The role of small and medium enterprises (SMEs) in economic development is frequently reiterated. Contributing approximately 50% of aggregate employment across the world and 40% of national income in emerging market economies, SMEs are given global recognition for their economic vitality. Accordingly, countries around the world were prompt in forming policies addressing the needs of SMEs at the onset of the pandemic induced lockdowns to alleviate the ensuing adversity.
Meanwhile, the Government of Nepal has finally come up with a stimulus package of NPR 50 billion to financially assist affected businesses, primarily SMEs, after almost eight months since the first lockdown. With the issuance of Business Continuation Loan Disbursement Guidelines, the Ministry of Finance hopes to help the struggling enterprises stay afloat and pay their employees. The concessional loans to SMEs (along with other entities in financial predicament) at an interest rate of 5% for the first year and 6% from the second year under this guideline, comes with the caveat that firms must retain the employment of their workers until the sum owed is repaid.
Furthermore, loans will be allocated on the basis of the level of damage each enterprise has sustained; NPR 100 million for the firms that have been highly affected, NPR 70 million for those moderately affected, and NPR 50 million for those relatively less affected.
The fiscal capacity of Nepali SMEs is often undermined by excessive collateral requirements and interest rates in accessing bank credit. In fact, according to Asia SME Finance Monitor (ASM), a survey done by the Asian Development Bank (ADB) on five ADB regions including South Asia, “limited access to bank credit is a structural problem” regularly encountered by SMEs especially in less advanced economies. Hence, in theory, the provision of soft loans is an apt response to bolster the SME sector that has been under additional strain ever since the spread of COVID. In practice, however, the effectiveness of such policy ultimately depends on how the government goes about implementing it.
Nepali SMEs predominantly operate in the informal sector, making it all the more difficult for these firms to access formal finance. Consequently, the availability of concessional loans is largely limited to registered entities while unregistered counterparts are generally left unfunded. If the government is earnest enough in its effort to revitalize the SME sector, then it will need to make necessary provisions to expand the reach of such initiatives so that the unregistered businesses could also reap benefits. Simplifying the process and removing eligibility criteria entailed in obtaining these loans are few of the approaches that could be taken by the government to make credit accessible to the wider business population. Similarly, the government must come with a proper mechanism to improve targeting to avoid high inclusion and exclusion errors prevalent in most social welfare programs.
Also, the Business Continuation Loan Disbursement Guidelines prevents the firms from dismissing their employees until they repay the principal including the interest. While this mandate is well-intentioned, its efficacy in bringing meaningful changes to the working condition and improvement in the overall livelihood of the employees remains dubious as employers could still exploit or underpay their workers.
The government’s decision to introduce a relief package for businesses that have been hit hard by the pandemic is timely. However, such effort needs to be supplemented by other appropriate measures for it to have a far-reaching impact.
For instance, for the complete recovery and development of the sector, the production capacity of SMEs needs to be strengthened. While access to finance is a crucial factor in determining the productivity of these firms, the presence of robust backward and forward linkages is equally essential in enhancing their performance. The government should take necessary steps to ensure uninterrupted supply chain linkages. Similarly, there is a pressing need for extensive adoption of information technology considering the widespread information asymmetry that persists within this sector. In this way, the identification of problems that impede the development of SMEs and subsequent policy responses should be a continual process the government actively undertakes even post COVID.
Sambriddhi Acharya is an MA economics graduate from Tribhuvan University. She has a keen interest in economic policies for socio-economic transformation. She has previously worked for the government and private agencies mostly as a researcher. She is currently working as a fellow at Nepal Economic Forum.