Ignoring Sme Support Risks Economic Revival Hopes

After months of discussion and debate in public forums and parliamentary committees, lawmakers eventually decided to reject the Small and Medium Enterprises (SMEs) support bill tabled by the government, with 29 MPs voting against it, 26 voting in favor and 2 abstaining.

The final rejection vote came in the second reading of the SME financial support bill, during parliament’s one-day supplementary session of its 15th legislative term on 20 October. Despite Minister of Finance Barrak Al-Shitan introducing amendments to the original bill as requested by some lawmakers, including deleting the phrase ‘other clients’, so as to limit the funding support only to the owners of SMEs, and reducing the budget for this purpose from KD3 billion to KD500 million, the bill failed to muster the required support. 

Last week, Chairperson of parliamentary Financial and Economic Affairs Committee MP Safa Al-Hashem confirmed that the committee had met with Minister Al-Shitan, as well as the Governor of Central Bank Dr. Muhammad Al-Hashel and the Director of Kuwait Investment Authority to discuss amendments to the bill. Explaining the allotment of only KD 500,000 for SMEs, the lawmaker said that the purpose of the bill was to support the economy as a whole.  She pointed out that the private sector constitutes 32 percent of the total income of Kuwait, of which three percent is from SMEs and 29 percent from other businesses. 

Clarifying that the capital of some companies that claimed to be SMEs was over KD 5 million, MP Al-Hashem said they were in fact ‘upper-medium’ businesses and they were accordingly  categorized as ‘other clients’ in the bill. However, another member of the Financial and Economic Affairs Committee MP Saleh Ashour, expressed his disapproval of the bill and said that he would vote against it when it came up in parliament, as he believed that it was meant to favor large businesses at the expense of SMEs. 

As expected there was a chorus of wails from owners of SMEs against the parliament’s decision to ditch the financial support law. Many owners accused MPs of not only failing the tens of thousands of Kuwaiti families impacted by their decision, but also delaying the country’s revival in the wake of the huge economic crisis that has arisen from the coronavirus pandemic.

One SME owner expressed his anger at the decision by saying, “We were always suspicious of the government’s intentions, but we did not expect that the blow would come to us from the nation’s MPs, who are entrusted with the role of preserving the interests of the people. Unfortunately, some MPs stood against the financial support law for political and electoral reasons, not technical ones, and we will remember them when we go to the polls.”

Kuwait’s economy which was already sluggish at the start of the year due to fall in oil revenues from a prolonged low international oil-price scenario, was thrown into deeper disarray with the onset of the COVID-19 crisis in late February. Extended curfews, lockdowns and business shut-downs over the last nine months have devastated many businesses in the private sector, especially among the country’s many small and medium enterprises. 

In all fairness, it needs to be said that with unusual alacrity and uncharacteristic cooperation from lawmakers, the government approved a slew of measures to revive the economy early on in the pandemic.  Among the government’s stimulus package  aimed to revive the economy, was support to provide liquidity for SMEs, by postponing their loan repayment installments to the National Fund for Small and Medium Enterprises Development (NFSMED). Local banks also agreed to a request from the Central Bank and offered a moratorium of six months, starting in April, on loan repayments by SMEs. 

Furthermore, in a bid to encourage local banks to provide soft loans to SMEs, the Council of Ministers agreed to provide up to 80 percent of the SMEs’ funding needs from the NFSMED (National fund for Small & Medium Enterprise Development, while banks would finance the balance 20 percent at an annual interest rate not exceeding 2.5 percent. In a further sop, the government also agreed to pay the interest on the loan for the first two years from the country’s general budget, with clients having to share the interest only from the third year. 

To further incentivize banks to extend soft loans to SMEs, the Central Bank reduced the risk weights for SME loans from 75 to 25 percent and agreed to include several stipulations designed to protect banks from default risk by SMEs. Among the conditions imposed on the loans was that the SME requesting a loan should be an existing client of the bank; should not have defaulted on any of its loan obligations in the past; and had to be a profitable venture before the virus outbreak. 

Moreover, the loan could be utilized only to finance operational expenses, such as salaries, rents and for paying vendors, and should not go to repay instalments or loans. The SME would also not be allowed to make any dividend payout till the loan was completely paid off. Other stipulations included that the business should be in a value-adding sector of the country’s economy and capable of creating national employment. 

The downside to all these stringent conditions is that it turned away the majority of prospective SME borrowers — only around 150 SMEs from the nearly 30,000 small and medium enterprises in the country applied for the soft loans. Probably businesses in Kuwait, long accustomed to government bail-outs to see them through financial crises, were not ready to accept loans, no matter whether it was soft or hard. 

What many SMEs wanted and expected the government to provide was more direct support in the form of grants or debt write-offs. But, this time around, with falling oil revenues and recurring deficit budgets straining liquidity, the government was unwilling, or more probably unable, to hand-out anymore doles to businesses.

In July, as the virus was gaining ferocity in the country, Kuwait Financial Centre ‘Markaz’, one of the leading investment management and research companies in the country, issued a special report on SMEs in the country. The report highlighted the importance of SME sector to Kuwait’s economy and pointed to some of the challenges the sector faced from the COVID-19 onslaught.

According to the report, the SMEs sector in the Kuwaiti economy contributes around 3 percent of the GDP, with the gross value added by the SMEs to the economy in 2019 a little over KD1.2 billion. The report also highlighted that there were around 30,000 licensed SMEs, representing around 90 percent of the total number of companies in the country. Around 40 percent of these companies were in the wholesale or retail trade, hotels and restaurants, while a further 33 percent were in construction and in the industry sectors.

Noting that most of the SMEs had limited cash reserves to start with, the report underlined that this  situation deteriorated with new challenges specific to the pandemic. The temporary shut-down of business operations and labor shortages, from precautionary restrictions on movement of people by the authorities led to a severe loss in revenue to SMEs and constricted their cash flow. The report added that the financial impact on SMEs made it difficult for many of them to resume  operations.

The COVID-19 crisis is unique in the unprecedented nature of its concurrent impact on economies around the world, and in the simultaneous blow that it has dealt to the global economy on both the supply and demand side. Consumers are not keen to keep consuming due to uncertainty over the future, while companies are unable to maintain production due to bottlenecks in supply chains or financial constraints.

Previous economic crises that have affected the supply side have usually been limited to companies that were financially vulnerable or were competitively inefficient. However, this crisis is unusual in that it has not differentiated between efficient or inefficient firms, or between companies that are resilient or vulnerable. 

Also, unlike previous global economic crises, such as the one in 2008, this crisis clearly warrants both fiscal and monetary responses. However, with interest rates at near-zero levels previous monetary responses by the Central Bank, such as interest rate cuts or encouraging the easing of short-term liquidity problems for businesses, will clearly not be enough. 

The overarching nature of the COVID-19 induced economic crisis has made it imperative for the authorities to undertake broad response measures aimed at concurrently reviving demand and removing supply and financing gridlocks. Experts recommend that the government should leverage all its resources to strengthen the fiscal response, and simultaneously address solvency issues exacerbated by the pandemic. They warn that failure to respond appropriately and in a timely manner could lead the country to an economic stagnation that could in the long-term prove prohibitively expensive economically, politically and socially.

 

SOURCE: TIMESKUWAIT

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