| Project Detail |
Project Name Enhancing Small and Medium-Sized Enterprises Finance Project Project Number 50349-002 Country / Economy Sri Lanka Project Status Approved Project Type / Modality of Assistance Loan The proposed financial intermediation loan (FIL) project will support small and medium-sized enterprises (SMEs) through two components: (i) a new SME line of credit (SMELOC2) for those affected by the 2022 economic crisis to provide emergency working capital (SMELOC2 component); and (ii) a loan to the government for equity infusion into the National Credit Guarantee Institution Limited (NCGI), which will provide partial credit guarantees (PCG) on investment loans to SMEs with inadequate or no collateral (PCG component). The project will help SMEs by enhancing access to finance and strengthening their capacity to adapt their business models to external changes, including those caused by climate change. The project is designed to particularly support women entrepreneurs who are often disadvantaged, as well as promote climate adaptation and mitigation activities. The implementation of both components is supported by ongoing technical assistance (TA), which was approved in January 2022. Project Rationale and Linkage to Country/Regional Strategy SMEs in Sri Lanka contribute 52% of the countrys gross domestic product (GDP) and provide 45% of employment, including for women and youth. Given its significant contribution to the socio-economy, expanding the SME sector will help the country to recover from the current economic crisis, promote export diversification, lessen provincial disparities, and support growth in disadvantaged communities. Gender equality can be enhanced by supporting SMEs and businesses led by women, and the countrys long-term climate change and sustainability objectives can be advanced by encouraging SMEs to undertake climate mitigation and adaptation investments. The economic crisis of 2022 affected 89% of all SMEs in Sri Lanka which were already severely impacted by COVID-19 (business operations of nearly 80% of the surviving micro and SMEs were affected). The decrease in economic activity due to COVID-19 and the 2022 economic crisis caused disruptions in supply chains and reduction in consumption, which ultimately led to layoffs and bankruptcies among SMEs. Most of these SMEs have financing constraints and low levels of technological expertise, making them less flexible to respond to the adverse economic situation. The level of finance available to SMEs had already been reduced during the pandemic-related lockdowns imposed in 2020. Credit to the private sector decelerated from 15.9% in 2018 to 6.2% in 2022 and contracted to 5.1% as of March 2023. This lack of access to finance and high interest rates reduced availability of working capital at affordable rates, while the lack of collateral required to borrow money restricted SMEs from expanding and reinvesting for future growth. SMEs tend to suffer disproportionally because of lack of financial literacy and resources, knowledge, and bargaining power. To help SMEs survive, recover, and transform, while mitigating the negative impacts of the 2022 economic crisis on the poor and vulnerable, it is critical to meet the immediate working capital needs of SMEs at affordable rates while meeting their financing requirements for expansion without collateral. The project will enhance access to finance for SMEs that have been most affected by the 2022 economic crisis and help improve their capacity to deal with vulnerabilities stemming from changes in their business operating environment and climate change. SMEs recovery from the economic crisis will be supported through FIL, with SMELOC2 providing urgent working capital targeting the export, agriculture, manufacturing, technology, and tourism sectors, as well as SME businesses led by women; and PCG component providing a loan to the government for its equity infusion to set up the NCGI, which will offer PCGs to SMEs with no or inadequate collateral for investment loans. A separate TA is being processed and will be provided to banks and nonbanks to build capacity on cash flow-based lending to SMEs and help improve SMEs financial literacy to enhance their access to finance and improve their adaptive capacity. Impact Contribution of businesses to employment generation, export diversification and productivity growth increased |
