Economy, Business And Markets

SMEs Under Crushing Pressure

SMEs Under Crushing PressureSMEs Under Crushing Pressure

According to the Ministry of Industries, Mining and Trade, Iran has more than 82,000 small-and medium-sized enterprises. According to the ministry, an SME is defined as an entity with less than 50 employees. It was reported in 2014 that these enterprises constituted 91.5% of the total companies across the country, while having 24.4% share of the total contributed capital of more than 1620 trillion rials ($50 billion). At the same time, SMEs employ around 41 percent of the workforce which shows production is labor intensive in Iranian SMEs.

According to the Central Bank of Iran, companies with less than 100 employees were accountable for around 35 percent of the value added in the manufacturing sector in 2012 and 2013. This share is estimated to be less in the next couple of years.

There are two main challenges faced by these small and medium entities. First, these companies have experienced a major rise in their input prices, mainly raw materials, for the last couple of years. Add up the foreign suppliers’ tightening of credit policies due to western sanctions (imposed against Iran over its nuclear energy program) to the equation and you will figure that most of these companies need to increase their working capital five to seven times in order to sustain their previous production levels.

So far, whatever said is true about all the companies operating in Iran’s economy. The second issue, which puts extra pressure on SMEs, is the bargaining power of their local suppliers, which are mostly big public companies that dictate the prices of their raw materials. Since these companies have lobbying power in legislation and government, they easily find a way to pass on the unwanted pressures down to their customers and remain profitable. Take the steel industry for example. In March 2015, Iran put 10 to 20 percent import tariffs on various steel products. Yet large steel producers are pushing for a further rise in tariffs. This has made small producers lose their competitive edge in exports, while they are facing weak domestic demands. The same is true for downstream petrochemical companies.

On the other hand, these SMEs have been rolling over or defaulting on their debts. This has made most of these companies insolvent and banks are already reluctant to renew their contracts with them. Since production in SMEs are more labor intensive than capital intensive, it seems more employment and production can be generated per unit of liquidity pumped into these companies. The CBI has thus set the financing of SMEs’ working capital the current year’s priority. The CBI has directed Iran’s banks to give a special treatment, with regard to debt financing, to SMEs that have idle capacity and unfinished expansion plans that require working capital financing.