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Jakarta Post

Bailing out SMEs is not enough. Boosting demand is more important

  • Esther Samboh

    The Jakarta Post

Jakarta   /   Fri, July 17, 2020   /   08:14 am
Bailing out SMEs is not enough. Boosting demand is more important Visitors at the Local Startup Fest 2017 at The Space Senayan City, South Jakarta on Sunday. The event aimed to connect young businesses to the general public. (JP/Masajeng Rahmiasri)

The government is under fire for its slow disbursement of rescue funds for micro, small and medium enterprises. Remember President Joko “Jokowi” Widodo’s outburst in a Cabinet meeting shown on video footage that went viral recently? That only represents a tiny fraction of our frustration at the snail’s-paced transfer of aid for small businesses, some of which have died before help arrived.

Most exasperating is the fact that small and medium enterprises (SMEs) are the backbone of the nation’s economy, absorbing 97 percent of the workforce, not to mention informal SMEs. If they don’t make it and are forced to close shop, it will deal a big blow to the nation’s employment and the broader economy, of which SMEs account for 60 percent. Again, not including the informal ones.

There is a problem even bigger than the slow rescue measures. With the prolonged economic crisis from the pandemic hurting consumers’ purchasing power, aid will only delay the pain small businesses will eventually suffer. Even after these small businesses get government subsidies for their loan restructuring, or cash for working capital, without strong consumer demand, they will scramble to survive.

Read also: Small businesses cry for lifeline as government aid underway

First, most small businesses operate on a thin cash flow, without access to bank loans. Even when they have access to financing, it will normally be short-term loans with high interest rates, almost impossible to repay at a time when demand is extremely weak and money does not flow in, such as today.

Second, there are more than 60 million SMEs across Indonesia, but only 12 percent have access to financing or bank loans. This data shows there is only a small fraction of SMEs in Indonesia that will get their loans restructured using government facilities while the majority will remain unassisted.

Third, with social assistance distribution limited to the low-income segment of society, the lower middle-income section is overlooked, even though they are a large pool that can shore up demand and get the economy going. Recent consumer prices reflect the low purchasing power hitting all layers of society with the June inflation rate at 1.96 percent being the lowest in 20 years.

Read also: Bailing out 60 million firms

Those backdrops leave a huge question mark for the government’s Rp 123 trillion (US$8.4 billion) rescue fund for SMEs. True, it will soften the pandemic’s hardest blows on businesses. This is not to say the rescue fund is not important, it’s the least the government can do to support SMEs.

Academics believe SMEs will form the backbone of the post-pandemic national recovery, because of their collective contribution to the economy and as their small size will naturally enable them to be more flexible and adaptive in changing their business operations and finances. Meanwhile, large enterprises will need more time to transition to a healthy balance sheet for more productive business operations with restructured loans waiting for repayment.

However, without fixing the demand side of the economy, purchasing power will remain weak, losing support for local small businesses. More cash support needs to be directed to the lower middle-income segment, which is part of the “aspiring middle class” according to a World Bank report. Accounting for almost half of the middle-income population, they are neither poor nor vulnerable but have yet to achieve middle class status.

Read also: Online MSMEs can reduce economic burden: Report

Economic theorists have long argued that the government should be the biggest spender during crises, making it the driving force getting the economic machine of the country going again. It is high time for the government to focus on boosting domestic demand, to widen, deepen and diversify its social assistance and financial safety net programs.

Nobel laureate Joseph Stiglitz once wrote that it was a popular misconception that those at the top are the job creators, and giving more money to them will thus create more jobs. “What creates jobs is demand: When there is demand, firms will create the jobs to satisfy that demand (especially if we can get the financial system to work in the way it should, providing credit to small and medium-sized enterprises).”

After all, SMEs have thrived without government support so far. They have grown and connected themselves to digital tools and platforms to optimize business and expand their market access, mostly unassisted.

SME development in Indonesia is a complex issue unable to be solved solely by government bailout, which will likely reach a segmented portion of the small businesses anyway. Proper education and — in many cases — literacy, integrity and reform of the tax system and tax officials, and inclusive access to finance are the important foundational pillars of support for SMEs in the medium to long term.

Read also: Unstable internet, shipment issues: SMEs face uphill battle digitizing business to survive

The shorter-term focus needs to be on accelerating the bailout funds for SMEs and making sure the disbursement is well targeted and adheres to accountability principles. In parallel, boosting the demand side is paramount so consumers can help support SMEs as well.

Small business owner Ibu Amalia from Bali in The Jakarta Post webinar “Expanding market access for SMEs throughout Indonesia” says it all:

“I don't dare hope for anything from the government. I just want the government to understand us. I'm happy when I see people in my village working. It's a pandemic but people are still productive. I don't hope for any aid or have any expectations from the government, because now I already can help people around me. I am only concerned if there’s no demand, how then will I help my craft partners?”

So long as there is demand, SMEs will be fine.

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Staff writer at The Jakarta Post