United Nations conference on Trade and Development: Improving the competitiveness of SMEs in developing countries,; The role of finance to enhance enterprise development. New York and Geneva, 2001.
ls World Bank. 2006. Access to Finance Newsletter.
IFC. 2010. Scaling-up SME access to financial services in the Developing World.
7 ACCA, CGA and CPA Australia. 2009. Access to Finance for the Small and Medium Sized Enterprises Sector, Evidence and Conclusions.
Oehring. E., Credit Guarantee schemes for the Small business sector. In: Brugger. E. A., Rajapathirana. S., eds. 1995.
Issues in Financing Small Enterprises in Developing Countries.
Footnotes
The sample was randomly selected using NCCSL database of members classified by NCCSL as SMEs. Any selection bias is unlikely owing the strongly heterogeneous nature of the enterprises surveyed. All are formally registered businesses.
" The size of the database was 400 members. However the authors acknowledge that this does not capture the entire SME population in the se Provinces. Such information is not available from government census and statistics data owing to SME definition and classification issues.

Page 21
Financing SMEs - Issues for Bankers
T he definition of Small 8, Medium scale Enterprises (SMEs) varies from country
to country. The classification can be based on the firm’s assets, number of employees, dr annual turnover along with the loan amount. Central Bank of Sri Lanka defines SMEs as enterprises with less than Rs. 600 million turnover per annum and with a maximum exposure of Rs. 200 million mainly to be classified as a SME for Basel III Capital adequacy calculation and utilization of funds accumulated in the Investment Fund Account in Banks.
Whatever the definition, and regardless of the size of the economy, the growth of SMEs throughout the region is Crucial to growth of respective economies. Because, SMEs play a critical and important role in providing job opportunities, enhancing the quality of human resources, maximizing the use of local Ire Sources, saving foreign exchange, nurturing a culture of entrepreneurship, fostering creativity and opening up new business opportunities etc. Most corporate organizations in Sri Lanka or elsewhere are the establishments started as SMEs in its early stages. Classic examples from our own country may be Nawaloka Group, Access International, Softlogic Group of Companies.
In most literature, it is mentioned that access to financing has been recognized as a major impediment for many SMEs and its growth, whereas corporate business entities have the advantage over the SMEs in doing so primarily as a result of their formalization.
However, according to Juliet Mckee and Kimball Dietrich (2003), most
Common problems lack of acces information and
low quality of huma the lack of acce Despite efforts
institutions and bodies to close fun continue to experit obtaining risk funding gaps rela risk, knowledge, a
The development ) a good deal of atte faced by SMEs in ac Traditionally, th: obstacles create institutions, mainl banks or on impe broader institution However, SME's als about financing attitudes that hav bearing on finan Therefore, constr appear On the "den financing market.
Objective of thi discuss the key
issues for banker SME lending, of wh are inherentin SM) bankers are respo
1. Issues of SM
1.1 Lack of finan weak financial li
In the literature, literacy is d informational asy. SMEs typically pc information on the cannot be easily ac be accessed at a outsiders.
Reasons for this Ir have different per
Economic Review: Dec.2012/Jan. 2013

Rey Challenges and
for SMEs are the S to market technology, the an resources and es s to capital. by financial public-sector ding gaps, SMEs ence difficulty in capital. These te to firm size, ind flexibility.
Literature focus 2ntion on issues ccessing finance. le focus is on d by financial y by commercial Ifections in the Lal environ Inent. D Inake decisions and display re an important cing decisions. aints may also hand side” of the
s article is to challenges and 's pertaining to ich, part of them Es and for others Insible.
Es
cial literacy or teracy
lack of financial esignated as mmetries where ssess privileged eir business that cessed or cannot ll by lenders or
lay vary and also spectives.
Wickrama Narayana
Chief Manager SME Development People's Bank
SMEs are mainly driven by entrepreneurs who have nurtured in their own ways to prospective SMEs. As a result of hard ways of development, they either had no time to devote further education or do not believe in learning. This is evident from the credit applications that are submitted to banks for financing. This eventually leads to low levels of financial literacy among entrepreneurs.
Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resource.
Though many SME owners are sound in developing business models and working out the profitability of products and services, understanding about the macro picture of the SME’s overall financial standing in terms of profit and loss account, balance sheet and cash flows is weak. As a result, they sometimes opt to resort to outsiders or merely depend on themselves in preparation of financial information which may or may not reflect the actual picture of the SMEs. Because of this impediment, banks have no choice, but to depend on bollateral for SME
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financing. At the backdrop Cash flow lending is encouraged, financial institutions Ie struggling to project the SMEs sustainable bankability. This is recognized as the Imain obstacle for banks and financial institutions in financing SMEs.
One of the options to counter this impedimentis the concept of"Para accountant”. A Para accountant is an external consultant who uses finance, e conomics, risk management and technology skills to help organizations prepare and report financial and tax statements according to accounting principles and regulatory requirements. A Para accountant also may review a firm's internal controls, processes and procedures to ensure that such controls are adequate. A Para accountant may work on a client's site or remotely. They are not necessarily qualified accountants, however, might be an option.
Bankers’ prime objective in this endeavour is to develop reliable sources of information so that they could project the sustainable cash flows of the business. With this objective banks could train their credit appraisal officers as Para Accountants, who will interacts with prospective SMEs and develop a set of financial information while strengthening the banking relationship over a period of time.
1.2 Entrepreneurs’ knowledge about building a prospective banking relationship
A banking relationship is about much more than just selecting a bank to handle a company's bank accounts. If the relationship is managed well, it can help a company to thrive.
SMEs that use more than one bank will need to manage multiple banking relationships. A company will first have a business account (or several) at a retail bank (or banks) for all day-to-day financial transactions. Whether it is retail, SME or corporate, the banks
- 20
should have a banking advisers and guide a com. to ei sure con usually offer a designated per expect to deal wit or persons from
.good banking rel
not only on pers also by ha understanding O. its financial net banking adviser good underst company's prefe. business and inc how their bank are handled.
There are many a sound bankin SMEs.The bank offer loans an credit, potential rates of intere advisers feel relationship with bank's advice car company's nee style, rather thar
In times of crisis, its bank's suppo Even if a compa case of insolvenc rapport with representative
bank is more lik if it knows that c their utmost to l
going.
Failure to de relationship, hov the SME is like good advice and, in times of dif unfortunately, m on the right tra the importance banking relation no sound financi available, at leas to maintain a relationship wi institution to needs, especii periods.

team of business
on hand, to advise pany. It's important tinuity- banks L contact with a son and in turn h the same person the company. A ationship depends Somal rapport, but ving a solid f the company and 2ds. Over time, a should build up a anding of the red ways of doing orporate that into ing requirements
advantages having g relationship for
is more likely to d other lines of lly at preferential est, if the bank there is a good the company. The be tailored for the ds and personal ngiven generically.
a company having )rt will be crucial. uny is a text-book y, strong personal
a company means that the ely to offer leeway irectors are doing keep the company
velop a strong wever, means that ly to miss out on crucially, support iculty. However, any SMEs are not ck to understand of having a good inship. Given that ial information are t, SMEs should try healthy customer ith the financial entice financial ally in difficult
Economic Review: Dec.2012/Jan. 2013
It is both Bankers’ and SMEs' responsibility of developing a prospective banking relationship over a period of time without compromising risk capital. More than the credit facilities, credit plus would be reasonably appropriate to start such a relationship and then move into advanced levels of relationships along with credit facilities.
1.3 Financial entrepreneurs
discipline of
As Henry Ford correctly cited, “Vealth dio es not come accidently. You have to plan for it.” One's discipline explains the right behaviour and ability to take decisions without emotions. Hence, financial discipline is all about right financial decisions. In order to be financially discipline one should understand concepts of accounting and financial management in SME business.
Accounting in general is all about record keeping and developing summary financial reports. Most commonly available financial reports or information are the profit and loss account, balance sheet and the cash flow statement. Unless SMEs keep records of their daily activities, it is difficult to develop financial statements with regard to their businesses. With no financial statements, SMEs will always struggle in making financial decisions. More often, there is no clear distinction between the business finance and the finances of the proprietor. Therefore, it is critical that the lender examines carefully borrowers all commitments, i.e., those related directly to the business and those associated with the proprietor's private life and assets.
Lack of Business Planning is a result of weak financial indiscipline in SMEs where investment decisions, working capital decisions, even pricing decisions are based on the entrepreneurs' values than on facts. The lack of proper financial discipline results

Page 23
in incorrect business decisions, which hampers the sustainability of the SMEs.
MacRobert (2002), in his SME
manual explains why SME borrowers are different to commercial and corporate
borrowers. One of the common reasons is unskilled/ untrained principals. Many SME principals in the Asia-Pacific region are selfstarters, often with limited formal education, and minimal training in business management skills. That is not to say that they are incompetent, but that they often lack the capacity to research information on ways to strengthen their businesses, and, indeed, to be aware that such resources even exists. Role of the bankers in this regard is to educate the importance of financial discipline through strong banking relationships. Bankers are one of the key sources, to get SMEs to believe in financial discipline. Bank officers should take the initiatives in this endeavour to educate the SME
OWIES.
Role of the Government is also a key imperative in developing required conducive environment through institutional and policy frameworks. Some universities in Sri Lanka have already started dedicated departments to teach courses related entrepreneurship. (Example: University of Sri Jayewardenepura and University of Colombo) and it is important to note that Business studies is part of the GCE A/L curriculum. Recent budget proposals in 2011, 2012 and 2013 have given enough support to encourage SMEs and SME financing and one of the very useful proposals was to direct government banks to set up dedicated SME Branches not only to facilitate SMEs with easy access to finance, but also to educate SME owners and to guide and direct them to right places and people. However, strengthening the institutional framework to develop business development support services is also an imperative.
2. Issues with
SMEs are not on economy, but als profitability. Most
maintain a substa of exposure to strategic investi diversity within th itself. It is always need to properly closely monitor th to avoid any credi
It is a perception : sometimes, that S highly risky as ex banks. It may be factors including, of financial infor returns, no colla show, highly sensi conditions, organizational stru Imore. These are r avoid or very underwriting of proposals. As a 1 reasons, credit poli institutions are bas Credit guidelines.
2.1. Institutiona with hindering p
In the case of Ina countries, the ab obstacles to SME exacerbated by in process factors. M countries are Concentrated uncompetitive ba This reinforces th adopt conservative Credit policies whic the credit risk an endorse a processe many elements to s while satisfying t requirements. Th results in a value culture in financia
According to Ma Timothy (2006), credit policy determ risk the bank will ta form. A bank's cred to the fundamental
- Economic Review: Dec,2012 (Jan. 2013

anks
7 critical to the ) to the banks' iversified banks htial percentage he SMEs as a ent given the e SME portfolio profitable, but
evaluate and e delinquencies
risks.
is well as a fact MEs are always lained by many due to several non availability nation, no tax :eral, one man ive to economic
O proper cture, and many easons given to
conservative
SME credit result of these cies of financial sed on stringent
1 framework rocess issues
any developing ove mentioned financing are stitutional and [ost developing still highly and have nking sectors. e tendency to ending policies. ch mainly cover di market risk, s which covers
ecure exposure, he regulator's his eventually : driven credit l institutions.
cDonald and management's lines how much ake and in what it culture refers
principles that
--
drive lending activity and how management analyzes risk. There can be large differences in their lending philosophy. The three potentially different credit cultures are: values driven, current profit driven, and market share driven. The institutional framework is reflected through the credit policy in this part of the world, the tendency is to inculcate a value driven credit culture, which has the following attributes:
o Focus is on credit quality with strong risk management systems and controls,
o Primary emphasis is on bank’s soundness and stability and a consistent market presence,
o Underwriting is conservative and significant loan concentrations are not allowed,
o Typical outcome is lower current profits from loans with fewer loan losses.
It is evident with lower nonperforming ratios prevailing in banks justifies that credit risk is covered with loan risk mitigation factors and discourage granting venture capital to SMEs. Eventually, SMEs need to resort to acceptable securities which hinders them from easy access to finance from financial institutions.
2.2 Collateral syndrome (Risk avert)
Strong value driven credit cultures in financial institutions always tighten the belts in covering credit risk. Unless the financial institutions develop competencies in cash flow based lending, Credit officers have no choice but to cover themselves with collateral in risky SME lending. Competencies itself will not drive the business unless the risky lending is rewarded with challenging business targets. Security based lending propositions are gradually becoming unhealthy for economies as it discourages strategically
Conta. on Page 32
21

Page 24
SME Access to Int Issues and Remedie
Introduction
international trade is a process of increasing
connectivity, where ideas, capital, goods, services and people are transferred across country borders. Trading globally enhances the domestic competitiveness and extends the sales potential of existing products. Olejarova (2002) states that it gives more opportunities for developing countries to access to global
markets, accelerates technology transfer from developed countries, improves productivity
and increases efficiency.
In Sri Lanka, large firms, with sufficient capital, market base information, access to modern technology and infrastructure facilities, are more successful in participating in international trade. However, it is yet a challenge for many Small and Medium scale Enterprises (SME) to engage in international trade due to inadequate access to capital and finance, inadequate industrial infrastructure, lack of market base information, obsolete technology and lack of modern management skills (Gamage, 2009). Further, supplier networking is also a critical challenge for SMEs.
Trading globally extensive planning,
requires
budgeting and prioritization which are immen se challenges for many SMEs in Sri Lanka. This research intends to explore the challenges
faced by Sri Lanka SMEs on export operations.
The majority of S are located in Irı of the SME entre locate their en Industrial Pal maintained by th present there is SMEs located ir parks spread
country. There conditions att leaseholds prope find it almos mortgage these p for loans. Altho SMEs own mova plant and mach reluctant to
collateral becaus
does not have a Registry to regis of movable mor borrowers tr; ownership of
mortgage. H industrial clust are mot well des
1. Structural Problems Faced
1.1 Inadequate
When banks pro SME, they exp equity stake or : the owner. Th lending by bank If the owner of
not have an ec business, he is r Risk taking is c characteristic o Today, banks e 40% as risk capi of enterprises i their full con
- 22

ernational Markets:
MEs in Sri Lanka ral areas. Some preneurs prefer to terprises within ks owned and e Government. At a large number of these industrial throughout the are very strict ached to these arties and lessees impossible to roperties to banks ugh, most of the ble assets such as inery, banks are take them as se, Sri Lanka still a Movable Assets ter the mortgages tgages preventing ansferring the
Sane after the
owever, these ers and networks gned .
Weaknesses | by SMEs
risk capital
vide funds to any ect a reasonable risk capital from is is common to s to any business. he business does uity stake in the ot taking any risk. ne of the primary
an entrepreneur. xpect around 30all from the owners in order to secure mitment to the
Economic Review: Dec.2012/Jan. 2013
1.2 Use of
Dr. S. P. Premaratna
Senior Lecturer Department of Economics University of Colombo
Danninda Niroshini
Assistant Manager DFCC
business; reduce the burden of debt servicing and also to share the risk in a business failure. Most of the SME entrepreneurs find it difficult to raise this minimum risk capital and the limitation in equity capital restricts the access to finance by SMEs from the banking
Sector.
outdated or substandard technology
Most SMEs in Sri Lanka use locally developed technologies in producing and delivering goods and services. One of the main factors that influences the success or failure of an enterprise is the technology it uses. The quality of Imost of the products and services produced by SMEs are of moderate quality or not up to international standards due to this substandard technology. They find it difficult to compete with relatively high quality cheaper imported products. Also with increasing globalization and phasing out of tariff and non-tariff barriers to widen trade, prospects for SMEs in Sri Lanka may be affected adversely, unless the above aspect is considered. This situation may adversely affect the SMEs in Sri
international

