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Dubai: The Government of Dubai’s plans to shorten payment cycles to small and medium enterprises (SMEs) will help boost the liquidity and economic activity in the emirate, according to industry representatives and bankers.

Dubai plans to expedite government payments to small and medium-sized companies. The government will pay SMEs within 30 days instead of 90 days, according WAM news agency.

According to the report, this measure is expected to result in Dh1.6 billion ($435 million) of additional liquidity to the companies. “Cash flow shortages, tighter liquidity and difficult credit conditions have been major hurdles for SMEs in recent years. Any efforts to reduce the credit period of government contracts will substantially reduce the cash crunch,” said Shailesh Dash, Founder and Board Member of Al Masah Capital.

Banking sector credit to SMEs in the UAE have been on a tightening cycle from the second half of 2015, following a significant rise in non-performing loans (NPLs). The excessive leverage combined with a breakdown in payment cycles led to a number of small business owners skipping their loan payments resulting in a big surge in NPLs for banks for banks during the past three years.

“In response to rising loan impairments, many banks have tightened their credit standards and or increased the interest rates significantly in recent years, making access to funds difficult for these banks. While many banks were forced to deleverage and restructure their balance sheets, some are still struggling with legacy NPLs from their SME portfolios,” said the SME head of a local bank.

Bankers and industry representatives said that the early payments on government contracts will come as a big relief to SME players in keeping up with their payment obligations. “The adoption of IFRS 9 [International Financial Accounting Standards] has mandated banks to recognise loan impairments based on their expected losses. This has further reduced the loan repayment cycles for SMEs. Speedier government payments will help this segment to better service their existing debt and manage liquidity,” said a banker.

The government plan also includes a reduction in insurance costs for SMEs that will not affect their eligibility for government tenders. The initiative allows reducing the value of primary insurance for SMEs. “This [reduced insurance costs] will be a huge relief to SME suppliers to the government. Eligibility to bid for government contract requires certain minimum insurance coverage for SMEs and the costs have been exorbitant for many to become eligible. Any reduction the limit will not only release liquidity, it will also make a lot more SME players able to bid for government contracts,” said Dash.

The Government of Dubai has announced a number of measures such as reduction in government fees and allocation 20 per cent of government tenders to SMEs in recent months to revive non-oil private sector economic activity in the economy.