Published:  01:55 AM, 09 September 2017

SMEs are key drivers of economic growth

SMEs are key drivers of economic growth

Bangladesh, over the past years, has made marked improvement in various socio-economic indicators. For its remarkable achievements in economic sector, Bangladesh has earned global recognition of a development wonder. It is now reckoned as an emerging economic tiger of Asia. All the stakeholders, including the government, entrepreneurs, exporters, farmers and even marginal ones in the field of agriculture deserve credit for all these achievements.

With all their limitations and isolated incidents of amoral practices our bureaucracy and the administrative set-up responsible to handle affairs related to the whole hog of production, distribution, pricing, internal and external marketing and management have been contributing to the country's march forward and deserve credit as well.

However, there are still many underlying challenges for our economy, which if not overcome by making sincere efforts, will act as big stumbling blocks to our way to attaining sustainable development. The poor state of investment has been one such major area of disgruntlement for the Bangladesh economy over the last few years. The government has been trying earnestly to build the investors' (both local and foreign big investors) confidence by providing attractive incentives, formulating more liberal and investment-friendly policies and simplifying regulatory practices.

However, apart from a slight increase in the inflow of foreign direct investment in last one year or so, the overall investment scenario has not markedly improved. The growth rate of investment in comparison to the rate at which the country's GDP is growing annually is not up to the mark. According to a provisional estimate by Bangladesh Bureau of Statistics (BBS) released on 14 May 2017, the size of investment has been 30.27 percent of the GDP in fiscal year 2016-17, a slender surge from last year's 29.65 percent. However, this rate is somewhat paltry for a developing country like Bangladesh. For Bangladesh to reach its anticipated target, investment has to surge to 40 percent of the GDP.    

The fact that the country has achieved an average GDP growth of 6.19 percent in the last 12 years and that it has already stepped into the group of lower middle-income countries might please policymakers, but that in no way should be a reason for complacency. In fact, any sort of complacency with regard to economic growth and development should be shelved once and for all in this new era, especially when we are committed to promoting ourselves to the next level, a middle-income country, by 2021, accomplishing the newly adopted set of extravagant Sustainable Development Goals (SDGs) within 2030 and subsequently becoming a developed country by 2041.

But the economy needs to grow at an annual growth rate of eight per cent or beyond in order for us to become a middle-income nation by the stipulated timeframe. To make that happen, the micro level of the country's economy needs to get more vibrant. Since the government's truly earnest efforts to convince the big investors have not been able to bring in the expected results, it is time to turn the focus towards some other areas, which if nourished will usher in a positive outcome.

The GDP of the country is dependent on a few specific sectors, predominantly readymade garments (RMG) and expatriate workers. The growth of other sectors and exploration of newer ones have not been satisfactory. Despite having the eighth largest population in the world, a substantial number of which are young, Bangladesh is not developing to its full potential. Unemployment, especially among the educated youth, has been a loose end of the Bangladesh economy and the menace is getting worse day by day. According to statistics from diverse sources, about half of the entire workforce of the country is unemployed.

The scenario of youth unemployment is more deplorable. Around 40 per cent of the young people aged between 15 and 24 years in Bangladesh today are 'not in education, employment or training' (NEET), shows an ILO report. The actual number of such youth, Bangladesh Bureau of Statistics estimate suggests, would be 11.6 million as there are at present a total of 29 million youth of that age group in the country. The country's rate of NEET is the third-worst one in Asia Pacific region, said the ILO's statistical report titled "Decent Work Decade 2006-2015: Asia-Pacific and the Arab States'.

Maldives and Yemen with 56 percent and 48 percent NEET rate respectively are ahead of Bangladesh. The rate of NEET is far worse for the Bangladeshi girls. Of the economically inactive youth, 62 per cent are females, says the same report. Renowned British magazine the Economist in its special report released a year ago said that 47 percent of graduates of Bangladesh are unemployed.

This is very alarming and this negative phenomenon has been upsetting the achievements in other areas of the sector. If Bangladesh really wants to expedite its economic growth, this huge workforce must be utilized. The educated youth, if provided with the opportunity, cumulatively can play an instrumental role in the country's achieving the desired success.

But solving the puzzle of unemployment is an enormous challenge ahead for the government, since new employment opportunities in proportion to the number of unemployed youth are not being created due to lack of investment --- both by local investors and in the form of foreign direct investment (FDI). And as the unemployment situation in the country is a gigantic one, the thought of alleviating it by creating ample job opportunities does not seem pragmatic, considering the resources constraints and other limitations. Therefore one feels a serious need for making self-employment opportunities for the unemployed people, particularly the educated youth. Facilitation and promotion of small and medium enterprises (SMEs) can turn out to be the best alternative the government can opt for at this moment.