Page 25
Lanka thereby reducing their viability. Due to the substandard quality of products produced by some SMEs, they have only a very limited market regionally or nationally. Due to quality issues entering the international market is difficult for them.
1.3 Lack of managerial skills
Due to the smallness of the business, many SMEs find it difficult to employ skilled managers to look after specific areas of their businesses. Like in larger firms there is no segregation of owners from the managers. Owners and/or managers of SMEs often need to perform a wider range of tasks than those do in larger firms since there is less room for specialization. This requires the few managers or employees employed by SMEs to possess diverse skills not limited to one or two specific skills. Managers in developing countries do not have this multiple skills. Lack of specialization makes management capabilities of SMEs very weak. In addition, poor financial position of SMEs prevents them acquiring skills from outside.
2. Remedies to Overcome Structural Weaknesses in SMEs
Above are the main structural weaknesses of SMEs that prevent them from accessing finance from the formal banking sector. This situation compels SMEs to borrow from the informal sector at exorbitant rates of interest. Sometimes the rates are as high as 10 to 15% per month. This cost of finance renders most SIMES unviable. What are the remedies available to SMEs to overcome this situationP
2.1 Financial records
In order to encourage and motivate SMEs to maintain proper books of
accounts and I periodic financ. reflecting i actu performance, th needs to provide fiscal incentives. C was hardly any di the tax rates for corporates. This c to understate the avoid taxes. Altho applicable to SMEs investment is les mn) was reduc 2011 Budget p improvement in the keeping cannot be addition to tax i essential to introc fiscal measures to to Imaintain pro records.
2.2 Risk capital
A few years back,
of Sri Lanka enco fiscal incentives th of venture capita provide venture ci SMEs. Although, were about 5-6 companies, they cc according to the These venture ca. were investing in
Iather than inve Only very few co those are surviving are also not helpi counties in the W
to address the iss for SMEs by estab) stock exchanges. segments or se platforms to enab equity from gent institutional inves in Sri Lanka, the institution set up
raise equity capit policymakers to st the possibility o Government spc
Economic Review: Dec.2012/Jan. 2013

repare proper all statements
Lal level of
e Government
Some attractive sntil 2011, there ference between SMEs and large
·ompelled SMEs ir incomes and
ugh, the tax rate (where the total S than RS 25. O
e to 1. O% in rop o sals, an financial record
; seen so far. In
Incentives it is
luce some non
motivate SMEs oper books of
the Government uraged through e establishment l companies to apital mainly to
initially there venture capital ould not perform expectations. pital Companies large corporates sting in SMEs. mpanies out of g today and they ng SMEs. Many orld have sought Je of risk capital |ishing dedicated junior market parate market e SMES to raise 2ral public and stors. At present ere is no formai to help SMEs to al. It is time for eriously consider f establishing a onsored and/or
funded venture capital institution exclusively for SMEs. This will encourage the entrepreneurs to set up new SME ventures and also banks to lend to them.
2.3 Sub-standard technology and managerial skills
The performance of SMEs in Sri Lanka is affected adversely due to the use of sub-standard technology and due to lack of proper managerial skills. The poor financial standing and the smallness in the size of SMEs prevent them acquiring these skills for themselves. Therefore
SMEs all over the world resort to outside support in areas such as technology upgrading, improvement of product quality, improving managerial skills and expansion in market access. Therefore, it is essential for any country with a Substantial SME sector to have a
vibrant network of Business Development Services (BDS) Providers. When al SME entrepreneur needs professional advice on a specific problem relating to the operation of his enterprise, he should be able to access quality and reliable professional advice to resolve the problem. Although, institutions such as Industrial Development Board and Export Development Board were set up for this purpose, whether they could provide this service effectively is questionable. In Sri Lanka there are many such supporting institutions for SME devlopment. Most of them are doing the same things. There is no coordination mechanism. In
like Indonesia and Malaysia there are very efficient and effective networks of Business Development Services Providers and SMEs in these countries heavily depend on them for professional advice to solve their in-house problems. During
countries Philippines,
23 -

Page 26
the 1980s and 1990s, there were several concessionary finance schemes to help SMEs to upgrade technology and managerial skills of their enterprises. These schemes were designed and implemented in projectbase and ad-hoc nature. Sri Lanka does not have a national plan for SME development.
Why Banks are Reluctant to Led to SMES and Rovy to
Motivate Then
In Sri Lanka, some banks are reluctant to lend to SMEs and as such banks frequently subjected to criticism by policymakers, politicians and SME
3.
Entrepreneurs. The criticism is reasonable to some extent as the reluctance on the part of banks hampers the growth of SMEs. There are three main reasons for some
banks to be reluctant to lend to
SMES.
1. Perception of banks that SMEs are with high risk
Most banks have a perception that SMEs are high risk due to the following reasons:
Insufficient assets and low capitalization, vulnerability to market fluctuations and high mortality rates,
• Information asymmetry arising from SMEs' lack of accounting Irecords, inadequate financial records and Ireliable business plans,
• High administrative and transaction cost and low
returns,
* High probability of default,
• Inability of banks to properly asse SS Whether the SME borrowers possess managerial skills to generate adequate cash flows to service the debt.
This perception SMEs are an a
business in dev
The internationa
shown that R (ROA) on corp around 1.0-1.5% on SME lending 3.0% provided carried out Imanagerial defi can be minimiz
vibrant Development providers. As in should work
Authorities an development a purpose like i: Philippines and
netwă
One way of mini SME lending i services of rati; credit rating Overcome the re.
to lend to SMEs. assigns a rating indicating its Iis the assessme: performance an its operational, f and managerial few internationa are operating ir thern concentr listed corpora instruments. No
Sri Lanka has be India, rating of large scale by ra: as CRISIL, Dun SMERA. SMERA set up by the GC to rate the risk worthiness of 1
medium SC3. (MSMEs) to enal funds from the
Sector at attiI
interest. Banks
to lend to thes
have been rate. professional ra
-- 24

is not correct and
attractive line of reloped countries. 1 researches have
eturn on ASS et S orate lending is whereas the ROA g as high as 1.5- SME lending is properly. The ciencies in SMEs ved by promoting y Ork Business Services (BDS) the past, banks closely with ld international gencies for this in countries like
Indonesia.
nizing the risk of is to obtain the ng agencies. The system helps luctance of banks The rating agency ; to an enterprise k profile based on nt of its past d also measuring inancial, business risks. Although, a all rating agencies Sri Lanka all of ate on rating of tes and listed rating of SMEs in een done so far. In
SMEs is done in ting agencies such 8. Bradstreet and A was specifically }veInment of India. profile and credit micro, small and le enterprises ble them to obtain formal banking active rates of
will be comfortable
se MSMES which d by independent ting agencies. In
Economic Review: Dec. 2012/Jan 2013
India, 75% of the fees charged by rating agencies from MSMEs are
subsidized by the Indian Government. It is time for
authorities in Sri Lanka to
introduce a system of credit rating similar to that of in India.
Transaction and Administrative cost will depend on the methodology and technology used in SME credit delivery. At present, most banks in Sri Lanka use “Judgmental Method” or “Manual Underwriting Method for approval or rejection of SME loan applications which involved in manual collection and review of operational data and personal information on borrowers. This system of processing of loan applications is time consuming and costly and also sometimes result in wrong judgment or adverse selection. Usage of credit scoring models by banks for lending to SMEs can overcome information asymmetry and high transaction cost. Credit scoring models can easily discriminate between high and low risk borrowers.
2. Lack of commitment of top management of banks
Top management of many banks in Sri Lanka is not fully committed to promote lending to SMEs. They are more comfortable with lending to few corporates, even if that segment of the marketis highly competitive. They perceive this sector to be risk free, hassle free and with high profitability. This, negative attitude of top management of some banks trickles down to all level of management making SME lending in these banks negligible. SME activity becomes less attractive career-wise to lending officers as
lending is recognized by the top management. The top management of these banks very often considers SME
corporate more

Page 27
lending as a corporate social responsibility for political reasons and not as a profitable business line. This criticis.In is not common
to all banks in Sri Lanka as there
are some banks truly committed to promotion of SME lending.
To change this negative attitude of some banks, it is necessary to use the “Carrot and Stick” approach to motivate the reluctant banks to
lend to SMEs. The “Carrot" may be some fiscal incentives. At present there are certain fiscal incentives
for banks to lend to SMEs. The
Budget proposal for 2012 encourage banks to set up dedicated branches for SME lending and profits from these branches will be taxed at a
reduced Irate of 24% and not at the
normal rate of 28%. Further
reduction of the tax rate on profits from SME lending will compel and Inotivated banks to increase their SME lending activities. The “stick “may be the directives from the Regulator making it mandatory to channel certain percentage of their loan portfolio to the SME sector. If this is not complied with, banks will be penalized. This is known as priority sector lending. In India, all banks are compelled to allocate 35% of their lending portfolio to priority sectors, one of which is the SME sector. It appears that Sri Lanka has accepted the principle of directed lending to priority sectors by making it mandatory (under Budget Proposals 2012) that all banks should lend a minimum
of 10% of the funds available in
their "Investment Fund Accounts”
with the Central Bank to the SME
sector. The amount available for this will be not significant as banks are required to invest only around 8% of their annual profits in this account. Therefore, there is a need to enhance the amount available
for SME sector link
that should be lent total lending by t fixing a higher pe India.
3. Lack of skills
SIMES
Bankers use
approaches in lenc on Collateral and t
on Cash flows. Som perceive that if len by realizable assets cover, such loans a that banks could
value of the assets
total outstanding ir situation. This is a country like Sri LaI of mortgaged as drawn process and an average 3-5 yeal even more. By the is sold, its realizab)
much less than th
if the asset is a
Banks will have 1
amounts on litigat end of litigation, bol lo se and only auctioneers and se
be the winnels. On if the lending is dc basis of cash flows, for willful defaults.
where no collatera
borrower will not li
willful default
genuine busin Collateral should o
of “hand twisting” a of debt recovery. A lending should be a collateral based based lending app) more emphasis on problem with most they have no skill based landing. Es flows based on the a
- Economic Review: Dec,2012 (Jan. 2013

ing the amount to SMEs to the
anks and also centage like in
for lending to
different ing; one based he other based e banks wrongly
WO
ding is secured with adequate Ie Irisk free and
realize the full
to recover the
default Irelated
misnomer in a
ka. Realization sets is a long it might take on is or sometimes
time the asset Le value may be e original value Inovable one. Io spend huge ion and at the th. parties might the lawyers, curity films will the other hand, ne only on the it makes IOOm In a situation 1 is taken, the pse anything in situations or
e SS failure. nly be a means ind not a means As such proper combination of
and cash flow Coaches placing cash flows. The t banks is that ls in cash flow stimating cash. appraisal of past
<
performance and the future prospects of the enterprise is a difficult task and it requires specific skills. If the lending is for a corporate, preparing cash flows is not a difficult task as almost all Corporates maintain proper financial records. As Inost of SMEs do not maintain proper financial records, computing cash flows from unreliable and incomplete financial records is a very difficult task. The situation becomes more difficult for banks as most SMEs also do not have assets that are acceptable to banks as collateral. Therefore, it is essential for banks involved in SME lending to vigorously train their lending officers in cash flow based lending.
In conclusion it can be said that if the structural weaknesses of SMEs
are corrected and the reluctance of
bankers to lend to SMEs are remedied, a smooth flow of funds from the banking sector to the SME sector could become a reality.
References
Gamage, I, B. (2009). Trade Facilitation and the SME Sector in Sri Lanka. Retrieved from: http:// WWW.uneScap.org/tid/artnet/mtgA. tf Sme-Sll.pdf
Olejarova, M. (2002). SME°s
Internationalization, In Context of
Slovak Republic Retrieved from
http://Web S2002. lab, es/dep
con omia empresa / Jorna da S /
P a p e - r S-A - 2 O-O 5-1.
ei v rti
Congres.pdf.
Contact details
Dr. S. P. Premaratna Sppremaratne(2yahoo.com
Darminda Niroshini
irodind(2gmail
25 -

Page 28
f
Despite
Global Value Chains SMEs - Sri Lankan F
Abstract
xport performance has EŽERA critical for the
economic development of many developing countries in recent years. It has contributed to faster grouth and poverty reduction. Exports have produced economic benefits deriving from efficiency gains associated uith exploiting comparative advantages and improved allocation of scarce resources. There are also dynamic gains in the export sector driven by greater competition, greater economies of scale, better use of capacity,
dissemination of knowledge and
know-hou, and technological progress. Competiveness of enterprises is fundamental for SMEs to to get integrated to Global Value Chairls and to succeed. In Sri Lankcar perspective, to increase export share of SMEs one has to adapt to the changes required in integrating to Global Value Chains (GVCs) follouing lessons from other developing countries.
Introduction
Export competitiveness is a forerunner of a country's economy for sustainable development. Most analyses of export competitiveness uncover a series of issues that a country would need to address to achieve success in export markets. As factors that constrain exports are generally complex and numerous, governments often find that all these issues cannot be addressed concurrently due to cost concerns, implementation barriers and political impediments.
international trade experiencing a contraction of 12.2%
- 26
in 2009 in th: financial crisis, the upswing. Thi a record-breakin the volume of exp question is wha policies and regul achieve export su this question is th countries are face export success.
It is now widel tackle the multi faced by exporter no longer be lin called “borde Policymakers mu range of national more inward OIie the success of export-led eco. especially in economies, since many other deve developed count tried to emulate has been a fund development p import-substit become more ol Today, the focus international con allowing the C markets to beco Global Value
presents opp ( challenges to Sm sized enterpri prosper in the ex
As in many deve contribution of S economy of Sri L 4% to 5% in Vall period from
Graduating SM. more from th, available globall the countries ha them to the Glo

s & Export-Oriented 'erspective
le wake of the rade is again on s is evidenced by g 14.5% surge in oIts in 201O2. The it are the trade lations needed to ccess? Answering le challenge many d with to achieve
y recognized, to tude constraints s, trade policy can nited to only soI measures'. st address a wide issues, which are inted. Because of
forerunners of nomic growth, the east Asian 2 the mid-1980s, aloping and least ries (LDCs) have this Inode. There lamental shift in olicy. From an
tion model to
utward oriented. is on improving npetitiveness, and iynamic export ome members of Chain, which ortunities and hail and Mediumses (SMEs) to
port trade.
aloping countries, MEs to the export anka remained at Lue terns over the .5 2012 م. 2010 Es to contribute e opportunities y is the challenge ave by integrating bal Value Chains
Economic Review: Dec.2012/Jan. 2013.
Rekha M. P. Hewaliyanage
Director Regional Development Division Sri Lankca Export Development Board
(GVCs), and becoming more efficient considering the investments made and resources allocated for the SME sector.
Sri Lankan Perspective
The rapidly changing international trading environment, highlights the importance of adopting a strategic approach to Sustain the growth momentum of exports in existing markets and diversifying into new markets. The diverse range of issues that emerge in facing these challenges require a competitive response, by the countries if the desired goals of export development efforts are to be realized.
Exports contribute nearly 17% to the GDP of Sri Lanka (Performance Review --2012/ Sri Lanka Export Development Board) and as the premier export promotion organization, mandated to develop and promote exports from Sri Lanka, the Sri Lanka. Export Development Board (EDB) plays a leading role in achieving the national objectives, as set out in the “Mahinda. Chintana”. Policy document (GOSL) reference).
The export sector of Sri Lanka, after facing a setback in 2009 due to the global economic crisis, rebounded strongly in 2010. The momentum gathered by the sector improved

Page 29
further in 2011 registering a highly commendable growth of 22.22%. However, during the period January-December 2012, the export earnings have registered a drop of 6.0% due mainly to the prevailing adverse external environment. It should be noted that, even though the export sector (Adverse effects of global financial crisis -2009 led countries to confront with economic recession which resulted contraction of purchasing power) suffered a setback in 2012, the earnings of the sector in that year is still higher
export earnings, d. and 5.43% respet earnings of the Information Tec. which accounted the total export e grew by 34.08% salient feature in was that contribu from all sectors to remained at 5% ov
years.
Patterns of Sri
An analysis of th
Merchandised Exports and Exports of
t
0.94 t
12,000 y 10,250 l
10,000-18,904
ーマト ൺ 6, 1% t
2. 8,000
: 6,000ψ
4,000:
2,000
O . ア
200 20ll Year 2012
❖፡
Figure 1. Overall Export Performance
i
Computer a Information Technology
Jan. -Dec. 2010, 2011, 2012
Source:
than the earnings recorded by the sector in 2010. The graph below indicates the performance of the export sector during the period January - Dec ember in 2010, 2011 and 2012. The Table 1, above presents the export performance of the four major sectors i.e. Agriculture, fisheries, Industrial and Computer 8. Information Services in the years 2010, 2011 & 2012.
As shown in the Table l, export earnings of the country have diminished by 6.09% during the period under review. Earnings from Fisheries exports which accounted for 2.09% of total exports, increased by 4.80% while earnings from Agricultural exports and Industrial exports which accounted for 22.94% and 74.3% to the total
Sri Lanka Export Development Board
stagnant produc relative to the economies.
Considering the pe top 10 export prod in 2012, Appare remains as the la sector, accounting overall Imerchandi Lanka and recor world’s total expo. (Performance Re Lanka Export Devo The second larges tea products, acc of the world ex strong comparati the world market comparative adv 75.7%. The Other rubber based pro
-- Economic Review: Dec,2012/Jan. 2013
 
 
 
 

opped by 8.59% tively. Export Computer & hnology sector only for 4.5% of arnings in 2012 However, the export earnings tion from SMEs export earnings er the last three
rarakan Exports
e export sector reveals that its Structure is u i t e concentrated, ooth in terms of p r o d u c t 2omposition and е x p o r t ide stinations over the last three decades. Therefore, al more vertically di i v e r s i fi e di export structure is needed; given that our exports are composed basically Of primary goods W i t h technologically stion practices industrialized
rformance of the ucts of Sri Lanka l industry still argest exporting g for 40% of the se exports of Sri ding 1% of the rts of the sector view -2012 / Sri elopment Board). t export sector is ounting for 22% ports having a ve advantage in as its revealed antage index is major exports are ducts and gen/
jewellery products. These five product categories together account for 75.2% of the total export earnings of Sri Lanka in 2012 and Sri Lanka's export product basket continued to bo e concentrated on a very limited number of products.
Another important phenomenon is that the structure of export destination differs for major export products and highly dependable on few countries. In the case of арparel industries, their destinations aᎱ6e quite concentrated on a few countries, mostly destined to USA and EU markets, for example: articles of apparel, accessories, knit or crochet go to top three export markets, ie: US, CJK and Italy. The situation is similar in diamonds, gems & jewellery product sector of which over a half of the exports is destined to Belgium alone. On the other hand, export destinations of rubber based products and tea are relatively evenly distributed.
In general, Western countries continue to be the major destinations for Sri Lanka's exports. EU and US together absorbed 60% of the country's exports in 2012. Therefore, the adverse economic conditions prevailing in the se countries negatively impact the export earnings of Sri Lanka.
Composition of Exports
The Figure 3 below illustrates the contribution made by each product sector to the total merchandise export earnings of the country during the period of January to December 2012. It Ieveals that 80% of export earnings were derived from eight product sectors, which were identified as thrust export sectors which are earmarked to surpass US$ 1 Bn.target (except Apparel & Tea exports which have already surpassed the US$ lBn. target) by 2020.
SME Contribution of Exports
Sri Lanka is presently a small player on the global scale recording
27 -

