Small, medium enterprises (SME) play a pivotal role in economic development. There are about 7.4 million SMEs in Kenya as per 2021 World Bank report, employing over 14 million people. More than half operate in the informal sector.
These SMEs are the engines that drive economic growth. They provide jobs and a lifeline to millions directly and indirectly. Most of these companies survive on financing and bank overdrafts to sustain their operations. This financing, most often, is from banking institutions.
However, with the government increasingly focusing on domestic borrowing as International Monetary Fund (IMF) and World Bank financing dries up, this important source of funds for SMEs will become more expensive and difficult to access going forward.
The government, in its current financial year, has factored in zero IMF financing, opting instead to focus on domestic borrowing and new World Bank loans. This comes as it faces a fiscal deficit of Sh923 billion and growing pressure from debt and interest repayments.
The government plans to borrow Sh635 billion this financial year. With frequent revisions of revenue targets, the fiscal deficit will likely increase.
What does this mean for the SME sector? As banks and financial institutions lend more to the government, the SME sector is bound to experience slow growth as funding becomes difficult to access.
Banks will prefer lending to the government, which is considered safer than lending to risky SMEs. As the Kenya Revenue Authority intensifies tax collection efforts, SMEs are likely to face a more challenging business environment, potentially resulting in job losses and the collapse of some businesses.
Operating costs will also rise as import expenses increase, given that many SMEs rely heavily on imported goods and machinery. With declining revenue to clear imports and limited access to funding, many of these goods are likely to remain stuck at entry points.
The government needs to come up with ways of cushioning this sector from unforeseen economic shocks that lie ahead. An SME fund can offer a ready and direct source of funding to this sector and assist in job creation. A review of the current taxation regime which is punitive to SMEs should be encouraged.
A tax regime that encourages investments should be implemented to spur growth and job creation. Finally, financial institutions should be mandated to continue lending to this sector at an affordable cost of capital. This can only happen if the National Government reduces its appetite for domestic borrowing and gives space to SMEs.
The writer is a Finance and Policy Analyst in Nairobi.
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