SMEs, especially their manufacturing sides, can employ a much higher number of labour with less investment. And since SMEs engage people from the middle and lower echelons of society in economic activities, they can help ensure an equitable distribution of resources. Thus, a vibrant SME sector can play a pivotal role in the attainment of social parity by annihilating hunger and poverty from the grassroots level. They do not require much infrastructural reform and energy and power supply, inadequacy of which is a major impediment to the setting up of big industrial farms and large enterprises.  

That SMEs can play crucial role in alleviating poverty, generating employment opportunities and overall development of a country is a globally acknowledged assertion. The SME policy in the country also accepts this truth. But despite the fact that SMEs are labour-intensive and require less investment that totally suit Bangladesh's situation, the sector has not been able to grow to the point, from where it can play a noteworthy part in the country's forward march. Actually, limited access to bank credit and a lack of patronage on the part of the government have pushed the SME sector, especially its manufacturing side, to a rather perilous situation.

Financial institutions are generally reluctant to invest in this sector. The investment made here, including those under the Bangladesh Bank's refinancing scheme, is really insignificant. On top of that, the bulk of this investment goes to trade and other service activities, which are less labour-intensive but are considered less risky in terms of credit recovery, as opposed to the manufacturing side.

It is quite a valid point that the financial institutions, as lenders, have their concern to get back their money and there is no denying that manufacturing sector is arduous, complex by nature and is often uncertain and at times falls in peril. On the other hand, business enterprises are more profitable and less risky by their very nature. Thus, they are in a relatively better position to refund loans, which attracts lenders. But it is not a regular phenomenon for the manufacturing SMEs to prove unprofitable. Contrarily, it is often found that if industrial units are innovative, they can make windfall profits. Moreover, as it has been mentioned earlier, manufacturing SMEs' role in creating employment opportunities and their contribution in social progress and cultural uplift are massive.

And if the issue of loan defaulting is seriously taken into account, it is statically proven that a majority of the loan defaulters are big entrepreneurs. The one Hallmark scam is enough to prove the claim. So, the simple consideration of loan recovery should not be the lone yardstick of the financing institutions in financing the manufacturing sector SMEs. At this moment, especially when the big investors have largely refrained from taking loans and the amount of idle money in banks is piling up, the financing institutions can definitely think about enhancing credit disbursement to the SME sector. The government and the central bank have a major role to play in this regard and it is gratifying that they have started showing a more positive intent to improve the sector.

The government has taken some praiseworthy steps, like establishment of the SME Foundation as an apex body for SME development in the country, in recent times to develop the sector. These are really encouraging. Besides, Bangladesh Bank has introduced several schemes and programmes, including credit wholesaling by using the grants received from different development partners, opening of 'Dedicated Desk'  and 'SME Service Centre' in the banks, as well as establishment of 'SME and  Special Programmes Department', which have had a positive impact on SMEs in recent years. The amount of credit disbursed to the SME sector and the number of beneficiary enterprises have increased as well. Still, the measures have not proved adequate.

Actually, the rise in the number of beneficiary small and medium enterprisers in the recent years is mainly attributable to the introduction of a new window of credit targeting a new client group --- the women entrepreneurs. These clients are provided with loans at a single-digit interest rate, while other entrepreneurs have to borrow at interest rates as high as 18 per cent, which is higher even when compared to interest rate of large entrepreneurs. We praise the initiative to providing women entrepreneurs with credit at less interest rate. It is really significant in terms of women's empowerment. It also contributes considerably in reducing the severity of unemployment since women constitute the major portion of total unemployed youths in the country.

But at the same time, interest rates for other entrepreneurs must also be brought down to a reasonable level. It is very important for ensuring smooth economic growth, as the number of women entrepreneurs is limited in the country. Due to the very fact that women who want to stand on their own feet by becoming entrepreneurs still have to face many challenges, including obstructions created by family and society, women feel discouraged to become entrepreneurs. Therefore, besides making efforts to eradicate the impediments to women's entrepreneurship, the authorities concerned has to do serious mulling over the issue of unemployment among huge number of educated youth.

The central bank may consider introducing special soft loan schemes targeting the educated youth. This will motivate them to become entrepreneurs instead of being job seekers. The huge pressure on the country's somewhat small job market will also be minimised. As a result, people's rush towards urban areas will decrease. The villages will emerge as manufacturing hubs and centre of economic activities. This will reduce the gap between urban and rural areas in terms of economic and infrastructural development and standard of living.

It has, therefore, become an obligation for the government to find a reasonable solution to the problem of finance crisis faced by the SME sector. Besides encouraging the banks, the government needs to put in place a comprehensive policy framework to help non-bank financial institutions, like finance companies, factoring and leasing firms, expand their SME financing options.

If Bangladesh is to become a developed country through ensuring sustainable and inclusive economic growth as per the target set by the government, it must develop a vibrant SME sector along with a competitive business and commercial sector. Hence, the government and all other relevant authorities, including the Bangladesh Bank, need to do everything necessary to provide SMEs with the long-term financing they need to mature.

The writer is an Assistant Editor  at The Asian Age.  Email:

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