While economies around the world are reeling from distress due to the debilitating impact of the coronavirus pandemic, some sectors are facing the brunt of Covid-19 the most. The micro, small and medium enterprises (MSMEs) is one such sector which has been affected severely. This is evident in the economies of the Asia Pacific region as in other regions. The region had started to face the impact of the corona pandemic before many other economies in the world since it originated from here. Due to the pandemic production has suffered, the supply chain has been disrupted within and outside the countries, and business operations have been hampered since the beginning of 2020. Thus, the sector which contributes significantly to the economic growth, employment, and trade in these economies have experienced significant losses. This is worrisome since about 96 percent of enterprises in the region fall into this category.
Many MSMEs have also been totally wiped out during the pandemic. Due to limited economic activities and lockdown in most countries in the region, the MSMEs have fallen into such crisis that they are finding it difficult to survive. A survey on 30,000 businesses across 50 countries by Facebook, the Organisation for Economic Cooperation and Development (OECD) and the World Bank shows that 18 percent of small and medium enterprises (SMEs) in the Asia Pacific region had to close their operations between January and May 2020. Compared to global average this was better. Globally, 26 percent of SMEs had to close their businesses during the period. Several enterprises had to cut down on their employment. Businesses from the South Asian region had to experience a larger hit by the pandemic with a 46 percent closure of the SME operations. Women-led SME businesses have been affected disproportionately. This is because their operations are smaller, their profits are low and they have very little savings. In the East Asia and the Pacific region 22 percent of the businesses owned by women had to be closed down as opposed to 16 percent for male run businesses.
Governments across the region have adopted various fiscal and monetary measures for the MSMEs to revive their businesses. These include stimulus and relief packages to the affected businesses. Such stimulus packages offer credit facilities at a reduced rate of interest. This has been a welcome initiative. However, the MSMEs need special attention as they have limited resources and flexibility to survive during crisis. They lack savings which can help them stay afloat. In this regard, a number of issues need to be considered by policymakers.
First, most MSMEs in the region currently operate informally. Therefore, they are not included in the national dataset of companies. Given that a large number of people earn their livelihoods from this sector, all MSMEs should be listed and recognised so that they can benefit from all types of support measures offered by respective governments.
Second, during corona catastrophe, businesses have become more dependent on technology. E-commerce has increased. However, most MSMEs are yet to adopt technology due to both lack of resource and skills. This risks creating further gaps between large and small enterprises. Due to this, further inequality is also feared in society. In order to help them sustain during the digital era and to reduce the glaring disparities between the MSMEs and the large businesses, governments should provide continuous support to the MSMEs during the crisis and post-Covid period.
These initiatives are indicative of the respective government’s commitments towards the sector. However, given the susceptibility of the sector and its contribution to the economy the MSMEs need further attention. In many countries in the Asia Pacific region there are real problems in implementing the stimulus packages announced by the governments. For example, the MSMEs do not usually go to the commercial banks for credit even though there are dedicated policies and packages in place. Therefore, many of them do not have transaction or loan records with the commercial banks. Now, when stimulus packages have been announced, the commercial banks are hesitant to provide loans to the MSMEs as banks are apprehensive about the repayment of the loans given to these MSMEs. Moreover, banks also do not find it cost effective to give loans to these businesses as their operational costs will be high for the MSMEs.
Thus, despite stimulus packages being announced by the governments, the MSMEs are yet to benefit from those fully. Many governments have provided credit guarantee schemes to the banks. The Indian government has introduced the Emergency Credit Line Guarantee Scheme. In Bangladesh, the central bank has announced a credit guarantee scheme equivalent to Tk 2,000 crore for the CMSMEs. This will cover a part of the risks by the lending banks. Hopefully, commercial banks will now be willing to extend loan facility to the MSMEs.
The underlying reason behind increased support for the MSMEs is that the sector is the engine of growth in the Asia Pacific region. As a source of economic output, employment and income, the sector has a critical role to make growth inclusive. Indeed, the achievement of the Sustainable Development Goals also depends on the success of this sector. Therefore, all recovery measures from the fallout of the corona pandemic will have to take special consideration of the MSME sector.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.
A shorter version of the article was published in the Asia Pacific Watch by the Indian Chamber of Commerce.