Page 30
Table 1 Export Performance by Major Sectors
Jan-Dec Jan-Dec Grow
2010 2O1 %
Agriculture Exports 2,216.18 2,453.OO 10.6
Fisheries Exports 2O2.24 19531 -3.4
Industrial Exports 5,781.64 7,678.56 32.8
Total Merchandise exports 8,638.8510,558.8222.2:
Computer & Information 265. OO 355. OO 33.9
Technology Services
Total Exports 8,903.8510,913.82 22.5
Source: Sri Lanka CustomS * Provisional
only US$ 10.2 Bn. export revenue from merchandised exports, where SME contribution to total exports was only around 5% contributed by 82% of registered exporters of the country. Lack of a national definition for SMEs paved the way to have varied definitions in defining SMEs by the institutions which deals with SME development. SLEDB is no exception and definition of SMEs by the Sri Lanka Export Development Board is "Enterprises having an annual export turnover less than Rs. 150Mn.in a given year”.
According to the definition Table 2 below analyses the composition of exporters for the 3-year period from 2010 to 2012.
From the data ab that percenta; composition of Sri community remail with a slight dec involved in both NC sectors and the also recorded whe export revenues g both sectors over period from 2010 t on same is given i
Although the co sector registered growth rate of 22% global crisis il noteworthy that sector has not Ire( of total export re by the sector i recorded around 4 to the revenues ge
metalic mineral Products Spices
196 %
Othe 2O 96
Textiles 8, Garments 4%
N Electronic, Ο Eletric
Machinery Products 8,
Food Bevera 4%
Gems,
Diamo
nds & Jewellen
6%
Rubbel Rubb, Produ
9%
Figure 3 Composition of exports - 2012
SOUICe:
Sri Lanka Export Development Board
- 28
 
 
 
 
 
 

(Value USS Mn.) product sectors is phenomenal in
Sri Lanka's export structure and
in Jan-Dec Growth
2012 %
SME export contribution also revolved around same product
2,242.3 -8.59
3 204, 68, 4.8O
7,261.93 -5.43
9,773.60 -7.44
476. OO|| 34.08
10,249.6O -6.09
sectors over the years. In year 2012 contribution of SMEs to exports is depicted in Figure 2 below.
SMEs contribution to exports in 2012 mainly concentrated in
хve it is obvious ge share of Lankan exporter S to be as same line of number )n SME and SME same behaviour in comparing the enerated by the the three-year o 2012. The data n Table 3 below.
untry’s export
a considerable in 2011 after the n 2009, it is the SME export overed in terms venue generated In 2012, which % drop compared nerated in 2011.
- In terms of number of & exporters and export
I e V 6e I, Ul e generated, t h е y country's е x p o r t 8. Structure r | h e a v i l y dependent O large S c a l e exporters. — O v e r
concentration
on limited
Inumber of
Economic Review: Dec.2012 (Jan. 2013.
Manufacture, Agriculture, Plantation, other export agriculture crops, fish 8. fisheries, industrial,
manufactures and other sectors.
Manufacturing accounted for 33% of the total export contribution having processed food export products & Confectionary 8, bakery products as the highest export earners from the sector. Agriculture sector accounted for 21% share, and highest export revenue earners of the sector were mixed coir fibre and tea packets. Industry sector accounted for 19% share with the highest contribution from export of gems and garments. Other export crops, Fish & Fishery products, Plantation, other SectOIS contributed 11%, 7%, 7% and 2% respectively.
The prominent feature in the main sectors of SME export contribution is that most of the sectors too are heavily concentrated on the same major export product sectors, majority of which are dominated by the non SME (large scale) exporters. The exception is Manufacturing, which consist of widely diversified export products ranging from processed foods to ships & boats and parts of aircrafts etc., which are categorized as Non Traditional Exports. Over concentration on limited products has to be analyzed with the present status of global demand for such Sri Lankan products.
With the latest global trade statistics by the International Trade Centre (ITC), global demand for Sri Lankan products is depicted
in Figure 4 below.

Page 31
Table 2 Composition of Exporters - Exporter
category wise
SectOr 2O10 2O. 2O2
No. Of 96 No. Of 96 No. Of 96 Expor-Share ExpoI-ShareExpor-Share teIS | O fters O. if ters || O f to tal to tal to tal expor- expor- exporteIS teIS terS
Non SME 611 || 18 647 18 59. 18
SME 2,697 82 2,881 82 2,685 82
Total 3,307 100 3,528 100 3,276 100
Source: Sri Lanka Export Development Board
The Figure 4 below presents the performance of 20 leading export products of Sri Lanka in the international market. The bubble denotes a particular product and the size of the bubble represents the amount of that product (in US terms) we export to the world marketo .
As derived from the above chart where Sri Lanka is a net exporter for major product categories of Tea and Apparel which falls into Non SME category are placed in the "Losers in the growing sectors" and "Losers in the declining sectors” respectively. Product sectors such as printed books, vegetables, Milling Products, Miscellaneous edible preparations, Ships & Boats are placed in the “Winners in declining sectors” and “Winners in growing sectors' respectively in the global scenario. If the bubbles fall into the “Winners in growing sectors", it means that the world demand for the product denoted by the bubble is increasing and also Sri Lanka's share of that product in world exports is also increasing. Our export products such as Rubber and articles thereof; Miscellaneous edible preparations; Edible fruits, nuts, peal of citrus fruit, melons; Ships, boats and other floating structures; Milling products, mould, starches, inulin, wheat gluten; Miscellaneous chemical products; Residues, waste of food industry, animal fodder, fall into this category. Trade promotion efforts for these
the exports of the
SME involvemer activities is great stated sectors. Th directly or indirect with Global Value their potentials harnessed yet. Sector S are Som) employers of the % of the labour Census 8. Statistic and have a great development dome global markets potentials open to for development c globally the countr way for SMEs competitiveness ) global value chair what is needed a Globali Value Cha excel in exports.
Global Value Ch Lessons for SME
The acceleration aided by the rapid
Table 3 Compos.
SetCtOr
Exp C Turno
Non SME || 899,1
SME 50,8
Total 949,9
Source: Sri Lank
- Economic Review:Dec 2012/Jan. 2013

p r o di u c t s should aim to broadening the Supply capacity to Cater to the markets with in cre a sing demand.
The Sri Lankan status in global scenario in “Winners in gr O W in g Sectors' need to be har nessed fully to strengthen
country.
it in economic er in the above heSe SectOIrS are ily have linkages : Chains though are not fully Further, these Le of the main labour force (75 force/Report of s) of the country er potential for stically targeting With the Se the SME sector lomestically and y has to pave the to Strive for required by the ns. Let’s look at ls threshold for ins for SMES to
tains (GVCS) 8
s
of globalization, l, development in
ition of Exports
information and communication technologies, improved transport facilities and tariff reductions by countries, presents opportunities and challenges to Small and Medium-sized Enterprises (SMEs). Participation in GVCs can give SMEs the opportunity to attain financial stability, increase productivity and expand their markets. Cooperation within a network of upstream and downstream partners can enhance a firm's status, information flows and learning possibilities; introduce new business practices and more advanced technology. On the other hand, SMEs' involvement in value chains demands greater Imanagerial and financial resources, the ability to meet international standards and the protection of in-house intellectual property. To meet these challenges, even in developed countries SMEs need the support of their governments (OECD, 2007).
A value chain describes the full range of activities through which a good or a service passes from its conception to its distribution and beyond. This includes several activities such as design, production, marketing, distribution and support to the final consumer. All these activities can be contained within a single firm or divided among different enterprises; they can be contained within a single geographical location or spread over wider areas. A Global Value Chain (GVC) is a
- Exporter category wise
2OO 2O1 2012
rt% Share Exp or t% Share Exp or t6 Share Ve Turnover TurnOver
OO 95 1.054,092 95 1,026,245 95
O4 5 53,508 5 48,870 5
O4 100 1,107,600 100 1,075,115 100
a Export Development Board
29

Page 32
chain of activities which are divided
competitive ad
among multiple firms in different locations. . Be.
geographical locations. GVCs cover possession of ce
a full range of interrelated skills and t:
production activities performed by resources, son
firms in different geographic examples in Asia
I
e
Other i.
Fish 8, Pantation Sectors F
fisheries 2 % N Products
7% S
Other s
Export l
Cгорs 1.96
21%
Industry 1996
Figure 3 Contribution of SMEs to exports
2012
Source:
locations to bring out a product or a service from conception to complete production and delivery to final consumers (UNCTAD, 2006).
Industries need value chains for efficient production, based on industry requirements. Global Value Chains determine competitiveness of enterprises along the activities which involve concept, design, production, marketing, distribution, retailing and R&D, and they might even include waste management and recycling. All these activities are linked to a one another and each link of the chain performs an activity, and different firms add value at each stage of the production or service process.
Rapid reduction of costs involved in transportation, acces sing information due to technological advancements and ICT has facilitated production, trading products and services through spatial division of value chains.
Accordingly availability of natural Iresources, low cost labour for labour intensive industries etc. have integrated into GVCs due to
Sri Lanka Export Development Board
handicraft Imanu: based compon automotives ar GVCs successful
According to Hum large retail and br such as Nike anc and footwear, aI within the foo exercise a decisi GVCS without tak of large parts O. process and logistics”.
SMEs from sele countries suc] Bangladesh, Ken to buildup compe particularly thro intelligence prog) initiatives which compete succes markets due to t functions (R&D, marketing) or rol tiers of suppliers
The SLEDB organization development of Out its function Advisor, Facilit
- 30
 
 
 
 
 
 
 
 
 
 
 
 

antages of the :ause of the rtain specialized 'ained human Le Of the be St are IT firms in India, and lectronics firms China, Taiwan rovince of China, Ialaysia and ingapore have u cc e s sfully integrated into FVCS.
in Sri Lanka, some f the SME .pparel 8. a I m e in t
с c е s s o ry nanufacturer S, rocessed fruit & e get a b le nanufacturer S, yo o den toys & facturers, rubber ent parts for e integrated to
ly.
phrey (2003), “[...] anded companies il Gap in clothing ld supermarkets d industry can ve influence over ing direct control f the production its associated
:cted developing in as Vietnam, ya have managed titive advantages, ugh their market rammes and R&D enable them to ssfully in global he distribution of
production and es among different
and distributors.
as the apex
fOI export he country carry s as a Promoter, ator, Knowledge
Economic Review: Dec.2012/Jan. 2013
provider and for the exporter community. The programmes for development of SME export sector are embedded in these functions where market, product, supply development programmes are implemented with the consultation of "ADVIORY Committees” which represent members of exporter community as well.
The challenge for SMEs is to determine how and where (in which niche markets) to position themselves so as to best reap the benefits of globalization. Market researches and market development programmes by the Divisions of the SLEDB facilitate export-oriented SMEs to establish market linkages with niche markets. What they need in order to create competitive capabilities is the capacity to continuously upgrade their skills so as to increase their returns. Continuous upgrading includes, Process upgrading aims at increasing the efficiency of internal processes (e.g. increased inventory turnover, lower scrap and successful adoption of standards)}. For example, Nestle has helped local suppliers in developing countries to meet better Standards in agricultural produce, offering training and technical assistance
in field care, post-harvest practices, Storage and transportation.
Product upgrading includes the ability to produce components or retail new or more competitive products developed by leading films (e.g. automobile dealers, gas stations, restaurant chains, travel agencies, drug stores, and courier services). V.
Functional upgrading seeks to increase the value added by changing the mix of activities conducted within the firm (e.g. taking responsibility for Outsourcing accounting, logistics and quality functions). For instance, General Motors, HP- Compaq, Nortel, and Sony have outsourced IT services to Wipro in India; Eli

Page 33
20-Losers in growing sectors
09-Coffee, tea, matt and spices
5
-
l
O
−
心
دسمبر
Losers in declining sectors 貂 0 纪 -20 O
Sri Lanka is a net
24-Tobacco and 4 lurra tobacco substitutes
40-Rubber and articles thereof
3-Residues, wastes of food industry
84. Machinery, nuclear reactors, b
2
%7024Fish, crusta 39-Plastics and artic 9နှီးပြိုး
حسین:} هم.ي؟ ဒို့ဗ္ဗုဒ္ဓါဇို့ chern 85-Electrical, electronic e "་། ibe fruit, 11-Milling
uts, peel of citrus . Y fuit melor
26Vegetable 87 vehicles other than railway,
Sri Lanka is a net
Growth of national supply and international demand for export pr
71-Pearls, precious stones, metals, coins, etc
S.
89-Ships, b
gluten
fruit, mut,ect for 53-Vegetable textil
S2-Articles of apparel, accessories, 1 添森露 49-P, accessories, knit gr crochet
20
Annual increase of Sri Lanka share in world exports bety
The ĉ3 Reference bubble | pro: ξεΧ.
;: importer for this 9 exporter for this
product product Figure 4 Global Demand for Sri Lankan Products
Source: International Trade Centre
Lily and GSK Pharma outsourced pharmaceutical functions to Shashun Chemicals, India; and Bharat Forge, India has been performing engineering for Caterpillar, FA W (China), Ford, Meritor, and Toyota (IBEF, 2007). Some SME s became global suppliers or even TNCs in their own right through functional upgrading in a GVC.
These are some of the GVCs which look for outsourcing IT enabled services at present from Asian countries for which Sri Lankan SME IT/BPO companies also have the potential get integrated. As the SLEDB has identified the IT/BPO/ KPO sector as one of countries strategic export sector for development and has developed a strategic plan for the sector to boost development of SMEs involved in the sector targeting an exportrevenue of US$1Bn. in 2015.
Chain upgrading creates opportunities for suppliers that have developed competencies and skills to move to a new value chain. For example, firms in Taiwan. Province of China gradually moved from the manufacture of transistor radios to calculators, to TVs, to computer monitors, to laptops and now to WAP phones.
Conclusion
There aTe now In developing coun been able to deve export industries rewarded with rem: growth: the Repub Chinese Taipei
Southeast Asian c. Thailand, Malaysi. in the 1970s; Chi and Central and
countries in 1990; These countries w tap into the phenc international tra these success stor countries have pli in integrating te Chains. Fundar continuous impro to gain “Comp integrate into
respective enablin an economy. Sri L have to be robus integrated to GV their export share by continuous
en.hancing compe in exports. To ena enhance their co: get integrated . government assi product adaptati
Economic Review: Dec.2012/Jan. 2013
 
 
 
 
 

ducts of Sri Lanka - 2011
Winners in growing sectors
ale: 400 US Dollar thousand
ats and other floating structures
unimal folder
villers, etç ; invertebrates nes ous edible preparations cal products
products, malt, starches, inulin, wheat
Ο or world trade d preparations гаплүүay
ot OT COC
oks, newspapers, pi
imit O es etc
Winners in declining sectors
40
reen 2007-2011,%
bubble size is
bortional to port value
X Trade
Y Center
any examples of tries that have alop competitive
and have been arkable economic blic of Korea and in the 1960s; ountries such as a and Singapore na in the 1980s; South American s, such as Chile. rere also able to menal growth in ude. Behind all ies, SMEs of the ayed a vital role Global Value nental is that vement of SMEs ) etiveness” to
GVCS within g environment in ankan SMEs too it enough to be Cs to increase
to the economy
upgrading in iveness to excel ble the SMEs to npetitiveness to Into GVCS the stance in R&D, on, use of new
2 fibręs nes, 器 yarn, woven fabric
鹽 e
International
technology and lowering cost of production to be facilitated by relevant stakeholder institutions.
The SLEDB has particularly implemented assistance programmes for export oriented SMEs in obtaining international product / systern certifications for Tea sector, Spices and allied products sector, development of production facilities in line with international Good 60 Manufacturing Practices/ Good Workplace Practices for coir sector, finding niche markets for processed food sector, gem & jewellery sector etc. are sonne of the initiative by which most of the export oriented SMEs in the regions have benefited in enhancing their competitiveness to get integrated with GVCs,
du
References
Humphrey J. (2003), “Opportunities for SMEs in Developing Countries to Upgrade in a GlobalEconomy”, SEED Working Paper No. 43, InFocus Programme ΟΙΩ Boosting Em p ll oy m e n tth r o u gh S m all Enterprise Development, Job Creation and Enterprise Development, International Labour Office, Geneva.
IBEF (2007), “India: Fastest Growing Free Market Democracy
(http://ibef.org/brandindia/).
OECD (2006). Enhancing the role of SME s in Global Value Chains: Conceptual issues. CFE / SME(2006)12/REV 3.
OECD (2007a). Final Synthesis Report on Global Value Chains, CFE/SME, Paris.
OECD (2007b). Tokyo Action Statement on Strengthening the Role of SMEs in Global Value Chains.Paris.
OECD (2009), "The Impact of the Global Crisis on SME 8,
31 -

