Annual Report 2010 - Ministry of Finance and Planning

6 | DEVELOPMENT FINANCEOverviewThe Government havingrecognized the importanceof the Small and MediumEnterprises (SME) and Microfinancesectors in achieving a balancedeconomic growth, equitable regionaldistribution and increasing employmentand productivity levels, has adoptedpolicies and strategies and introducedprojects and programmes to promotethese sectors.SMEs scattered in agriculture,plantation, construction,manufacturing, trade and other servicesectors, contribute to 40 percent ofthe total Gross Domestic Product(GDP). Microfinance has also beenidentified as one of the key tools topromote self employment and smallenterprise backyard economy. Theabsence of a cohesive regulatoryand supervisory system for themicrofinance sector has been oneof the constraints to the growth ofthe sector. The Microfinance Act hastherefore, been drafted to ensure thesmooth functioning of this sector.SME SectorThe development policy framework ofthe Government identifies SMEs as thecatalyst of the economic growth. SMEsaccount for 70 percent of the totalnumber of enterprises in Sri Lanka andhave gained wide recognition as a majorsource of employment, value additionand income generation, povertyreduction and regional development.It is also revealed that about 26 percentof the total employment in the Islandis accounted for the SME sector 1 . Theopening of economic opportunitiesin the North and East region hasexpanded the scope of the SME sectorby number and market share. However,the SME sector has to recover from theadverse impact from the slowdownin the global economy in 2008/2009,achieve a growth rate of 10-20 percenton the SME sector, and fulfill the desiredeconomic growth of more than 8percent. For this purpose, the followingtwo projects are being implementedby the Department of DevelopmentFinance through long term fundingarrangements with the World Bank andAsian Development Bank (ADB).Box 6.1SME Policy Initiatives For High GrowthShort/Long Term Recovery and Access to Finance• Create space for new capital injections byrescheduling of repayments of SME loans.• Amend the Recovery of Loans by Banks (SpecialProvisions) (Amendment) Act. No. 4 of 1990 toprovide flexible solutions for small loans.• Improve access to finance for SMEs affected by theglobal financial crisis.• Develop a Credit Guarantee Scheme under the Smalland Medium Enterprise Development Facility Project(SMEDeF).• Implement the budget proposal of 2011 to haveinvestment account from the tax reductions in respectof Value Added Tax (VAT) and income tax.• Promote long-tem funding for SME and otherenterprises.Technology• Remove all taxes applicable to machinery andtechnologies while introducing programmes for skilldevelopment under the budget proposals 2011.• Provide funding for new machinery and technologythrough SMEDeF project and specific investmentportfolio by the development banks.• Prepare a strategic plan by the developmentbanks to facilitate the SME sector to increase theinvestment by 30-40 percent during the next fouryears.Small and MediumEnterprise DevelopmentFacility Project (SMEDeF)Small and Medium EnterpriseDevelopment Facility Project(SMEDeF) is a three year project,through the credit facility ofthe World Bank (InternationalDevelopment Association - IDA)commencing from 2010. The1Department of Census and Statistics, 2008objective of SMEDeF is to improveaccess to finance (including termfinance) for SMEs in Sri Lankaaffected by the global financial crisis.The total value of the project is Rs.6,314 million (USD 57.4 million) andthe Loan Agreement between theGovernment and the IDA has beencompleted in November 2010. Theproject will be entirely functionedfrom 2011 onwards.The project consists of twocomponents namely,1. Financing and risk sharing facility,2. Policy and capacity enhancementfor SME banking.Financing and risk sharing facilityincludes line of credit to refinanceshort and long term loans for SMEsnationwide and risk sharing facility290