Case Study: SME Economic Recovery Loan Scheme

As a source of employment, economic dynamism, competition, and innovation, the contribution of SMEs to the economic development of Namibia is significant. Unfortunately, cheap-money policies will not resolve the fundamental economic imbalances. As the financial system becomes flooded by cheap credit, SME owners feel that they are becoming more prosperous and begin to expand their consumption through increased debt.

As an independent economic and business researcher, I want to take a moment and thank the Bank of Namibia and the Ministry of Finance and Public Enterprises for doing a great job by re-launching the SME Economic Recovery Loan Scheme. I will be glad if the government could consider my proposal:

To ensure that small and medium-sized enterprises (SMEs) weather the storms that have assailed the sector since 2018, the government should consider all the SMEs to use a portion of funds to acquire real income-generating investments instead of concentrating on paying salaries, rent and other operational expenses. Consumption increases current utility and leads to higher living standards in the short term. The investment will require less current consumption but can enable higher living standards in the long term. SMEs are a vital lifeline in a country, as they represent the grassroots that keep the local economy going by encouraging growth, employment, and income.

Therefore, I believe, it is the right thing that the government should intervene in the economy to solve market failures and transform the economy. In my view, BoN and the ministry of finance should have considered a portion of consumption and long-term investment. With the current fragile economic environment, including record high-interest rates and high inflation, conditions are ripe to explore how implementer’s financing can help SMEs reach their full potential. It’s about ensuring SMEs operate above industry averages, and increasing productivity, performance, and most importantly, profitability.

Additionally, BoN and the ministry of finance asserted the SME Economic Recovery Loan Scheme is meant to assist distressed SMEs. The scheme will provide funds through participating commercial banks, to eligible businesses to assist them in paying for operational expenses such as salaries, rent and lease agreements, and contracts with suppliers. Further loans are not the solution for distressed SMEs without considering both independent and dependent variables.

This means that our borrowing produces different effects on the economy. However, the exact effects of borrowing will greatly depend on the sources of borrowed amounts. If loans are raised for productive purposes, scarce resources may be distributed rationally. In other words, resource allocation will take place to sub-serve national interests. Consequently, national income will rise. But if loans are raised to finance unproductive activities like repayment of loans, then resources may not be allocated optimally.

Moreover, economic recovery will not be achieved by extending loans to SMEs for consumption purposes, but rather by diversifying the SME Economic Recovery Loan Scheme in meeting operation expenses as well as a portion for investing in incomegenerating activities. The scheme will make a more positive impact if investment considers the wear and tear approach to enhance competitiveness and provide even greater support to businesses that were impacted by the economic effects of Covid-19 and by the recent floods. Addressing the financing issue of SMEs is of particular importance in the way out of the crisis, to ensure they can engage the transformations needed, such as digitalising or greening their processes and products or services. The sudden and steep drop in sales has exacerbated SME cash flow issues and reduced their profit prospects. The Covid-19 crisis has highlighted SMEs’ difficulties in mobilising liquidity and accessing short-term financing solutions and it may also undermine their investment prospects. Therefore, access to finance is essential for improving SME competitiveness, as SMEs must invest in new technologies, skills, and innovation. Access to finance issues cannot be resolved by implementing financing schemes or programmes in a vacuum.

The scheme will continue to be crucial for the SME sector, there is a broad concern that credit constraints will simply become the new normal for SMEs. It is, therefore, necessary to broaden the range of financing instruments available, to enable them to continue to play their role in investment, growth, innovation, and employment.

Without a doubt, the full potential for ensuring the expansion of entrepreneurs can be viewed from the performance of SMEs. The scheme will undoubtedly be the most flexible and straightforward scheme that has been introduced to date, certainly for SMEs. However, I am far from convinced that facilitating SMEs taking on even more unaffordable debt is the right solution without considering investing in an incomegenerating instrument. Furthermore, the scheme aims to assist eligible businesses in recovering from constraints in accessing finance due to Covid-19 and so on.

Unfortunately, the informal sector is often neglected in the SME Economic Recovery Scheme loan business support policies and interventions. The informal sector is also not fully accounted for in economic reporting.

To survive the crisis, small businesses in the informal sector need urgent liquidity support. Who is going to look after the informal traders? What will happen to them? What is the action plan to graduate these informal traders to formal? The policymakers will have to assess the situation and be innovative and adaptive in responding to gaps in their proposed measures. Overall, short-term measures to help the informal SME sectors should be linked with longer-term resilience programmes for more sustainable postCovid-19 recovery.

Hence, given the role of the informal sector in the economy, the government should begin to take more than a simple look at the informal sector with a view of enacting policies that will synergise the informal and formal sectors to unleash the vast potentials of the Namibian economy since activities in both sectors of the economy are not mutually exclusive.

In conclusion, borrowing is normal practice, but it becomes the worst of strategies when borrowing for consumption rather than production. It is even more devastating when the borrowings are principally for servicing the existing debts coupled with the absolute absence of practical measures or capacities for sustainability, not to talk of a possible halt to future borrowing.