Page 34
Entrepreneurship Financing and Policy Responses
Premaratne S (2004), “Networking for SMEs - Case of Sri Lanka Netherlands University
SLEDB, (2010/2011/2012) - Policy Briefing and Discussion papers, Sri Lanka Export Development BOARD, Colombo
United Nations (2010) “Integrating Developing Countries' SMEs to Global Value Chains http// www.wtio.org, Various articles on SME Development
Footnotes
Trade to expand by 9.5% in 2010 after a dismall 2009, WTO reports, WTO Press Release 598, 26 March 2010. Available at: www.wto.org/ english / new si e / pre s 1 0 -e / pr598 e.htm
* Trade growth to despite 2010 rec hangover persis Release 628, 7 Ap. at: www.wto.org/ pres11_e/pré28
* Kaukab, R., “) trade policy-mal and possible res, S t a k e ) participation”, Trade Hot Top February 2010.
* The Republi Chinese Taipei Southeast Asian ( Thailand, Malays in the 1970s; Ch: and Central and countries in 1990 These countries
tap into the phen international tra
Contd. from Page 21
important investment decisions. Government of Sri Lanka recently enacted legislations to ease the pressure on SMEs through amendment of Parate execution where normal civil procedure of debt recovery should be applied for loans below Rs. five million with security of property mortgages.
2.3 Weak competency in building cash flow based lending propositions
Strong value based credit policies encourage security-oriented lending and creates knowledge gaps in credit officers. Securityoriented lending does not require strict cash flow projections and credit evaluations. Developing cash flow projections is an art and requires overall knowledge about the industry, technology, external factors (external climate) and specific firms (internal climate) along with econometrics modeling to analyze the cash flows. When it comes to large projects, knowledge in project apprais als and risk analysis will help the credit officers to get exposed to project financing.
At the backdr confidence ar businesses
economies, vent business propos agenda of the ban intuitions. Final risky but at t profitable, so inde develop how b mitigate the risk ( One of the optior develop a culture with confide development of their credit offic development not econometric analyzing and eva prop o sals, but knowledge al experiences of si business units, v world economic emerging ΥΥ technologies, b issues of labout the entrepreneur
Conclusion
Many of the litera issues of financ
- 32

ease in 2011 but ord surge, Crisis ts”, WTO Press i2O1. Available english/news_e/ 2.htm
Inclusiveness of cing: Challenges ponses for better o 1 d e r Commonwealth ics, Issue 70,
c of Korea and
in the 1960s; ountries such as ia and Singapore na in the 1980s;
South American ls, such as Chile. were alsoable to omenal growth in i.e.
5 Export Statistics — Sri Lanka Export Development Board - 2012
6 The Y Axis of the Chart denotes the Annual growth of world imports between 2007 -2011,% and the X Axis denotes the annual increase of Sri Lanka share in world exports between 2007 - 2011, 9%. Accordingly Winning sectors are the sectors which falls into the quadrants having a high annual growth of world imports and high annual increase of Sri Lanka share in world exports.
Contact details
Rekha M. P. Hewaliyanage Email: rekhaQedb.tradenets.lk Tel. O11 2 300701/ O1123OO7O5-1
Ext.325
op of investor ld developing in energing uring into risky sitions is in the king and financial ncing SMEs are :he same time
ed banks need to est they could of these ventures, ns is to gradually of SME financing Ce through competencies in ers. Competency only addresses techniques of luating the credit also industry nd exposure, ck industries and world politics and s, knowledge in larkets and behaviours and r, understanding ship etc.
ature examine the ing SMEs world
over. However, there are key issues not only from the SMEs point of view, but also from the financial institutions and, government's point of views. No one can expect the SME S to nurture in b est practices all by themselves. In this regard, the role of financial intuitions is greater, when it comes to inculcate and nurture SMEs in the right directions. The issues for SME financing discussed above are the keys, but there are many others which needs further discussions.
References
Torre A, Peria M S M., Schmukler S L. 2008. Bank involvement with SMEs: Beyond Relationship Lending
MaKee J, Dietrich K 2003. Financing SMEs: Issues and Options, 2nd A.III.a Conference of the PE CC Finance Forum held in Hua Hin, Thailand.
S. Scott MacDonald/ Timothy W. Koch 2006, Management of Banking, 6th Ed
McRobert A 2012, 4th Annual SME Banking Excellence 2013, Thailand.
Wikipedia & Newspaper Articles
Economic Review: Dec.2012 (Jan. 2013 -

Page 35
Emerging Challer
Sri Lanka
mall 8, Medium Enterprises (SMEs) form a high impact- making
component of the socio-economic structure in any developing country. Development or decline of the SME sector spreads its impact on the national and area-bound economy, employment, poverty alleviation, quality of life, educational level and many more. In addition, it serves as the breeding field for national and global level entrepreneurs. In terms of economic volume, the Banking Survey (2006/2007) done by the International Finance Corporation (IFC) of the SME Market in Sri Lanka, reveals that the SMEs constitute 80 - 90% of the total establishments and 20% of the industrial value addition together with 70% employment opportunities generated in the business sector. The whole scenario is a representation of the significance of the SME sector in the national economy and the social development map in Sri Lanka.
Despite its inherent importance and practical potential to be the vibrant contributor to the overall development of the country, especially in a post-war era where over 30 year old destructive pressure of different restrictive factors has been released, the power of the SME sector is yet to be unleashed via a cluster of effective methodologies. The prevailing constraints include multiple factors ranging from intrinsic attitudinal and habitual barriers to less capacities and capabilities to be winning
enterprises t operational costs that, most of the encounter a series are under-perfor planned and stead Our practical expe SMEs reveals th
“Survival” is the bo in their day-to“Operation for surv Management” air precedence in management appr for a majority o development-foc Imodels are deman up calls emerging current atmospher requires to get harvest Of the SM)
Apart from that, w fast changing world global village ef SIMES exр environment of r
a T6
consumer habits developing technol global competitive rural lands an emerging situatic field for SIMES is ev becoming more CC evolving dynamic posing a series of to the SMEs in Sr other developi) compelling the governments, chambers and
business consulta
academics an ( organizations a supporting SME view in a visionary in a non-tradition
- - - Economic Review:Dec.2012/Jan. 2013

ges for SMEs in
) eScalating s. It is evident SMEs regularly of problems, and ming witholut a. y march. In fact, Tience with the
e fact that the iggest challenge day business. rival” and “Crisis e being taken terms Of oach, especially f SMEs. Many used support ded by the wake even under the e if the country the optimum E sector.
re are living in a limpacted by the Fect where olur posed to an apidly shifting exponentially ogies, increased
6CSS CV6CI OJIO OU di many more pins, The battle rer changing and mplicated. This environment is new challenges i Lanka and the ng countries, entrepreneurs, SME-related associations, nts and mentors, the other and personnel development to manner and act alway providing
Dr. N. K. Silva
Vice Chairman / Managing Director Business Development €entre
(Pvt) Ltd
their individual and collective contribution in order to unlock the real economic value of the SME sector, allowing it to yield the enhanced social value addition. The purpose of this article is to reveal about some emerging challenges for SMEs in Sri Lanka enabling the interested and responsible stakeholders to explore more about such challenges and design and implement precise solution models that can enable the SMEs to face these challenges.
Information an di Communication Technology (пст) Development 85 - Social Networking
Information and communication technology (ICT) has taken an exponential growth pattern. The adaptability of its applications for business development is multifaceted and its degree is ever increasing. It can be successfully manipulated for product improvement, productivity improvement, operational accuracy enhancement, cost reduction, local and global marketing, and many more aspects intertwined with SME development. In almost all SME segments of product or service based industries and trading firms, ICT applications and e- commerce will automatically be placed on the high priority list Qf requirement for
33 -

Page 36
them to be competitive. However, current situation reveals that the Sri Lankan SMEs are backward in using ICT and e- commerce in their businesses.
As an example, Social networks are increasingly and profitably used by many companies in developed Countries. When used in effective way, it is a powerful process to engage consumers and Suppliers, together with the other public in product development. This is called co-creation. It provides insights and extremely valuable ideas of outsiders, basically customers in product designing, marketing, after sales activities and a host of business development processes. This practice speeds up the development cycle and establishes customer loyalty. Eventhough distributing co-creation, or distributing innovation through the value chain was initiated by large companies, the advancing business environment has motivated the SMEs to use similar formats, sometimes with certain variations for their business development.
In this context, SMEs of tomorrow will have to be equipped with ICT enabling mind-sets, awareness, knowledge and tools in order to capture the full benefit package of the serving markets. Increased applications of ICT will no longer be an option for SMEs, but a must for the survival and development. E-readiness of SMEs will be a
prime concern within the atmosphere Of emerging challenges.
Accessing up-to- date Technology
Technological improvements are continuously offering new machinery, tools, and processes that can be used by the businesses
for profit optimization and business
sustainability. In fact, companies create real wealth when they
combine up-towith new ways ( SIMES who are practice will fa being phased competition. The of very weak us technology by th a threat to thei they make a accessing the ne shift will undou
if the SMEs are up-to-date techn Imind— sets, sho: business open
a Waele SS OT improvements, c acquisition, less Supporting natic etc. would be C regard.
Greening Ente
“Greening a bu popularizing st approach irrespe the business. A
formulates and and policies
Sustainable fut
environmental increased qual customers, e community. It ConsuInption, C environmental supports envi human sustai) surveys reveal provides a comp for the busine customer accep community en strengthens the and a host of advantages in unique CO environmental C
www.earthshare
sense, econom Should be ac harming the communities. G
- 34

-date technology of doing business. away from this ce the danger of out from the prevailing reality age of up-to-date le SMEs will pose I Survival unless
shift towards w technology. The btedly be possible enabled to access lology. Traditional rt-term focus on
lack of technological osts of technology preparedness of pnal mechanisms
obstacles in this
ration,
rprises
siness” is a fast rategic business :ctive of the size of green business adopts strategies that ensure a ure with positive Concerns and ity of life of its Imployees and reduces energy arbon footprint, damage and ronmental and nability. Global that “greening” petitive advantage 2 sses, improves )tance, increases gagement which enterprise image, other business
addition to its
ntribution to conservation (Ref: 2.org). In its real nic development hieved without planet and treening business
Economic Review: Dec.2012/Jan. 2013
was initially limited to corporate businesses, but it is speedily
encroaching the boundaries of
SMEs owing to its high relevance. More powerful waves on “green employment” are taking shapes to be released from the generation points and the SMEs should be Iready to encounter the situation when they reach the shores. Inclusion of “Environmental Entrepreneurship” in all relevant areas will be an absolute need, Green business members of the SME community will have a significant advantage over the others in terms of sales, profits, goodwill and sustainability. Greening will be a compulsory factor SOO. when engaging in international business.
Mega Competition by Large Companies
It is evident that the competition by big scale businesses is systematically protruding into the SME market. Gradually expanding super markets in strategic locations is a clear indicator in this Iregard. The trend will continue in many fold and mòre big companies will open up mega Super markets, departmental stores and super markets in strategic cities and mini supermarkets in suburbs and remote locations flashing an increased challenge for the SMEs in all locations. The policy of strengthening the shoulders is more sensible when you are. receiving more and more weight on your shoulders, than requesting for lightening the weight. Similarly, the strategies, practices, tools, systems, mechanisms should be explored and implemented to overcome this challenge which has already commenced raising its head.
Market Mind- s et Shifts an di Knowledge Gaps
Consumer mind-sets aind the resultant habits are continuously

Page 37
being shaped by the accruing knowledge, forceful media, internet and many other factors. These dramatic shifts are widening the gap between what the SMEs think about the consumers and their
wants and needs and the real consumer thinking, wants and needs. Situation will worsen with
the fact that the consumers are becoming more knowledgeable than the SMEs in most of the occasions, especially in respect of product/ service related and relevant
business related areas. The knowledge gap weakens the customer loyalty and solidifying CUStOlmer relations, Le SS entrepreneurial capability and the Static attitudinal nature of SMES generates a barrier to visualize the relevant shifts in the first place and then to act accordingly, resulting in the reduced competitiveness. SME related consumer research, mentoring organizations, business development training, state sponsored SME development initiatives will have a vital role to play ih addressing this situation.
Intensive Entrepreneurship Demand
Entrepreneurship in full scale reflects Centered marketing approaches against product or service centered ones, creative initiatives for business maintenance and development, business planning, cash-flow linked financial discipline, product/ service quality improvements, environmental entrepreneurship and more. The future will demand a grown entrepreneurship from SMEs. Survival and developmentfocused requirements will include business operations supported by many entrepreneurially attracted tools and strategies such as “energy strategy” which is a working paper setting out how energy will be managed in the business. Current observations and analyses
COSUD. E
on SMEs do agreet the level Of entre SMEs should be significantly. challenges are wak SMEs to compelth they should acq entrepreneurial c external facilitatio) business envir provision of tools Would not be a solution to face future. Emergir demand entrepreneurship f they want to reap It is so in respect best harvest in ter and social develop
Proliferation o Products from E1
Markets
Consumer attracti products in-bou emerging global becoming greater. products are impo and China (out of and countries suc] Thailand. The tren pushing the local segment of SMEs Corner. The im challenge, not onl manufacturing seg the losing layers of with trading, alt composition adve] this situation def more specific implementations policies and SME si entrepreneur et empowerment,
business cha associations will engagements in fr strategies in ad focused efforts to
the SMEs themse)
Access to Busine
Costs are alrea markets and profi
Economic Review:Dec 2012 (Jan. 2013

with the fact that preneurship of strengthened All emerging e up calls for the em to think that uire intensive apabilities. The of an enabling onment and and processes fully qualified the business ng conditions intensive rom the SMEs if the full benefit. of reaping the ms of economic
ment tOO.
f imports of merging Global
on towards the Lind from the I markets is More and more rted from India. BRIC countries) h as Japan and d is aggravating manufacturing in to a difficult pact of this ly squeezes the ment, it replaces f manufacturing ering the SME rsely. Handling initely requires planning and
while state upport schemes, ducation and initiatives of Imbers and have positive aming solution ldition to the be exercised by lves.
2ss Financing
dy escalating; tS for SMEs are
shrinking compelling the SMEs to look for more borrowing for survival, not for business expansion. In contrast, Banking institutions are taking extreme precautions in lending as they are worried about recovery despite the fact that Banks operate SME support units with SME lending schemes. The outcome is that the SMEs become too large for micro financing and too small for commercial financing, narrowing down the business financing optións practically available for SMEs. The resultant environment of highly structured lending processes with no option for flexibility will serve no purpose in terms of SME development unless corrective actions are taken in devising a pro-development mechanism for the SMEs to have access to finance when required. Understanding the total picture of the challenge is extremely important for the solution providers to design and implement the integrated solution consisting with horizontal and vertical solution models.
Increasing Demand for SMErelated Research
SME- related research has not yet been a priority item in the agenda in Sri Lanka. Even to assess the current situation of SMEs in Sri Lanka, the facts and data available are extremely insufficient and understanding of trends and patterns is difficult. However, designing and formulating policies, development-led solutions, and sourcing for appropriate tools in order to face the energing challenges require vital information on the SME sector, its behaviour and its potential. Enabling and Strengthening of initiatives for conducting SME Research is absolutely essential for this purpose. Since the challenges are emerging in continuously, Sri Lanka should have a dynamic
V. 35

