In this recent COVID-19 Notes prepared by the World Bank and IFC, contributed by Ghada Teima, Global Lead Financial Sector Specialist at IFC, you will read an assessment on the impact and policy responses in support of private-sector firms in the context of the pandemic.

Summary

While a COVID-19 outbreak will have a generalized impact on business activity and employment, it will have a disproportionate effect on SMEs. Small businesses play a significant role in all countries and are the key generators of employment and income, especially in emerging and developing countries. Even in normal economic conditions, governments have long recognized that to thrive and grow SMEs need specific policies and programs, hence the comprehensive range of measures currently in place in countries. However, SMEs will be especially hard hit by the pandemic. Not only due to the traditional challenges, but new, supply-side and demand-side difficulties will soon become apparent. SMEs risk being caught in a vicious cycle of supply shock, demand shock, the decline in working capital and an increase in insolvencies. At the same time, tightened credit conditions will affect the ability of SMEs to access liquidity, setting in motion a downward spiral that can significantly impair the backbone of all economies. SMEs in global supply chains are even more exposed as they will take the brunt of the difficulties of large firms. 

The threats and risks posed by the COVID-19 to small businesses require a swift and resolute government response. Countries’ ability to deal with the crisis depends to a large extent on the space provided by their respective fiscal and monetary policies. While SMEs can benefit directly or indirectly from these measures, more targeted actions aimed to address their financing problem are warranted.

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