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Localised agro-based SMEs: Challenges and way forward

Mahbubul Mokaddem Akash | December 08, 2021 00:00:00

A salesperson showcases products at a stall during Bangladesh's National Small and Medium Enterprise (SME) Fair-2019 in Dhaka — Xinhua Photo

As the Covid-19 pandemic persists, all sectors of the economy are facing massive pitfalls, which include the nascent agro-based SMEs of Bangladesh. Operating in 400 or more clusters, the agro-based small and medium enterprises have been primarily suffering from a lack of finance, a problem that has been exacerbated in the disruptive pandemic period. Big agro-processing corporations like Bashundhara and Pran pose unequal competition to SMEs in the sector. In order to reduce this uneven competition, SMEs need effective technology and trained personnel, which would require an influx of capital.

Big corporations are able to obtain big loans and government protection and are able to package and sell imported goods when they are not producing. It, therefore, boils down to whether the government favours big corporations or the smaller multitudes.

Although the government targeted a stimulus package for SMEs, the disbursement procedure was inadequate. Therefore, an essential challenge remains to enhance this disbursement process, as well as to increase the volume of credits coming to SMEs. Moreover, it is crucial to properly identify the agro-based SMEs that need loans and enlist them, in order to streamline the disbursement process.

Since these SMEs were not able to fund themselves from their own revenue during the pandemic, they had to resort to getting easy loans from banks. However, banks were not keen on financing them but were more inclined to finance the huge industries. This is because the government-backed SME fund's interest rate is split into two parts: the first part is paid by the SMEs themselves and the other part by the government. Banks tend to believe that it is not viable to lend to SMEs because of this interest payment owed in the fund, with the perception being that SME loans cannot be recovered with interest. If the bank cannot recover the loan, the government will reimburse the interest payments, but the loan fund will be lost. Therefore, unless the government creates a guarantee scheme for SME funds, banks will not be interested to provide them loans.

It is imperative for the government to learn about the demand situation of the clusters in which these agro-based SMEs operate. If vertical integration does not take place, the middlemen take a significant part of the profits, which is why integration has to be done with the producing firms and the supply chain with a profit/value-added sharing arrangement.

Another thing that needs to be done is, if there is unequal competition on the market, for instance, lentils, salt, sugar or rice, which are sometimes being imported, protective measures have to be undertaken for the domestic competitors at least in the short run especially for those agro-based industries where we have a comparative advantage. This could be done by imposing high tariffs on or completely stopping import of those goods for a while.

Moreover, the recent price hike in the country has caused the price of raw materials and transaction costs to rise, causing the cost of production to increase. Overall, as the price of consumer products increases, the demand for SME products plunges even further. This is making it further difficult for the agro-based SMEs to compete, from both the supply side and the demand side.

In order to protect localised agro-based SMEs from future calamities such as the COVID-19 pandemic, unequal competition and short supply of financial capital, robust affirmative policy mechanisms should be implemented. The process of disbursing productive assistance is happening slowly, because effective targeting and the monitoring and coordination mechanism is absent. Productive assistance and subsidies should be provided where it is really needed, for which the mechanism to monitor all the agro-based industries has to develop. To do this in a planned way, an SME-monitoring cell or a central agency is needed. The body will monitor all the other supportive agencies, help to activate them and will be intervening if they fail.

The pandemic has caused poverty levels to rise almost twofold in the country. Some poor people have slid down further and become extreme poor. Productive activities are not much helpful to these extreme poor, and they need mainly relief and food aid first. At the second level the government should also, side by side, invest a part of its development funds in labour-intensive industries, like SMEs, and facilitate new infrastructural services in the localized SME-cluster areas. This is because the money invested in the so-called fast-track megaprojects and large-scale capital-intensive projects is not going to produce benefit in the short run, and because of bad governance, a large part of that investment goes into the pockets of a few contractors, importers, donors and bureaucrats, and only a relatively small number of low-paid workers.

But when development funds are invested in SMEs, it becomes an effective way to generate more employment with less money. In our country the demand-supply mismatch of education is also an old problem. In order to encourage the youth to engage in employment in the SME sector, or be an entrepreneur of a newly built SME, the curriculum needs to be changed, education has to be made more practical, an apprenticeship system needs to be started by developing university-industry linkage. Instead of providing everyone with a generalized education, specific skill and trade-based education should be provided at the mid level. The whole education system needs to be revamped. Without reforming the system, the twin problem of low productivity and educated unemployment cannot be solved.

The future of agro-based SMEs lies in semi-urban villages and localities where agro-based clusters are situated. Once the Padma Bridge is completed, the southern and southwestern districts will be joined and SMEs can possibly flourish there. That is why a combination of both macro and micro measures turned into a big push will be needed. If the Padma Bridge starts from 2022, rural and backward regions might start having a lot of SMEs, if not big corporations. At present the agriculture sector's percentage of GDP has come down to 16 per cent from 50, while the industrial sector now comprises 30 per cent of the GDP, where SMEs have the main contribution. This proves that at our stage of lower-medium economic development the agro-based SMEs have a natural thriving because of the advantage of cheap labour as well as a huge domestic market. However, they face a competitive disadvantage with the big when it comes to technology, branding, export, and marketing dimensions. It is indispensable that the localised agro-based SMEs are provided with at least sufficient capital so that these enterprises can thrive and develop even in the face of the pandemic.

Dr Mahbubul Mokaddem Akash is Chairman of the Department of Economics, the University of Dhaka. [email protected]

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