Page 38
process of performing SME-related research. Logical and scientific analysis of research findings, making them available for policy and strategy formulation and decision making, and full scale usage of them instead of treating them only as academic support material are associated important factors.
SME Development Enabling Policies
Availability of a comprehensive SME policy which is a sector development- focused synergic formulation with a 360 degree coverage is extremely vital in order to enable the SMEs to overcome the challenges and competitively move forward. The well designed policy is the basis for enabling
emerging
fully functional environment. This vital need should not be overshadowed by incongruent, losely-bound, policylike ; pie ces of material. Compatibility with the global and regional SME policies should be a qualitative feature of the SME policy.
Promotion of Woman-led
Enterprises
Women entrepreneurship is apparently in a backward stage in Sri Lanka. Although the actual research-based hard facts are not available, our experiences in working with SME community provide a clue that the woman-led enterprises do not exceed 15%. Advancing global and regional SME development support systems are more focusing on Supporting woman-ed enterprises. If the current situation continues, SME sector will not be able to accrue the benefits from the emerging, well Support systems
for WOel
designed dedicated entrepreneurship development.
Attracting more SMEs, estab commitment, anc environment for
the business are
of the relevant c
Internationali Marketing
"Internationaliza increasing of gec of economic act
national bounda
environments will
to be internation ready to climb up into the next le Although the internationalizati
foreseeable conc
the readiness
internationalizat the product/ qui creation of enab. prevalence of r strength and associated factor be a strong ena and motivating internationaliz stakeholder ap necessary to challenge. Foc exercised preci significant re development.
Uprising Media
Propagation of I. of electronic and impactful tren operation and cor Comparatively, e more powerful
pressure gene. challenging thi strictly observe to the state, th planet and flas negative effects ( term and lor. accountability
- 36

women to start up blishing their | creating enabling them to continue vital components hallenge.
zation of SME
tion” refers to the pgraphical spread ivities across the ries. Evolutionary enable the SMEs Lalized if they are the ladders to get vel of business.
potential on is created, the erns will include
of SMES for ion together with ality adherence,
fOI
ling environment, narket research
many more s. State policy will bler in preparing g the SMEs for ation. A multiproach will be overcome this used efforts, if sely, will accrue Sults in SME
Effect
nedia effect, both print is setting an d on enterprise hsumer behaviour.
lectronic media is
and the media rally directs on e enterprises to the accountability e people and the shing positive or on business, short g term. While -related media
Economic Review: Dec.2012 Jan. 2013
effects are justifiable and healthy in terms of social norms, SMEs will have to be ready to face this situation since managing the accountability aspect in full Swing needs more resources and management talents. From the other component of flashing positive and negative effects on business by media, the negative effects will have to be eradicated using counteracting strategies by SMES. The process Of counteracting willbe very costly or, sometimes, nearly impossible. The continuing and aggravating trend may pose a hard-bodied challenge
for SMEs.
Conclusion
There are two major implications associated with these energing challenges. If they are not foreseen and appropriate steps are not taken, SME sector will face a setback flashing a negative impact on economic and Social development territories while weakened breeding grounds will retard the probability of generating high calibre entrepreneurs. In a scenario where the emerging challenges are fores een and appropriate steps are taken, the power of the SME sector can be unleashed to a significant level if the other SME development mechanisms are set in motion.
Based on the undisputed fact that the SME sector is the backbone of
the national economy and social development, all interested parties should make a serious note on the emerging challenges highlighted and yet to be uncovered and initiate appropriate actions to turn the tide to the advantage of the land.
Contact details
Dr. N. K. Silva E-mail: enkaySQbdcSrilanka. COIn
Web: www.ibdcSrilanka.com

Page 39
Flourishing Entrepr
the Country
Strategy: Competitive Business Opportunity Ident Business Sector Development - “Gamata Obina Vya
Method: A mixed approach of Local Competitive A (VCD) for promoting Entrepreneurs at Regions.
Introduction
or a business to succeed there should be a
successful entrepreneur who possess or inculcate entrepreneurship characteristics. At the same time the entrepreneur should select a viable business opportunity that fits into one's culture, background etc. If a patient is sick, a doctor can prescribe Inedicines to acquire. But when an enterprise is getting weak, it is not as straight forward as prescribing a medication to a particular illness. This writing concentrates on an approach to identify viable business opportunities as a proactive measure for businesses to succeed.
Business opportunities exist in the environment. They originate to satisfy human needs. Needs of humans are identified in a form of a hierarchy by Maslow (1954) in his book on Motivation and Personality . Business opportunity exists, if only it can satisfy an existing human need or an anticipated human need. Entrepreneurs seize business opportunities in seeking profits and take risks. Risk minimization through risk management is an essential factor. More higher risk ventures will give more profits. Therefore, business opportunity plays a major role in entrepreneurship development. Hence, it is important to discuss an approach that brings about business opportunities for entrepreneurs. In other words,
failure rate of star is high, as much findings of Ge Internationale Zusar sponsored Comp Economies throug Enterprises (CEFE) it is important to present approache: Micro, Small Entrepreneurs, business opportuni approaches could b following:
Inherited from Follow the neig: Experienced at Trained / Learr Acquiring TechI. Just se en c happened.
A business selectec will face issues suc high cost of produ operate within a
margin.
The right busines (“Gamata Obina Vya Local Competitive Value Chain Deve and VCD) method a solution to identi business sectors opportunities.
Justification G Vyapara Program
Small and Mediu (SMEs) have been i a crucial role in
Economic Review: Dec.2012 / Jan. 2013

eneurial Culture in
ification, Matchmaking with entrepreneurs and
para”
dvantage (LOCA) and Value Chain Development
:-up businesses as 40%, as per sellschaft für nimenarbeit (GIZ) etency Based h. Formation of
Project. Hence,
investigate the s of, especially and Medium in selecting a ty for them. The e confined to the
the family, hlbour, a workplace, hed a subject, nical knowhow, or accidently
lin this manner h as marketing, action and will
limited profit
ss for a village apara”) based on Advantage and lopment (LOCA ology is offering fy a competitive
and business
amata Obina
Lim Enterprises dentified to play the economic
Lakshman Wijeyewardena
Director National Enterprise Development Authority (NEDA)
development process in Sri Lanka, as well as to alleviate poverty and create employment opportunities. In Sri Lanka, majority of the population are living in rural areas which is estimated to be around 84 percent of the total population (World Bank, Annual Report-2012). The Small and Medium Enterprises in the rural areas, are the major sources of employment next to agriculture. It is clear that the sector has not achieved desired level of contribution when compared to other countries. As per estimates made by Kohatha Year 2010 and in his presentations to Ministry of Enterprise development and investment promotion, there are about 650,000 SMEs in the country.
Hence the National Enterprise Development Authority (NEDA) of the Ministry of Industry and Commerce has undertaken various steps to promote this vital sector since its inception. NEDA promotes SME sector especially in rural areas in the country under the “Garmata Obina Vyapara” programme to promote business at village level, under the “Mahinda Chinthana Way Forward” policy.
The Objectives of the programme are to introduce a risk minimizing
V.
37 -

Page 40
business undertaking strategy, by introducing a competitive business opportunity to the right entrepreneur.
This program consists of two major components:
l. Identifies Competitive Business Opportunities, issues and make suggestions for development of competitive business sectors in a given geographical area (District
Level) through LO CA Inethodology,
2. Identify impediments for
development of competitive business sectors and propose sector development proposals.
Through the above components of the program, NEDA promote SME sector at regional level and encourage rural host communities to engage in busines ses by developing regional entrepreneurial culture through the “Gamata Obina Vyapara” program.
Component 1:
NEDA identifies competitive business opportunities, issues and make suggestions for development of competitive business sectors at District level through Local Competitive Advantage (LOCA) methodology. NEDA has completed this program in Kurunegala, Kandy, Mannar and Batticaloa districts, so far 120 entrepreneurs were developed. NEDA completed this program during 2011 — 2012. NEDA found that Entrepreneurship development and technology transfer could play a vital role in enterprise development other than providing financial assistance. The progress evaluation of the programme was just began and therefore, clear outcomes will be published later. NEDA provide further assistance for ensuring their sustenance. During the implementation process NEDA found that External disturbance in selecting right entrepreneur has
hindered the rea programme and strategies to over future. Inste component, N accessibility ti convincing the l minimizing ap program.
What is LOCAp
Local Competi (LOCA) is a mi identifies comp opportunities,
constraints and development of
in the region ( consists of follow
Objectives -
c Identify com
sectors in the
e Identify majo: in the abo business sec propos als fc issues,
o Identify pote:
improved,
o Identify com
opportunities
Different phases
1. Research 8,
1.1 Build-up ph
A Core team and will be set-up di The core tea implementing members and pri staff. There will b the core team. T consists of stake business sector
Overall action p. lines and res stakeholdiers w Available secon and data will be
Stakeholders wi start-up work s]
- 38

all outcome of the
NEDA envisages come thern in the :ad of grant EDA promotes O finance and banks about risk proach in this
tive Advantage ethodology that etitive business problems/ suggestions for business sectors District) and, it wing steps:
petitive business
region,
r business issues lve competitive tors and develop or resolving the
ntial areas to be
petitive business
Under LOCA
Analysis Phase
施纽$@
a support team uring this period. Im consists of
organizations oject management pe 3-6 members in The support team holders of a main in the region.
lan with the time ponsibilities of rill be prepared. dary information
collected.
Il be invited for a hop, which is one
Economic Review: Dec.2012/Jan. 2013
of the most important steps of the LOCA program.
1.2 Hypothesis workshop
Results of initial research will be taken into consideration. Teams' expectations towards the LOCA project will be aligned. Expected opportunities and constraints will be taken into consideration. Expected proposals and Outcomes also are taken into consideration during hypothesis workshop. The team will prepare for the next event that is start-up workshop.
1.3 Start-up workshop
Participants will be the private sector stakeholders, Business Development Service Providers (BDSP), authorities etc. related to business development. Media also will be invited. Participants will be convinced that there would useful outcomes through the program and their support is mobilized for the program.
Identified business sectors will be verified during this program. Initial a SS e S Sment will be O opportunities and constraints and rules and regulations. Possible solutions also will be identified from the group as initial proposals. According to participants' information, interviews and miniworkshops will be arranged.
1.4 Focus group discussions a di inteviews
These will be used to collect information and data that are important for the LOCA program. Market requirements, opportunities and constraints in supporting functions, rules & regulations will be identified in different business sectors. Possible interventions will also be taken into consideration.
1.5 Results workshop
(Analysis)
Data and information collected during previous. phases will be analyzed collectively by the team.

Page 41
Proposals will be developed in order to develop identified competitive business sectors.
In addition to the LOCA Methodology, value chain development analysis will be conducted for competitive business sectors in order to identify gaps in the value chain and business
opportunities (existing opportunities and future potentials)
Finally a list of competitive businesses will be prepared.
1.6 Results workshop
presentation
All relevant governmental and non
governmental organizations, representatives from each business sectors, political decision makers, authorities, BDS providers and media will be invited for a Results Presentation Workshop.
During this phase awareness and publicity will be given for the LOCA project and stakeholders commitment would be solicited for the proposals. The team will present and discuss findings of the LOCA research & analysis and action plan.
1.7 Follow-up and
implementation phase
A follow-up program will be conducted based on proposals through the District Enterprise Forum. Requirements and demand conditions will be identified. The findings of SWOT analysis carried earlier will be discussed and implemented. Finally the competitive business opportunities will be published.
1.8 Value chain development (vocD)
Interlinked valueadding activities that convert inputs in to out put s which , in turn, add value helps create a competitive advantage. A value chain typically consists of (1) inbound distribution or logistics,
(2) manufacturir (3) outbound dis logistics, (4) marke and (5) after-sales activities are su purchasing or (7) research and (8) human resource and (9) corporate in
Identifying the pro place in between the products are c end consumer a
Suppliers
Perchasis
BowersOX
Source:
account in the pro VCD. The business are identified in th amount of value calculated. For this depth analysis is n requirement is only business opport along the value
identified compet: sectors of the LOC
Component 2:
2. Services und
Through the above the program, NEI promote the SME se level and to encour:
host communities regional business r the “ Gamata. Ob program. Steps are
2.1 E n t r e p r e development trail
This training plays O the deve entrepreneurship selected beneficiali them an opportun their potentials an
- Economic Review:Dec 2012/Jan. 2013
 
 

g operations, ribution or ing and selling, Service. These ported by (6) procurement, development, development, frastructure.
cess that takes )roduction and elivered to the e taken into
lirements information Flow
Industrial Enterprise
Manufacturing
and Closs (1996)
cess of doing a s opportunities is process and addition are purpose, an in tot done as the to identify that unities exist, chain for an itive business A exercise.
er component
: component of DA expects to :ctor at regional age other rural by developing models through ina Vyapara”
given below.
n e u r s h ip ning program:
more attention lopment of skills of the es while giving sity to uncover
di future goals.
The selected beneficiaries will be given an entrepreneurship development training which ConCentrates On:
e The self-confidence
development aS 3. entrepreneur,
O Match Business with the
entrepreneur,
of financial
e Improvement
literacy,
I m p art business planning skills and m an age m ent capabilities.
At the end of the entrepreneurship development training, the beneficiary will have his/her own business plan for a chosen business from LOCA findings. At the same time a need analysis will be carried out during the training with references to further training (competency development, technology etc.) and type of marketing assistance needed.
2.2 Financing of business
plans
When it is required the financial assistance for the proposed business plans, NEDA provides financial support by way of a grant while facilitating to obtain a bank loan.
2.З T е с h n o 1 o g і с а 1 improvements of businesses
Under this phase technology transfer programs are designed and conducted. Further, field visits are
arranged to research and development organizations:
In this regard, following
technological categories are more prominent when designing the programs:
o Human related capacity development (mainly technical skills),
39 -

Page 42
e Introduction of new production
processes,
e Introduction
machineries and equipment,
o Product
promotion,
o Productivity
improvements.
Divisional Secretariat office with the support of NEDA officer arrange
technical training programs as per b e n e ficia ry requirem ents and financial Support are provided by NEDA.
2.4 Marketing Development
T r a in in g programs & field visits SIC arranged by the NEDA with supporting of D i v i s i on a l Secretariat Office in regard to the following:
Pack a ge designing,
Marketing s k i l l s development,
Promotional m a t e r ii a li designing,
Promotional pro g r am designing.
2.5 Bus in e SS Counselling & follow up Activities
B u s i n e s s counselling and follow lup activities will be done by NEDA with supporting of the Divisional Secretar i at office / B DS providers.
40
development 8,
The approach i following manne)
of new Conclusion
In conclusion, G (a support busir service of the minimize the engaging into a b of a business is m organizations ar extend their fulle recovery is ensul is sustained. Usu
8, quality
“Gamata Obina Vyaparao - Ente
Physical Resources
Method
Material, Machinery 8, Money
Business Development Service Providers, Professionals, Academia &
NEDA
Prepared by Lakshman Wijeyewardena, Direc
 
 
 
 
 

s figured in the
OV is a strategy ess development government) to risk involve in usiness. The risk Lanaged, financial e encouraged to st support as the ed. The business ally, if a business
is successfully running, entrepreneurs tend to honour the repayment of loans. The new business opportunities derived from VCD will pave the way for high return businesses. The Success rate of businesses are improved and returns from business are escalated, public will attract towards engaging in to business and leads to entrepreneurial culture in the country and establish forward and backward linkages of businesses servicing an entire value chain.
prise Development Approach (EDA) of NEDA
Process
Hunnan
Resources
tor, National Enterprise Development Authority (NEDA)- January 2010
Economic Review: Dec.2012/Jan. 2013 -

Page 43
TEATURES
Contd. from last issue
Economic Drivers of Eastern Sri Lanka
The Economic Base Sectors and their Growth Potentials
is an exercise in mapping the structure of the local
economy in terms of the (i) basic sector (aka export sector), and (ii) nonbasic sector. The basic (or export) sector refers to all goods and services sold outside the boundaries of the city (or the district). The non-basic sector Irefers to goods and services sold within the local economy such as output from grocery retailing, hairdressing, restaurants, and other local services. Economic base analysis is based on the economic base theory according to which money earned from the basic/ export sectors is the Imain source of growth in the economy that determines the rate of employment and growth of employment in the non-basic sectors that caters to local consumption. Economic base analysis is an analytical tool used to forecastincome and employment generation in the local economy.
he economic base analysis
An important catalyst is the economic linkage between the city and its hinterland – in this case the linkages between the three cities and their respective districts. The provincial “market towns' and the district capitals like Ampara city, Batticaloa city, and Trincomalee city exist largely to serve the outlying areas (mainly the respective districts). Even if the base economic sub-sectors Such as agriculture and fishing are not carried-out within the city proper the city benefits. It provides necessary services to farmers and fisherpersons, and associated middle-women, traders and agents, such as banks, communications,
and transport servi is the city and its which manage the electricity, telecommunicatio services, etc, up Iregion's economic b city's traders also s' agriculture and fis facilitate downst packing, wholesaling adding value to the the city where mai administration and are situated. Finall where the hinterla goes for many of its health, educat entertainment/leisl
In this section the base sectors and present in the di Eastern Province reviewed, since it is that are most import drive the sub-regio economies and cor. economies Of the c i t i e s lo c at e di
Table 6
within it, Highe: contrib gen er al, a. C. У јeconomic Goverr bo a s * | Consta activities in a Factor particular Paddy sub-region will need Transp t h e Services Whole. provided Trade by the Fishin in a j or - town/city Source in the
Economic Review: Dec.2012 (Jan. 2013

Post-war Cities in
ce providers. It regional offices roads, water, transport, Ins, financial on which the ase relies. The upply inputs to hing and also eam sorting, g and in general : product. It is in government public services y, it is the city ind population needs such as ional, and ure services.
main economic sub-sectors stricts of the are briefly their dynamics antifactors that nal/provincial sequently the
Dr. Muttulkrishna Sarvananthan
Principal Researcher Point Pedro Institute of Development
area, even if most of the inputs and Outputs physically by-pass the city.
The government services (public administration, other government services, and defence), construction, and factory industry are the largest three contributing economic sub-sectors in the Eastern Province (EP) accounting for almost 50% of the PGDP. The government Services and construction sub-sectors each contributed little less than 20% to the provincial GDP and factory industry sub-sector contributed little more than 1 O% in recent years. (See Table 6)
5 Highest Contribution to the Eastern Economy
by Economic Sub-sector (%) 2003 - 2010
st Sub-Sector 2003 2005 2007 2009 2010 )luution. (provisional) hment Services 1.5 9.0 19.4 19.4 17.9
uction 1.9 5.1 215 18.0 15.9
y Industry 17.7 7.3 11.8 O.4 9.6
6.9 4.7 5. O 9.O 82
)OIt 8.8 6.9 5.5 7.9 O.5
sale and Retail 8.9 13.5 11.0 7.5 11.0
g 11.9 3.8 38 5.5 6.5
: Central Bank
of Sri Lanka, Economic and Social
Statistics of Sri Lanka, various years.
41

