Small businesses will strengthen positions not soon. Economic analysis by Info-Prim Neo

Only four in ten small and medium-sized enterprises (SMEs) in Moldova make profit, almost every second enterprise sustains losses and only one third of the companies have available resources to immediately pay the current debts. These official statistics show the real situation of the small businesses of the country. The SMEs have yet a long way to go until they will become strong on the market. At the yearly Forum of SMEs, the participants spoke about the performance of the sector, stressing that the small and medium-sized enterprises make up 98.3% of the total number of economic entities. This is indeed an impressive figure. But with over 333,500 employees or 59% of the total, the SMEs lose to the large companies, the turnover of the small businesses making up only 45% of the total turnover per economy. Some 66% of the SMEs are located in Chisinau and 6.5% in Balti, but they still feel foreign in the regions. There is a wide discrepancy as regards the number of small and medium-sized enterprises in urban and rural settlements. There are 31 SMEs per 1,000 people in rural areas and 5 SMEs in urban areas. As to the development of the small business per sectors, 41.1% of those that build a business prefer the trade, 13.1% - the real estate transactions and 12.8% in processing industry. [What problems do the businesspeople identify?] "It is hard to build a profitable business when there are no conditions for development, the bank loans continue to be expensive and the costs of doing business are very high,” say the entrepreneurs. The reform of the regulatory framework has hindered the civil servants from dictating and controlling everything, but the effects will be felt later, say the entrepreneurs. The businesspeople ascertain that: - the bank loans are expensive, while the repayment term is small; - the companies do not have pledges and therefore, cannot take out loans (82% of the applications for loans are turned down because the applicants do not have pledges); - the access to market is also a problem; - the state adopts laws that favor the development of a business, but most of these are not observed; - the level of corruption is still high; - the procedure for liquidating a company is rather complicated. It is easier to register a firm than to liquidate it (according to official statistics, over 50,000 of the registered companies do not carry out entrepreneurial activities, but cannot struck off the State Register; - the training and consultancy services are poorly developed and cannot survive owing to the low demand for the services they provide; - there is no entrepreneurial culture. [What problems do the experts identify?] The high risks related to the guaranteeing of the right of ownership and the fair competition pointed to by the potential foreign investors remain the main problems faced by the business community, according to IDIS “Viitorul”. Among other obstacles hindering the development of business are: - excessive bureaucratization of the business activity and the increased volatility of the regulatory framework, despite certain progress and the optimistic statements made by representatives of the Economy Ministry; - Moldova lacks “quality infrastructure”; - the low capacity of the national economic entities to use the preferential trade regimes with other states; - the delay in examining cases in the court. The business environment in Moldova is unattractive not only to foreign investors, but also for the people that accumulated sufficient financial resources. [What does the state do to help the entrepreneurs?] The term for registering a firm was reduced from 15 to 5 workdays of the day when all the necessary documents were presented, while the tax is 250 lei. The tax for registering a private company is 54 lei. A number of 3,445 companies were registered in the first quarter of this year. Out of these, 71% were registered during a day. A one-stop office was opened at the Registration Chamber. The strategy for supporting the development of SMEs for 2006-2008 is being implemented. It includes a set of measures designed to foster the sustainable development of the SMEs. The Ministry of Economy and Trade is working out a new strategy for developing the development of the SME sector for 2009 – 2011. There was created the Organization for Developing the Sector of Small and Medium-Sized Enterprises which was entrusted with the task to implement the state programs and policies aimed at supporting the SMEs. It works out and implements different programs/projects designed to support the young people and women that want to start and develop a business and teach them how to manage a business, provides assistance in developing the infrastructure that supports the SMEs (business centers, business incubators) etc. The Organization for Developing the Sector of Small and Medium-Sized Enterprises provides guarantees for the loans granted by commercial banks and information about possibilities of obtaining financing. A sum of 3 million lei was allocated for implementing a program for training the entrepreneurs, supplementing the special loan guarantee fund and organizing the yearly SME Forum in 2008. Information points that provide information about the development of a business have been set up in eight districts. [A continuous fight for existence] How many firms survive? How many SMEs cope with the competition? We should ask ourselves these questions when thinking about the economic situation of the small business. As many as 11,490 companies were registered in 2007. The number of struck off companies rose to 1,915. This number is comparable with the average figure for the last six years. This year witnesses the same tendency. The only exception is that the number of companies struck off from the state register increased from 417 in the first quarter of 2006 to 573 this year. The share of new companies set up in other zones than Chisinau increased in the first quarter of this year. The ratio is 51%: 49%. The share of new companies created in the service sector is also increasing. This fact positively influences the structure of the national economy. The profitability of sales is also growing, although slower than projected: 2001 – 13.5%; 2002 - 15.5%; 2003 – 15.9%; 2004 – 15.5%; 2005 – 16.0%, 2006 – 16.2% (editor’s note – the data for 2007 have not been made public yet). The economic profitability rose from minus 1.9% in 2001 to 5.9% in 2005 and, respectively, 5.8% in 2006. But only one third of the total number of economic entities have resources to pay the current debts. The situation remained unchanged during the past several years, despite the rise in the incomes from sales of the economic entities. On the whole per country, the companies possess only 0.11 lei per every overdue leu on short term. This is twofold less than the optimum level of 0.22 lei. This shows that the companies are incapable of immediately paying their current debts. The economic entities from the energy industry and agriculture are in the worst situation. The companies from the construction sector are in a better situation with 0.17 lei per every overdue leu on short term. According to the National Bureau of Statistics, about 45.4% of the SMEs in Moldova reported losses and only 40.5% posted profit for the first nine months of 2007. The others had a nil financial result or declared lack of economic activity. Absolute liquidity rate (lei) Period 2001 2002 2003 2004 2005 Total 0.03 0.06 0.07 0.08 0.11 Agriculture, hunting and forestry 0.02 0.04 0.04 0.03 0.04 Extractive industry 0.14 0.18 0.12 0.10 0.15 Processing industry 0.05 0.06 0.06 0.06 0.09 Electric power, heat, gas and water (energy industry) 0.01 0.02 0.02 0.03 0.04 Construction 0.05 0.09 0.11 0.15 0.22 Retail and wholesale trade 0.10 0.07 0.09 0.14 0.08 Hotels and restaurants 0.10 0.07 0.09 0.14 0.08 Transport and communications 0.09 0.09 0.12 0.15 0.22 Financial activities 1.06 1.27 1.81 2.26 3.33 Source: National Bureau of Statistics