Like many other countries, Sri Lanka has had to grapple with the socioeconomic impacts of the COVID-19 pandemic. The outbreak of cases in March 2020 prompted the Government of Sri Lanka to implement measures to counter the spread of the disease.
Although the measures contained the spread of the virus and prevented a serious outbreak, they resulted in a slowdown in economic activity. Large segments of the population experienced income and livelihood losses. Informal workers, who comprise a larger share of Sri Lanka's workforce, and daily wage earners were the most severely affected. As the labor market worsens, the country's poverty rate of USD5.50 a day could rise to 41.7 percent in 2020, up from 40.4 percent in 2016.

Two of Sri Lanka's state-owned banks, Bank of Ceylon and People's Bank, worked with the government to support struggling businesses.
Sri Lanka had to impose a full country lockdown and travel restrictions in several instances. This greatly affected the manufacturing, agriculture, tourism sector, and services businesses that depend on trade and especially small and medium-sized enterprises (SMEs) and micro, small and medium-sized enterprises (MSMEs).

SMEs and MSMEs contribute significantly to Sri Lanka's gross domestic product. SMEs account for over 90 percent of Sri Lanka's total enterprises and 45 percent of total employment.

Most businesses were left with no means of going forward given the volatile, unpredictable and chaotic conditions. The most imperative need of the hour for business entities was immediate payments such as salaries, bills, important trade credit settlements and loan settlements. The majority of enterprises approached financial institutions for working capital loans to support their business.

The government had been working with the Asian Infrastructure Investment Bank since its inception. From the onset of the COVID-19 crisis, BOC and People's Bank had been helping their clients with their working capital. Through a joint application of the Ministry of Finance and the two state-owned banks, they sought financing from AIIB for additional support.

In February 2021, AIIB approved a USD180 million under the COVID-19 Crisis Recovery Facility to provide support and increase liquidity resources available to corporations and SMEs affected by the economic upheaval. Each bank was provided with USD90 million.

"The project provides sovereign-backed loans to the borrowers, state-owned banks BOC and People's Bank," said AIIB Suyez Pinto Portfolio Management Officer and project team leader. "BOC and People's Bank will on-lend the proceeds to corporates and SMEs in the form of short-term working capital loans."

In selecting the SMEs that will benefit from this financing support, BOC and People's Bank paid particular attention to women-led SMEs and made sure to distribute funding to different sectors, with an emphasis on beneficiaries likely to be most affected. At least 60 percent of the subloans on a value basis will be on-lent to SMEs.

"It's a long-term facility with a tenor of seven years, including a grace period of two- and-a-half years," Pinto continued. "The long tenor of the facility has been designed so that it will not add to Sri Lanka’s debt-servicing burden in the near term."

AIIB’s assistance helped companies meet their working capital deficits and led them to achieve sustainable development. Beneficiaries mostly came from the manufacturing, wholesale/ retail trade, construction, and agriculture and fishing sectors.

AIIB’s project implementation support included safeguards to ensure that both clients became familiar with AIIB's procedures and on-lending process throughout the implementation, drawdown and post-assessment process. The project was fully disbursed in 2021 and enabled the SMEs of Sri Lanka to enjoy much-needed financial assistance when it was most needed.
Sri Lanka: Financing Small Enterprises for Big Wins