Page 44
Government Services
As we noted above, Sri Lanka is saddled with a bloated bureaucracy and an overgrown defence force which are drain on the national economy; for every 16 citizens there is 1 public sector employee (including the armed forces - national, provincial and local) (see endnote number 20) and for every 46 citizens there is l armed forces personnel. Sri Lanka has one of the highest public sector personnel per capita and armed forces personnel per capita in Asia and the World. With the total public debt of Sri Lanka equivalent to around 75% of its GDP, it is necessary that Sri Lanka rightsizes its bureaucracy and the armed forces and release scarce financial resources to produce higher productivity goods and services. 26
Excessive (or dispro-portionate) public expenditure crowds out private investment. Besides, the salaries of bulk of the public servants are comparatively small and hence the purchasing power of public sector emoluments is very limited. Therefore, having a large public sector is not going to create sufficient demand for goods and services produced by the private sector, which in turn stifles private investment on production of goods and services. If the growth of private investment (and thereby private sector employment) is stifled, the population will depend on the public sector to create more employment opportunities. This will result in further expansion of the public sector in terms of personnel and expenditure. This process results in a vicious circle of multiplying public sector (employment and share of the economy) resulting in diminishing productivity of government services and diminishing value-for-money to the citizens, which in turn fuels the expansion of the public sector. 7
Construction
The contribution , of the construction sub-sector to the
eastern provincia last long as the shows. (See Tat resumption of th ended) post-ts truction works a civil war in the ) and the post-w works, the construction Sil provincial econ( However, post-d war Ireconstructi carry on forever. share of the co Sector in 2OO9 aJ peak in 2007) indication of the in growth of t However, constru and social infras going process tha only in the sh ( terms, but in th well.
Therefore, the largest contribut the eastern government construction, are un Su Stainable However, the economic and SO in the EP Such a harbour develoj infrastructureS proposed or in the pipeline h a v e potential t Ο contribute con si – derably to the provincial economy 3S it. attempts t Ο catch-up with the rest of t h e
economy and get connected to the
Table
N O te
- 42

l economy will not time series data le 6) Due to the e (hitherto suspunami reconster the end Of the East in July 2007 LI reconstruction share of the b-sector in the )my got a boost. isaster and poston works will not The decline in the instruction subhd 2010 (after the in the EP is an
temporary spurt his sub-sector. uction of economic tructure is an onit needs to last not Drt and medium Le longer term as
current top two ing sub-sectors to economy, viz. services and 2 undesirable and
respectively. construction of cial infrastructure S the Trincomalee pment and other
global economy. That leaves only the factory industry and paddy crop sub-sectors to be the major consistent and positive contributors to the provincial
economy for a considerable period
of time. (See Table 6)
Factory Industry
The contribution of the factory industries to the provincial GDP has dropped sharply from between 17% and 18% in the early to mid2000s to between 10% and 12% in the late-2000s. However, it is the third largest shareholder in the provincial economy; being concentrated in the Trincomalee city area. Therefore, it qualifies as an economic driver in Trincomalee Only.
The factory industries are almost entirely in the Trincomalee district within the limits of the Trincomalee Urban Council. With the Trincomalee harbour in the city limits and the railway line to Colombo and Batticaloa it makes logistical sense for the factory industries to be concentrated in Trincomalee city. Therefore, factory industries are the economic drivers of the Trincomalee city which is the largest urban centre in the Trincomalee district.
7 Share of the National Paddy Output (%) 1980
2011
1980 990 2000 2004 2010 2011
anka 1.O.O.O. 10O.O. 10O.O OOO 100.0 100.0
ern Province 20.6 9. O 2.O. 29.9 24.8 6.8
aa. 1.7 11.9 15.2 19. 14.7 O.6
Caloa 4.4 5.3 2.0 6.2 6.2 2.8
>omalee 4.5 1.8 3.7 4.5 3.9 3.4
ce: Sarvananthan, Muttukrishna, (2008), The Economy
of the Conflict Region from economic embargo to economic repression, Point Pedro (Sri Lanka): Point Pedro Institute of Development, pp102 (for 19802004); CBSL, Economic and Social Statistics of Sri Lanka 2012, pp43 (for 2010 & 2011); CBSL, Annual Report 2011, Statistical Appendix Table 16 (for 2010 8, 2011 district breakdown)
Paddy output dropped significantly in the EP in 2011 because of severe floods in early-2011. Therefore,
2011 was not a representative year.
Economic Review: Dec.2012 / Jan. 2013 -

Page 45
Paddy
Historically, the Eastern Province in general and Ampara District in particular had been a major contributor to the total production of paddy in the country. Rice, the derivative of paddy, is the staple food of the people of Sri Lanka. The EP accounted for over 20% of the national paddy production in 1980 (pre-war time), 19% in 1990 (war time), 21% in 2000 (war time), almost 30% in 2004 (ceasefire time), and almost 25% in 2010 (post-war time). Within the EP, Ampara district alone accounted for more than half of the total production of paddy in the province during the past thirty years. (See Table 7) Thus, Ampara district has demonstrated a consistent competitive advantage in paddy production over a long period of time.
Further, the productivity of paddy cultivation (i.e. quantity of paddy produced per hectare of land) in Ampara district is the fifth-highest among the twenty-five districts plus two special agriculture zones in the country. The Table 8 catalogues the top five districts/ special agriculture zones in terms of productivity of paddy cultivation in a descending order. Moreover, the productivity of paddy cultivation in Batticaloa and Trincomalee districts are among the lowest in the country. Hence, Ampara district has re-affirmed its competitive advantage in paddy production in terms of productivity too (not only within the province but in the country as well).
Therefore, we would argue that paddy crop is an economic driver in the Ampara district only in the EP. Although Ampara city urban area is not a major paddy producing area, it functions as one of the major centres of trade in agricultural inputs and one of the major wholesale market areas for the sale of paddy to other districts in the country.
Fisheries
The Eastern Province is a coastal province and has the longest
coastline among all in the country. Th has been a major ec in the province. Am (2nd), Batticalo Trincomalee (4th) t with the largest fis in the country in 20 82, 120; 89,910; fisherpersons resp.
The EP accounted f of the total fishcountry in 1980 (pr. which dropped to le 2000 (conflict year)
up to over 21% in : year) and 23% in year). Trincomalee districts have bee contributors to the catch in all the
consideration, exce Table 9) While Ka fishing hub in the A Trincomalee cit surrounding areas) hub in the Trincom
Although the fishi accounted for onl provincial GDP in 2( for which data is avi sub-sector would economic base si economic driver) bec that Inore than or total fish catch in from the East (2004 part of which is sc province) and the Inl populations in all th the East were amol. in the country.
Within the agricul the EP, paddy culti district), dairy farm district), and fisher three districts) sub be regarded as econ sectors (or econor selected districts o
Agricultural product should bo e
(concentrated) in where each crop or the highest yield within the provinci
Economic Review: Dec.2012 / Jan. 2013

the provinces refore, fishing onomic activity ara (Kalmunai) (1st), and op the districts her population D9 (and before); and 76,970 actively.
or almost 15% catch in the 2-conflict year), ss than 10% in and then shot2004 (ceasefire 2009 (post-war : and Ampara in the highest provincial fishyears under rpt 2009. (See lmunai is the Impara district, y (and the is the fishing alee district.
ng sub-sector y 6.5% of the )10 (latest year ailable), fishing qualify as an ub-sector (or :ause of the fact he-fifth of the the country is 8, 2009) (a large ild outside the unber of fisher hree districts in. ng the top four
ture sector in vation (Ampara ing (Batticaloa ties (perhaps all )-sectors could omic base subnic drivers) in nly.
ion in Sri Lanka
specialised districts/areas sub-sector has /productivity e as well as in
the country as a whole and its share in the national output. Historically, paddy cultivation, for example, had been undertaken in all the districts in the country without spatial specialisation resulting in diseconomies of scale and abject poverty among most paddy farmers in the country. Although Batticaloa district accounted for over 6% of the national paddy production in 2004 and 2010 (see Table 7), Batticaloa recorded the highest incidence of poverty in the country (>20%, which was just 9% in the country as a whole) according to the latest Household InC One and Expenditure Survey (HIES) 2009/ 2O1 O because of one of the lowest yield per hectare in the country (see Table 8). Similarly, cultivation of several crops and the production in sub-sectors are dispersed throughout the country, disregarding respective competitive advantage (or disadvantage) in terms of productivity and spatial specialisation.
Agglomeration in the agrarian economy of Sri Lanka is the critical need to transform the lowproductivity and low-value agriculture production into higherproductivity and higher-value agriculture in the country.
Manufacturing
Over twenty-five years of war has destroyed (either partially or fully) almost all the industrial infrastructure of the province and uprooted associated skilled human resources. But the large-scale industries situated in secured zones mainly surrounding the Trincomalee port (Prima Flour Mill, Prima Logistics, Mitsubishi/Tokyo Cement, Fuji Cement, Bio Mass Power plant and the Indian Oil Company) were able to function. (Also see the section on “Factory Industry” above).
In addition to the factory industries, there are thousands of small and medium industries in the country which are referred to
43 -

Page 46
as "cottage industry” and “processing” (tea, rubber and coconut) in the national income accounts. Of course there are no tea or rubber processing industries
in the east.
Province that exploited for ex and that coulc employment or " as inputs int( However, build
Table 8 Paddy Yield by District 2002 - 2011
Special agriculture Maha (kg per hectare) Ya zone / District 2OO1-2 2006-7 2010-11, 2O(
Udawalawe zone 5,238 5,636 6,337 4,9
Mahaweli “H” zone 5,192 5,563 5,004 4,6
Hambantota Dist 4,820 5,215 5,147 4,3
Polonnaruwa Dist 4,627 5,119 3,831 45
Ampara Dist 4,607 4,934 3,333 4,5
Anuradhapura Dist || 4,323 4,726 4,313 4,1
Trinconalee Dist 3,607 4,261 2,388 42
Batticaloa Dist 3,126 2,891 2,399 3,2
Source: Central Bank of Sri Lanka, Annual Report, St
Appendix Table 16 (20ll), various years.
Note: The first two rows pertaining to special agric
the longest river in Sri Lanka, the Mahaw agriculture seasons in Sri Lanka: Maha — Se & Yala — Apr/May to Aug/Sept
According to the Census of Industry of 2003, there were 7,399 manufacturing industries (including factory, processing (coconut only) and cottage industries) in the EP. Out of this total, 7,067 (95.5%) had less than ten employees and just 332 had ten or more employees. The total number of manufacturing industries in the EP (7,399) accounted for just 5.6% of the total manufacturing industries in the country in 2003 (131,387).37 The total employment in all the manufacturing industries in the EP in 2003 was 27,692; accounting for just 2.7% of the total employment in all the manufacturing industries in the country in the same year.
Local Endowments
Mineral resources
There appears to be little in the way of Imineral resources in the Eastern
44
local productio demand for a n deposits, especia tiles and brick.
Trade and serv
Each city in the banks, telecomin (including broa educational an whole Sale tir markets, and a establishments
These are impo city's competitiv almost all deriv activities orient local markets. T the cities, hov certain basic fur that students C the immediate J restaurants also "basic" to the
cater to interna

could be easily ort out of the area i generate much that could be used ) manufacture S. ing materials for
la (kg per hectare)
D2 2007 2011
O2 5,641 6,545 O6 5,136 5,508
43 4,940 5,140
28 5,057 5,055
12 4,993 4,913
90 4,804 4,7OO
38 4,376 4,737
82 3,680 4,114
atistical
ulture zones along eli. There are two pt/Oct to Mar/Apr
in have created a lumber of nineral ally clay for roofing
rices
EP has numerous munication services adband internet), d health centres, ading centres, wide array of retail
and distributors. rtant factors in a eness but they are red or "non-basic” ed to serving only the universities in vever, perform a hction to the extent come from outside region. Hotels and can be considered
extent that they tional tourists and
Economic Review: Dec.2012 (Jan. 2013
domestic tourists coming from outside the region.
Higher-order transport services
Transport services that serve more than the local population and enterprises can be considered base economic activities. Trincomalee harbour and the rail Services connecting Colombo, Batticaloa, and Trincomalee could be considered base economic activities. The Trincomalee harbour serves the entire eastern Seaboard and could serve the whole country; second only to the Colombo Port. The Trincomalee harbour has the potential to become the Springboard to the emerging Asian economies Such as China, India, Korea, Malaysia, Singapore, Viet Nam, and others.
Tourism
Although tourism in the EP is still a very small part of the provincial economy concentrated almost entirely in the Trincomalee district, it has the greatest potential in all three districts. Out of the total of 5 million foreign guest nights in 2011 in the entire country, only 79,000 (or 1.6%) foreign guest nights were spent in the East Coast. However, it has increased from 10,000 foreign guest nights in 2007 to 79,000 foreign guest nights in 20ll. In other words, out of all the tourism areas in the country (Ancient Cities, Colombo City, East Coast, Greater Colombo, Hill Country, and South Coast), the East Coast is experiencing the highest growth rate in the tourist traffic (foreign guest nights) in the post-war (post-2007) period.
Not only does the eastern coast have some of the best natural beaches in the country, their exploitation has been largely on hold for decades due to the protracted armed conflict. Thus, there is tremendous potential especially along the practically virgin coastal areas from Mullaitivu in the north-east all the way to Arugam Bay in the south-east (total length of over 240 kilometres).

Page 47
Table 9
Share of the National Fish Catch (%)
198O-2OO9
1980 1990 20OO 2004 2009
Sri Lanka 1OO.O 10O.O OO.O lOO.O 1 OO.O
Eastern Province 4.9 6.7 9.6 21, 23.3
Ampara 6.O 6.9 4.4 7.8 5.5
Batticaloa 2.l. 2.4 2.0 6.4 8.4
Trincomalee 6.8 7.3 3.2 6.9 9.4
Source: Sarvananthan, Muttulkrishna, (2008), The Economy of the Conflict Region: from economic embargo to economic repression, Point Pedro (Sri Lanka): Point Pedro Institute of Development, pp.109 (for 1980, 1990 & 2000); Department of Census and Statistics, Statistical Abstract 201O (for 2004 & 2009) http://www.statistics.gov.lk/ abstract2010/chapters/Chap5/AB5-34.pdf
It should be added that there are a number of eco-tourism destinations (mainly national Ieserves and parks) and also heritage sites in or within close distance to the main resort areas in the Eastern Province. Trincomalee has the highest potential because Habarana with its stupas and rock shrines, ancient water/irrigation tanks, Minneriya National Park, and the spectacular rockfortress of Sigiriya are within a short drive. There are also the Maduru Oya, Lahugala, and Gal Oya National Parks near Ampara and Batticaloa, as well as the religious centre of Buddhangala just outside the Ampara City.
Hunani resources
According to the latest Household Income and Expenditure Survey (HIES) 2009/10, the demographic characteristics of the Eastern Province (EP) was somewhat different from that of the country as a whole. The salient features of the demographic characteristics of the EP are as follows:
While 33.4% of the national population had "never married”, 40.0% of the eastern population had “never married” (the highest share after the Northern Province among all the provinces) (Ampara
share among all (Ampara 35.8%, Ba and Trincomalee 2 32.3% female-head were married in th whole, 35.5% of the households in the E (Ampara 39.6%, Ba and Trincomalee 25
Further, while only national population by age, it was 32. (Ampara 31.2%, Ba and Trincomalee 34 while 12.3% of
population was 60 age, only 6.9% o population was in
(Ampara8.1%, Batti Trincomalee 5.8%).
While l4.7% of the the country hac General Certificat Ordinary Level (G.C 10) public examinat of the eastern pi passed the same ( Batticaloa 10.5%, a 14.4%). Similarly, of the country’s passed the G.C.E. Level) (Grade examination and a had passed the s (Ampara 8.8%, Batt Trincomalee 4.3%)
Economic Review: Dec.2012 (Jan. 2013

4. 1 .. 4 % , Battical o a 38.9%, and Trincomalee 38.9%). 35 Besides, among the f e m a l e – h e a d e d households in the Country, w h i l e nationally 7.8% were in the age group of 2539 years old, it was 30.4% in the EP (high e st he provinces) tticaloa, 25.9%, 9.1%).36 While ed households e country as a female-headed P were married itticaloa 36.3%, .4%).37
26.0% of the was 14 or under .5% in the EP itticaloa, 32.8%, .3%). Moreover,
the national
and above by if the eastern that age group caloa 6.3%, and
38
a population in i passed the se of Education .E. O/L) (Grade ion, only 11.9% opulation had Ampara 11.7%, nd Trincomalee whereas l1.2% population had A/L (Advanced 12) public bove, only 7.4% ame in the EP icaloa 7.7%, and
39
The forgoing data indicate that there is higher share of unmarried population in the East vis-a-vis the country as a whole, the femaleheaded households in the East were much younger compared to the total female-headed households in the country as a whole, higher share of femaleheaded households in the EP was married in comparison to the entire female-headed household population in the country, significantly younger population in the EP compared to the rest of the country, and that the educational level of the population of EP was lower than that of the country as a whole.
Poverty
The incidence of poverty (headcount index) in the country has drastically declined during the past twenty years. While the percentage of population living below the poverty line in the country was 26% in 1990/91, it had dropped to just 9% in 2009/10. Rural and urban poverty has declined more than in the estate areas. (See Table 10) A.
However, according to the latest available data, the Eastern Province had the highest incidence of poverty (among all the provinces) where almost 15% of the population was deemed poor.' Moreover, among all the districts in the country, Batticaloa district had the highest incidence of poverty at over 20%. (See Table 10) District-wise data reveal that all the districts in the country barring the districts in the North and East had experienced reduction in the population living below the poverty line over the years.
There are no data available on poverty in the urban areas of the three districts in the Eastern Province. The above relates to total district populations. Considering that urban poverty is much lower than rural poverty at the national level, it can be assumed that poverty levels in the cities of these districts are lower than the districtwise figures.
45

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Table. 10 Headcount percentage of populati
under the poverty line
1990/91 2009/1(
National 26.1 8.9
Urban areas 16. 5.3
Rural areas 29.4 9.4
Estate areas (plantations) 2O.5 11.4
Eastern Province not available 14.8
Ampara District not available 11.8
Batticaloa District not available 20.3
TrinCOmalee District not available 11.7
Source:
Department of Census and Statistic
Household Income and Expenditure Survey 199
91 and 2009/10 (pp35).
Institutions: Business
Environment
The business environment is getting better in all three towns, but it could be improved further in many ways. In Trincomalee basic economic infrastructures such as electricity, telecommunications
and internet services are now
reasonable. Water, however, is only available for limited number of hours each day. The city still suffers from poor connectivity, especially in terms of the poor road network to the rest of the island and the lack of any scheduled
commercial air services to Trincomalee airport. Te reconstructed Al 5 road to
Batticaloa (recently completed with bridges) is an example of how connectivity can be quickly improved through investment in and upgrading of Ioads. It now takes only two hours to reach Batticaloa from Trincomalee, The sanne could be said for Batticaloa and Ampara as well. Basic infrastructure and utilities that businesses rely on are available, although they could be improved.
According to a qualitative survey undertaken by The Asia Foundation, roads are “poor” in Ampara, Batticaloa, Kalimunai, Kattan kudy, Kinniya, and Trincomalee towns; telecommunication services are “good” in all the foregoing towns,
- 46
Kinniya, and T (This survey was two years after War in the EP i. recent data to di: that may have then.)
An enterprise su Sri Lanka by t 2011 reveals th busines ses in indicators by Pro the main ob s business for má were ranked as to finance, (b) cc informal secto supplies, and (c Eastern Provinc obstacle faced enterprises was at 36% of respor Customs and tr 26%, then licer and inadequ workforce at 139 enterprises i Province, the gre access to fin; respondents foll land at 20%.
Current 8. Economic D Secondary Citi
This Concil recapitulates th drivers in the cities of the Eas

on el e c t r i city Supply was “good” in ) Kinniya, "poor" in Ampara, and “average” in Batti calo a, Kal. In un ai , | Kattan kudy, a. d Trin Comalee towns; water Supply was “good” in Ampara, “poor in Kattankudy, S; and "average” O/ in Batticaloa, Kal. In un ai , rincomalee towns. s undertaken about the end of the civil 2009. There is no iscern any changes taken place since
rvey undertaken in he World Bank in e challenges facing Sri Lanka with Dvince.' Nationally, stacles to doing anufacturing firms follows: (a) access ompetition with the or, (c) electricity l) tax rates. In the ce, the first ranked by Imanufacturing access to finance indents, followed by ade regulations at lsing and permits ately educated % each. For service In the EasteIn 2atest obstacle was ance at 60% of lowed by access to
In di Po tential rivers of the es in the East
Juding section se current economic three secondary stern Province and
Economic Review: Dec.2012/Jan. 2013
also identifies the potential economic drivers of the same secondary cities. (See the following Table)
Currently, fishing is the only subsector that would qualify as an economic driver in all three districts/cities under scrutiny (note that Kalmunai and not Ampara City is the fishing hub in the Ampara district). Further, infrastructure construction and factory industrial manufacturing are also economic drivers in the City of Trincomalee. Moreover, paddy Crop cultivation in Ampara district is an economic driver of the City of Ampara, Fishing is the only economic driver in the City of Batticaloa. Therefore, while the City of Trincomalee is driven by three economic sub-sectors, two economic sub-sectors drive the City of Ampara (including Kalmunai), and only one economic sub-sector drives the City of Batticaloa.
However, construction Of infrastructure (physical and virtual), development of economic institutions (such as law and order, political and fiscal decentralisation, property rights for land, and financial integration), fishing, հսIman capital development (such as education and training services), and tourism sub-sectors could be potential economic drivers of all three secondary cities in the EP. Thus, the foregoing five are cross-cutting potential economic drivers in the three cities under consideration. Further, factory industrial manufacturing (including processing) has the potential to continue as an economic driver of the City of Trincomalee and paddy crop cultivation in the Ampara district has the potential to continue as an economic driver of the City of Ampara.
Economic and social infrastructures have to be restored and new ones developed in all three secondary cities of the EP in order to get connected physically and virtually to the economic hub of the City of Colombo and the

Page 49
Economic Drivers of the Secondary Cities in the Eas
ECONOMIC DRIVERS
Km Ampara Batticalioa Economic sub-sector
Current Construction - Infrastructure - Fishing & S H
(Kalmunai)
Manufacturing - Factory Industry Paddy Crop
Potential
Construction - Infrastructure & S (physical and virtual) Economic Institutions (law & S è order, property rights for land, political 8, fiscal decentralisation, financial integration) Fishing
Human Capital
Manufacturing - Factory Industry
Paddy Crop
Tourism è
Greater Colombo area and thereon to the rest of the world. In the modern world, lack of fasthighways, airports, and harbours connecting different cities within and outside the country could be partially compensated by the development of Information and Communication Technologies (ICTs) in interior parts of the country which are much more cost-effective. Modern virtual connectivity (ICTs) is less costly and less time-consuming than the traditional modes of physical connectivity (roads, railways, and sea and air ports). Thus, physical distance could be bridged considerably through virtual connectivity. However, an economy (such as that of the Eastern Sri Lanka) overwhelmingly
dominated by primary produces.
(agriculture) and limited secondary produces (such as manufacturing and construction) need to depend heavily on physical connectivity such as roads, railways, and sea and air ports. Therefore, construction of physical and virtual infrastructures could be potential economic drivers of the secondary cities in the East.
Secondly, as noted
capital developmer secondary cities in t than the average of terms of lower andhi public examinat Therefore, developm capital is sine qua 1 the competitiver secondary cities in Eastern University (EUSL) is mainly Chenkalady (16 kiloj Batticaloa town) an the Batticalloa, tov EUSL also has anot Trincomalee distric of the Trincomalee
Nilaveli). The Ampa its own universit Eastern University (SEUSL) in Oluvil (Oluvil also has a There are few vocatic educational insti three districts of
quality of school tertiary education improved in additic the number of ac output of student level of a city popul correlated to the ec
Economic Review: Dec.2012/Jan. 2013

stern Province
Trincornalee
above, human ht in all three he Eastis lower the country in gher secondary ion results. hent of human non to enhance ness of the n the EP. The r of Sri Lanka 7 situated in metres from the d partly within wn itself. The
her campus in
t, which is out town (closer to ra District has y; the South 7 of Sri Lanka along the coast small harbour). bnal and further tutions in all the East. The education and in needs to be In to increasing dimissions and s. Educational ation is strongly conomic growth
of the same city. Education is a critical ingredient in the local agglomeration economies and cities boost the accumulation of human capital. Therefore, human capital development should be a thrust activity in the eastern secondary cities.
Thirdly, economic institutions such as law and order, property rights for land, political and fiscal decentralisation', financial integration, etc., needs to be restored and strengthened in the three secondary cities of the East. As a result of the prolonged armed conflict, Such economic institutions have deteriorated in the past three decades. As argued
before, while physical infrastructure connects places, virtual infrastructure and
economic institutions connects people.“ Therefore, development of economic institutions is a sine qua O for enhancing the competitiveness of primary and secondary cities. The development of economic institutions is a crosscutting potential economic driver of the secondary cities under scrutiny.
Fishing will continue to be a crosscutting economic driver in all three cities and outlying areas keeping with its natural advantage. Tourism is an emerging cross-cutting economic driver in all three cities/ districts as noted above. Factory industrial manufacturing will continue to be an economic driver in the City of Trincomalee because of its logistical advantage with the one of the world's best natural harbours, airports, and railroads. The cultivation of paddy crop will continue be an economic driver of the City of Ampara and outlying
a3S
Another critical competitive advantage all three districts/cities in the EP have is its Irelatively younger population compared to all other districts in the country. A “demographic dividend” is realised when the number of working-age population increases more rapidly than the number of dependent/ elderly population in a geographic area or country. South Asian
47 -

Page 50
countries (except Sri Lanka) are currently reaping a demographic dividend which will continue until 2040 (and beyond in Afghanistan). In Sri Lanka the demographic dividend ended in 2005.
However, in contrast to all the districts in the country, the three districts in the Eastern Province are endowed with a much younger population; a uniquely eastern demographic peace dividend. According to the Household Income and Expenditure Survey 2009-10, while only 26.0% of the total population of the country is under the age of 14 years, 34.3% of the population of the Trincomalee district, 32.8% of the population of the Batticaloa district, and 31.2% of the population of the Ampara district are under the age of 14 years.' As a corollary, while the share of the population that is 60 years and older in the country as a whole was 12.3%, it was just 5.8% in Trincomalee district, 6.3% in Batticaloa district, and 8.1% in Ampara district...o A considerably higher share of unmarried women in the population of the former conflicted-affected region (in Ampara, Batticaloa, Jaffna, Trincomalee, and Vavuniya districts) is another comparative advantage vis-a-vis other districts in the country.
Therefore, the secondary cities in the East should take full advantage of this uniquely eastern demographic peace dividend and convert it into economic peace dividend by focussing their economic revival strategies on youths. This has the potential to result in a youth spring in Eastern Sri Lanka.
Footnotes
2 Cities Alliance, The, (2007), Understanding your Local Economy: A Resource Guide for Cities, Washington D.C., pp 87-88.
* Sarvan.anthan, Muttukrishina, (2O11), “Sri Lanka: Putting Entrepreneurship at the Heart of Economic Revival in the North, East, and Beyond”, Contemporary South. Asia, 19 (2), June, pp209.
Muttukrishna, Putting
. 26 Sarvan anthan,
(2 0 1 1), “Sri Lanka:
- 48
Entrepreneursh Economic Reviva and Beyond, C Asia, 19 (2), Jun
*** Sarvanantha (2011), “Sri
Entrepreneursh Economic Revival and Beyond”, C Asia, 19 (2), Jun
http://WWY abstract2010/ch 32.pdf
http://WWV abstract2010/ch 32.pdf
According to th of 1983, thi manufacturing
Eastern Provinc Muttukrishna, (2( the Conflict Reg embargo to econo Pedro (Sri Lar Institute of Deve
*1. Sarvan antha (2008), The Econ Region: from ec economic repress Lanka): Point Development, pp
32 Sarvarnantha (2008), The Ecor Region: from ec economic repress Lanka): Point Development, pp
Central Bank ( Report 2011, St Table 79.
3* The latest HII between July 20 (first one after t war) througho However, three namely Kilinoc) Mullaitivu were survey. In addit: DS division of th was also not cov data pertaining Province and Vav entirely repres
-
1 0Fi
5 Household Inco Survey 2009/10,
36 Household Inco Survey 2009/10,
Household IncC Survey 2009/10,
Household IncC Survey 2009/10,
99 Household Inc. Survey 2009/10,

lip at the Heart of I in the North, East, Dontemporary South. Le, pp206.
an, Muttukrishna, Lanka: Putting lip at the Heart of l in the North, East, 3ontemporary South e, passim.
e Census of Industry ere were 5,720 industries in the xe. (Sarvananthan, )08), The Economy of tion: from economic mic repression, Point nka): Point Pedro lopment, pp.110)
Lin, Muttukrishna, nomy of the Conflict conomic embargo to ion, Point Pedro (Sri Pedro Institute of
O.
Lin, Muttukrishna, nomy of the Conflict onomic embargo to ion, Point Pedro (Sri Pedro Institute of
12.
of Sri Lanka, Annual :atistical Appendix
ES was Undertaken )09 and June 20 O the end of the civil ut the country. northern districts, hchi, Mannar and not covered by this ion Vavuniya North ne Vavuniya district ered. Therefore, the to the Northern Luniya district are not sentative. http:// : S. go V.lk / HLE SA alReport.pdf
yme and Expenditure
Table 7.
omne and Expenditure
Table 9.
me and Expenditure
Tapole 1 O.
me and Expenditure
Table 3.
ome and Expenditure
Table 5.
40 If the entire Northern Province is surveyed then North could become the poorest province in the country.
* Asia Foundation, The, (2009), Qualitative Assessment of the Local Enabling Environment for Private Enterprise in the Eastern Province of Sri Lanka, June, Colombo, pp34.
*2 World Bank, The, (2012), Sri Lanka: Findings of the World Bank Enterprise Survey, Finance and Private Sector Development Department, March 2012. These findings need to be treated with caution since the sample size of the survey was small.
* For empirical evidence see Nallari, Raj, Breda Griffith, and Shahid Yusuf, (2012), Geography of Grouth. Spatial Economics and Competitiveness, Washington D.C: The World Bank, pp 54&58.
“ See Sarvananthan, Muttukrishna, (2011), "Fiscal Devolution: A stepping stone towards conflict resolution in Sri Lanka”, Economic Review, 37 (1&2), April/May, pp 44-48.
“o See Sarvananthan, Muttukrishna, (2009), "The Path to Economic and Political Emancipation in Sri Lanka”, Conflict Trends, Issue 4, ppl3-22 for a comprehensive policy brief on the role of economic institutions in the enancipation of the conflict-affected regions in Sri Lanka.
*o Nallari, Raj, Breda Griffith, and Shahid Yusuf, (2012), Geography of Grouth. Spatial Economics and Competitiveness, Washington D.C: The World Bank, pp8.
" Nayar, Reema, et al. (2012), More and Better Jobs in South Asia, Washington D.C: The World Bank, pp 1.
Nayar, Reema, et al., (2012), More and Better Jobs in South Asia, Washington D.C.: The World Bank, pp.2.
9 In Colombo district only 23.2% of the population is under the age of la years.
50 Household Income and Expenditure Survey 2009/10, Table A3. (Colombo district has one of the highest shares of 60 years and above population in the country with almost 15%) http:/. A W W. W. Statistic S. gov.lk/ HIES/
5 Household Income and Expenditure
Survey 2009/10, Table A7. http://
W
HIES2009-10Final Report.pdf
Contact details
Dr. Muttukrishna, Sarvananthan Email: sarviGpointpedro.org
Economic Review: Dec.2012/Jan. 2013 -

Page 51
studENTS PAGE
Macroeconomic Polic
Introduction
olicy economics is an important area coming under the scope of economics. Economic policy can be defined as a course of action based on economic theories and intended to resolve a specific economic problem or to achieve a set of policy goals which are related to the five key macro variables such as employment, output, the price level, the exchange rate and the balance of payments. Until the twentieth century, the main responsibility of the government towards the economy was to provide a stable background of law and order, and security of contracts that would help citizens to get on with the private economic activity on which the material wealth of the nation depended. Early in the history of economics, it was realized that the amount of money and credit that was available to 'grease the wheels of commerce' was at least partially under the control of the government. It was also realized that mismanagement of the monetary system could cause inflation. The government's responsibility was therefore understood to include management of the monetary system in Such a way that there was enough money to satisfy the needs of trade, but not so much as to cause inflation. The macro variables other than the price level were not, however, considered to be the responsibility of government policy.
In response to the so-called Great Depression of the 1930s, and the decade of heavy unemployment that was a part of it, modern macroeconomic theory was born. Since that time, economists have understood that government policy can have a significant influence on the nation's overall level of economic activity, while governments have, for better or for worse, accepted a responsibility for influencing the behaviour of major macro variables. Today, in nearly
every country, go held responsible health of the econo times incumbent go judged, first amor issues, on the performance.
Economic Goals
If economic policie to achieve certain e then we need to number of major in policy objectives governments strivet include:
o Economic growth and better goods or more simply, d standard of livin
a Full employm
suitable jobs for are willing and a
g Economic efficier
maximum fulfil using the availa ICCSOUlITCCS.
o Price stability upswings and di the general pric avoid inflation a
O Economic freedc
that business, consumers have freedom in th activities.
e Equitable dis income: Ensure of citizens faces most others enji
• Economic secur those who are disabled, laid otherwise una minimal levels C
O External bala reasonable over: the rest of 1
Economic Review: Dec.2012 (Jan. 2013
 
 

ies: Monetary Policy
ernments are
for the good my. At election Vernments are g many other ir economic
s are designed Conomic goals, recognize a nacroeconomic which most o achieve. They
: Produce more s and services, evelop a higher
3.
ent: Provide all citizens who ble to work.
cy: Achieve the ment of wants ble productive
: Avoid large lown swings in e level; that is nd deflation.
Om: Guarantee workers and high degree of eir economic
tribution of that no group
poverty while
oy abundance.
ity: Provide for chronically ill, off, aged, or ble to earn a of income.
race: Seek a all balance with the world in
Prof. Danny Atapattu.
Senior Professor of Economics University of Ruhuna
international trade and financial transactions.
The above list of basic economic goals inevitably entails problems of interpretation. We might disagree substantially on their specific meanings and, hence, the types of policies needed to attain these goals. What are 'sizeable' changes in the price level? What is a high degree' of economic freedom? What is an “equitable distribution of income? These objectives are often the subject of spirited public debate.
Also, some of these goals are complementary; when one goal is achieved, some other goal or goals will also tend to be achieved. For example, achieving full employment means eliminating unemployment, which is a basic cause of inequitable income distribution. But other goals may conflict or even be mutually exclusive. The involve trade-offs, implying that to achieve one goal we must'sacrifice another. For example, efforts to equalize the distribution of income may weaken in centives to work, invest, innovate, and take business risks, all of which promote economic growth. Taxing high-income people heavily and transferring the tax revenues to low-income people is one way to equalize the distribution of income. But then the incentives to high-income individuals may diminish because higher taxes reduce their rewards for working. Similarly, low-income individuals may be less motivated to work when government stands ready to subsidize then.
When basic goals do conflict, society is forced to develop a
49

Page 52
system of priorities for the objectives it seeks. If more economic freedom is accompanied by less economic security and more economic security allows less economic freedom, Society must assess the trade-offs and decide on the optimal balance between then.
Instruments of Economic Policy
There ae tw O Sets Of macroeconomic policy tools available to the government. One set, called demand-side policies, works on the demand side of the economy’s markets. These are called the policies of demand management. The other set, called supply-side policies, work on the supply side of these markets. The demand side relates to spending decisions by economic agents - households, firms, and government agencies - both at home and abroad. The principle of aggregate demand management policies is that the government can take actions to offset or smooth out those of private agents - firms and households - in order to dampen or eliminate fluctuations in total spending. The idea is to take the edge off recessions as well as booms. Two traditional demand management instruments are fiscal and monetary policy. Fiscal policy manipulates government expenditures or taxes in an attempt to affect the volume of national spending. Monetary policy is directed at influencing interest and exchange rates, and more generally conditions in financial markets. This in turn affects spending on goods and services. The supply side relates to the productive potential of the economy. The choice of hours worked by households, the productivity of their labour, and in general the efficiency with which Iesources are allo cated in generating a nation's output, all affect an economy's aggregate supply. Accordingly, supply-side policies represent government’s effort to increase an economy’s long-run capacity as well as its overall efficiency. Frequently, this effort is about reducing or eliminating government-induced - inefficiencies, which weI e introduced before the importance
of the supply si or as the res lobbying by in also about underutilized productive use: of this articl detailed discus and operation
Monetary Pol:
Monetary manipulation money and crec cost of that crec interest rates) influence tot businesses borrow to fina expenditure, availability, anc can influence Inaking Inore f borrowed, ar. downward pre rates which 1 borrowing, the to increase t making fewer fi borrowed, an upward pressu the government demand. Mo: administered by bank - in Sri Central bank ( the Central Bad accomplish the conditions o. discussed ir subsequent article.
Objectives of of Sri Lanka
The Centra Ba established by act of 949 an safeguarding b Sri Lanka Rupe banking, finan system. In ke trends in cen objectives of the Streamined 1 Monetary Law A it to pursue its to free it of the that were origin With this amer Bank has two
- 50

idewas understood, sult of successful
terest groups. It is bringing idle or resources into
s. The main purpose e is to present a ssion on the nature of monetary policy.
ісу
policy is the of the amount of dit available, and the dit to borrowers (i.e. in an attempt to all demand. Since and households ince much of their
changing the i the terms, of credit total demand. By unds available to be ld by exerting a essure on interest OWers the cost of government seeks otal demand. By unds available to be d by exerting an re on interest rates, : seeks to lower total netary policy is y a country's central Lanka this is the of Sri Lanka. How nk of Sri Lanka can ese changes in the f credit will be detail in the Sections of this
the Central Bank
nk of Sri Lanka was the Monetary Law d is responsible for oth the value of the ce and the country's cial and payments eping with global tral banking, the 2 Central Bank were by amending the ctin 2002, to enable core objectives and multiple objectives nally assigned to it. hdment, the Central objectives:
Economic Review: Dec.2012/Jan. 2013
e Maintaining economic and price
stability, and
O Maintaining financial system
stability. 冬
With a view to encouraging and promoting the development of the productive resources of Sri Lanka. Prior to amendment of the Act, the Central Bank had multiple objectives such as the stabilization of domestic monetary value, the preservation of the stability of the exchange rate, the promotion of a high level of production, employment and real income and the encouragement and promotion of the full development of productive resources. The problem was that these multiple objectives could sometimes be in conflict or be inconsistent with each other. Meanwhile, a consensus had developed internationally that a central bank's primary goal should be the maintenance of price stability. As price stability is crucially dependent on stable macroeconomic conditions, one of the core objectives of the Central Bank was specified as "economic and price stability'.
Further, as the stability of the financial system is crucial in improving the resilience of the economy, financial system stability was also identified as a core objective of the Central Bank. The two objectives are correlated and complement each other. Ensuring financial system stability is of prime importance, as monetary policy is transmitted through financial institutions to achieve price stability. Hence, the two objectives are in harmony and this enables the Central Bank to perform its main functions more effectively.
Monetary Policy Instruments
A primary function of the Central Bank, as stated in the Monetary Law Act, is the determination and implementation of monetary policy for the country. The Central Bank Of Sri Lanka possesses a wide array of tools to be used as instruments of monetary policy. The main instruments of monetary policy are the following:

Page 53
e Open market operations: These operations involved the purchase or sale in the open market Of government securities (Treasury Bills or Bonds) or sale or retiring of Central Bank securities to affect the liquidity in the banking system. The Central Bank sets the policy interest rates, i.e. the Repo rate (selling/borrowing rate) and the Reverse Repo rate (buying/ lending rate), for standing facilities and expects the open market operations to take place within this interest rate corridor,
o Statutory reserve requirements on commercial bank deposits: This is the proportion of deposits that commercial banks are required to keep as a cash deposit with the Central Bank,
o Bank Rate: This is the interest rate at which the Central Bank lends money to commercial banks that have liquidity difficulties. The Bank Rate is much higher than the Reverse Repo řate and is apenal interest Irate,
e Foreign exchange operations,
e Quantitative restrictions on
credit,
e Ceilings on interest rate,
o Refinance facilities,
e Moral suasion: A persuasion tactic used by the Central Bank to influence and pressure, but not force, banks into adhering to policy.
At present, monetary policy places greater reliance on market based policy instruments. The main Imonetary policy instruments currently used are (a) policy interest rates and open market operations (OMO) and (b) statutory reserve requirement (SRR) on commercial bank deposit liabilities.
Policy Interest Rates and Open Market Operations
The Central Bank conducts open market operations with counter
parties such as con and primary deale market liquidity. operations involve t sale in the ope] government securiti of central bank secu of securities by the in open market oper effect of withdrawing the banking syste purchase of secur Central Bank inject the banking system the Central Bank monetary policy und active open marke which was introdu 2003. The key eleme system are:
o An interest rate C
by the Central night policy ra repurchase rate (l the reverse (Reverse Repo) r
e A daily auction e or withdraw liq market,
o Standing facilitic
parties at these
o Outright transac
A Repo/Reverse agreement to buy/ with an undertakin them back at an ag at an agreed price. Bank's Repo rate is borrowing rate, whil repo rate is the over rate. The change in C Repo and Reverse Re signalling mecha monetary policy stan are reviewed on a usually once a mont if necessary.
Under the current
operations system
Bank makes a daily
liquidity in the banki conducts either Re Repo auctions fo determined by the Ce reduce large fluctu inter-bank interest II excess liquidity in th Central Bank will co
Economic Review:Dec.2012/Jan. 2013

umercial banks rs, to control Open market he purchase or in market of es or the issue Lities. The sale
Central Bank ations has the g liquidity from m, while the ities by the s liquidity into h. At present,
conducts its ler a system of at operations ced in March ints of the new
Orridor formed Bank's Overates, i.e. the Seporate) and
repurchase ate,
tither to inject uidity in the
es to counterrates,
tions.
Repo is an sell securities g to sell/buy reed date and
he Centra its over-night e the Reverse -night lending central Bank's po rates is the nism of its ce. These rates regular basis, h, and revised
open Imarket the Central assessment of ng system and po or Reverse II a.In almOUnit 2ntral Bank, to lations in the ate. If there is he market, the onduct a Repo
auction to mop-up the surplus money. If there is a shortage of liquidity in the market, the Central Bank will conduct a Reverse Repo auction to put money into the market. The magnitude of the Central Bank intervention depends on the overall liquidity excess or shortfall. The auction interest rates are determined by the counter-parties (commercial banks and primary dealers) through their bids. Participants could make up to three bids at each auction and the successful bidders will receive their requests at the rates quoted in the relevant bid.
Standing facilities are available to those participating institutions which were unable to obtain their liquidity requirements at the daily auction. That is, even after the daily auction, if a participant needs liquidity to cover a shortage, he could borrow funds on reverse repurchase basis under the standing facility. Similarly, if a participant has excess money, he could enter into a repurchase transaction under the standing facility. Accordingly, these facilities help containing wide fluctuations in interest rates.
Outright transactions are conducted at the discretion of the Central Bank to address long term liquidity issues. If a relatively large liquidity surplus exists and is likely to persist for a long period, it is absorbed by selling treasury bills outright out of the holdings of the Central Bank, and if a sufficient stock of treasury bills is not available, by issuing the Central Bank's own securities.
There also exist another policy rate known as the Bank Rate. It is the rate at which the Central Bank provides credit to commercial banks as a lender of last resort. These are collateralised loans and government securities are accepted as collaterals. The Bank rate is usually a penalty rate and it is higher than other market rates. Therefore, at present this rate is just an indicative rate as commercial banks can borrow from the Central Bank at the Reverse Repurchase rate which is less than the Bank rate. م
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Statutory Reserve Requirement (SRR)
The statutory reserve ratio (SRR), i.e. the proportion of the deposit liabilities that commercial banks are required to keep as a cash deposit with the Central Bank, also has been widely used to influence money supply in the past. However, the reliance on SRR as a day-today monetary management measure has been gradually reduced with a view to enhancing market orientation of monetary policy and also reducing the implicit cost of funds which the SRR would entail on commercial banks.
Under the Monetary Law Act, commercial banks are required to maintain reserves with the Central Bank at rates determined by the Bank. At present, demand, time and saving deposits of commercial banks denominated in rupee terms are subject to the SRR and the applicable ratio is 10 percent on all deposit liabilities. By changing the SRR, the Central Bank can influence the credit creating ability of commercial banks and hence, broad money supply and market interest rates.
Monetary Policy Targets
Excessive growth in money supply generates inflation. This happens when the growth in money supply is greater than the growth in output. The changes in money supply are a primary causal factor affecting price stability. To maintain price stability, the Central Bank influences the growth in money supply by determining the level of reserve money. This is done by targeting the level of reserve money needed to achieve the desired path for the growth of the money supply.
At present, monetary management in Sri Lanka is based on a monetary targeting framework. In this framework, the final target, price stability, is to be achieved by influencing changes in broad money supply which is linked to reserve money through a multiplier. Reserve money is the operating target of monetary policy. The monetary targeting framework is operated through a monetary programme. The monetary
programme Central Bank economic fa expected fis payments dev growth, desir credit and i the se facto
programme S path for no determines t
reserve mone achieve this r. Central Bank its open marl a corridor of by its policy reserve One are periodic adjusted necessary, t money to the
The Trans Monetary Po
Changing m important el demand, and and prices. T the changes instituted by the general p in the econo: the monetary mechanism. channels thro policy chang through the usually ide interest rate ( economy is changes in ir Credit channe is affected th: availability exchange rate economy is changes in th (d) the wealt the economy changes in a impact on channels, gr been placed and credit chi developing Co Bank tight borrowing co are less likel would norma houses or ca are less like equipment, s This reduce
- 52

is prepared by the taking into account ctors such as the cal and balance of 'elopments, economic ed levels of growth in inflation. Based on rs, the monetary sets out the desired netary growth and he path of quarterly y targets necessary to nonetary growth. The would then conduct ket operations within interest rates formed rates to achieve the y target. Policy rates ally reviewed and appropriately, if o bring the reserve
targeted path.
mission of the licy to the Economy
Onetary policy has ffects on aggregate thus on both output he process by which in monetary policy a central bank affects rice level and output my is referred to as policy transmission There are several ough which monetary ges are transmitted economy. These are ntified as (a) the channel (whereby the impacted through nterest rates), (b) the l (where the economy rough changes in the of credit), (c) the channel (whereby the affected through Le exchange rate) and h channel (whereby is affected through sset prices and their wealth). Of these eater emphasis has On the interest rate annels, particularly in untries. If the Central ens, for example, }sts rise, consumers y to buy things they lly finance - such as Lrs — and businesses :ly to invest in new oftware, or buildings. d level of economic
Economic Review: Dec.2012/Jan. 2013
activity would be consistent with lower inflation, because lower demand usually means lower prices. Also it is important to note here that there are different and long lags, sometimes extending up to two years, in the process of transmitting the monetary policy impact from the policy instruments (i.e. SRR or OMO) to intermediary targets (such as broad money Supply) and subsequently to the final targets (i.e. prices and output).
Conclusion
Through monetary policy, the Central Bank seeks to provide the economy with the "right' rate of money growth - enough to encourage high employment, steady prices, and rising real GNP. These are the basic macroeconomic goals of efficiency, stability, and growth. The more recent evolution of the global economy has accentuated the challenges that face monetary authorities. Increasingly, monetary policy decisions have to be made in an environment of heightened uncertainty. Structural changes associated with globalization have in creased the un certainty in interpreting macroeconomic indicators regarding the state of the economy. Financial markets, driven by massive cross-border capital flows, and the information technology revolution, immediately transfer the valuation of risks associated with uncertainty across the globe and this can lead to contagion. More than ever before, the choice of monetary arrangements depends on the choices that other countries make. Despite these constraints, monetary policy plays a continuingly important role in the economy.
References
Central Bank of Sri Lanka. 2005. Centra1 Bank of Sri Lanka: Objectives, Functions and Organization, Colombo.
Lipsey Richard G. and Harburry Collin. 1992. First Principles of Economics, ELBS, London.
Mathai Koshy. 2009. Back to Basics: What is Monetary policy? Finance and Development, International Monetary Fund.

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•වාණිජ කෘෂිකාර්මික කටයුතු නඟා සිටුවීම, #කාෂි ආශ්‍රිත කර්මාන්ත නඟා සිටුවීම. uසහල් පිටි නිෂ්පාදනය සහ ඒ ආශ්‍රිත ආහාර නිෂ්පාදන
• කිරි ආහාර නිෂ්පාදනය, nපශු සමීපත් සංවර්ධනය සහ සත්ත්ව පාලන කටයුතු, "අපනයන කෘෂිකර්මය,
යු ෙත් වගාව සහ ෙත් කර්මාන්ත ශාලා සංවර්ධනය.
රබර් ආශ්‍රිත නිෂ්පාදාන.
පාලී වහාව සහ වී ආශ්‍රිත කර්මානීත සඳහා වන ක්‍රීවාය. ( 4 සුළු අපනයන බෝග වගාව සඳහා සැකසුමී කර්මාන්ත, [...] හෝවිපල කටයුතු, ස්ථිර ෂිෆිග වගා සමීබන්ධ නිෂ්පාදානං
KY DLLmL LLuGuu L uuuu LuS LLL Y
Man Cabílinin Sıçan 5 Sisašā galı I.
වැඩි විස්තර සඳහා ළගම පිහිටි මහජන බැංකුව හෝ පුධ agene. o-24838, o 846
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Economic Review: Dec.2012/Jan. 2013
 
 
 
 
 
 
 

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සහ එහි උන්නතිය වෙනුවෙන් විවිධ වූ සංවර්ධන සහ ක්ෂුදු මූලින් Gස්වා සපයනු ලබයි.
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āti sis, sidē 5 g. ti
bන කාර්යාලෙය් සංවර්ධන සහ ක්ෂුදු මූල්‍ය ඒකකය
AA-Brand Finance Rating, AA+Fitch Raing в с. е c е с г. е X), 6tasetes

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