How can we help small business affected by the COVID-19 crisis?

by Robert Skidmore, Chief, Sector and Enterprise Competitiveness, ITC (@rskidmore001) and Jasmeer Virdee, Trade Specialist, ITC (@JasmeerVirdee)

Adapting technical assistance to meet the challenge

As COVID-19 moves from a health crisis to an economic crisis, we are trying to anticipate how small businesses around the world will weather this storm and where we need to focus our efforts.

ITC works with micro, small and medium-sized enterprises (MSMEs), primarily in the developing world. The typical small business we work with employs between 10 and 20 people, is close to or is already export-ready, and wants to grow internationally. These MSMEs represent 60%-70% of jobs in developing countries and around half of economic activity¹. Moreover, they tend to employ young people and women.

It is still too early to estimate how deeply the pandemic will affect our core constituency. Small businesses are already or will soon face a liquidity crisis, which could wipe out whole segments of the economy. In the next few months, they will face a range of challenges that will depend, to a large degree, on how policymakers react to the crisis today.

Challenges facing small businesses

How big is the coming wave? The world as a whole is likely to enter into a recession in 2020, according to latest estimates from the International Monetary Fund (IMF)². Some sectors will suffer more than others, with the travel, accommodation and food services sectors being hit particularly hard. Businesses themselves are likely to travel through a four-phase process: shutdown, supply-chain disruption, demand depression and finally, recovery. The severity and disruption caused by each stage of the process will depend on the policies adopted by governments. We know the impact will be severe; what we do not know is how long the crisis will last.

As they move from shutdown to recovery, MSMEs will face a combination of threats to their survival:

1. Collapsing demand and access to liquidity. Demand has plunged for the businesses and entrepreneurs we support – even in commodity sectors – and some buyers are slowing payments for orders already received. MSMEs have small cash reserves, and therefore go out of business first in a liquidity shock. Businesses who trade internationally are especially vulnerable, as they depend on access to increasingly scarce US dollars to fund a variety of their costs.

2. Accessing inputs and managing inventory. MSMEs frequently source inputs from abroad, increasingly so as supply chains have become longer and more complex. For the garment companies we work with in North Africa, for instance, as orders have collapsed key inputs, such as fabrics from China, have also disappeared.

3. Managing the work environment. For manufacturing MSMEs in lockdown situations, remaining open is challenging as factory floors are not designed for social distancing. Massive outmigration from cities has meant workers have disappeared and they may be difficult to remobilize. Many countries have suspended support to farmers even as the agricultural calendar continues.

4. Policy uncertainty and disrupted supply chains. Policies are evolving fast. MSME managers often work alone and cannot create crisis teams to track changes. One of our clients reports having a shipment of fresh produce grounded at an airport because passenger air travel has stopped. Supply chain disruptions such as grounded airlines create huge liabilities.

5. Accessing emergency support: Many of the small businesses we support are on the edge of the formal economy or trade informally. They rarely draw on government support and relatively few participate in networks of government support institutions. As governments put together emergency support, reaching these companies and finding ways to help may be difficult.

Reactivating business linkages

When the crisis passes, our beneficiaries will expect us to be ready to help them reconnect with buyers, re-hire staff and re-launch production. It is too early to draw lessons but these are our suggestions, based on early advice from the field:

  •  Modify the playbook (and listen). Like other technical assistance providers, many of ITC’s projects helping MSMEs have rigid targets and work plans that did not anticipate such a shock. We should modify these plans, listen closely to MSME managers and governments on what they need – and find ways to get it done. For instance, our colleagues are already working with an apparel industry association in Africa to develop a recovery plan, with the active support of the funder.
  •  Be ready with data. International value chains account for a huge proportion of trade and connect to millions of MSMEs. ITC is using networks within these chains to measure the impacts of the crisis and is making the analysis available to decision makers and companies. The key is to time surveys so they do not disrupt partners while they address immediate issues.
  •  Build (re-build) the ecosystem. MSMEs need business support organizations now more than ever. Governments also need an ecosystem that can deliver much needed aid to their MSMEs. ITC’s institutional strengthening team is connecting trade promotion organizations from across the world to share emerging good practices and resources for small businesses such as market information, so they can learn from each other in real time.
  •  Think value chains and alliances. Actors across entire value chains have to work together to restore trade. ITC, for example, is working to maintain the dialogue between buyers and suppliers.
  •  Focus on finance. Because few of ITC’s beneficiary companies receive formal financing, they may be left out when governments and international lenders offer emergency liquidity. ITC is working with trade finance providers, regulators, guarantors, buyers, and suppliers to integrate MSMEs into affordable financing networks.

It is imperative we start these processes as soon as possible, going virtual where we can. Some of ITC’s teams in Geneva have found ways to help small businesses from a distance, through mentoring start-ups virtually, conducting virtual inception missions or even providing early grants to keep them moving. More importantly, ITC’s field teams have rapidly increased their role in collecting data, delivering services and maintaining relationships with our clients, which will be more critical than ever in our response.

In many cases, our MSME beneficiaries are succumbing to the immediate effects of COVID-19. When they are ready to talk about recovery, we need to be ready and react quickly.

References

¹ ITC, ed. SME Competitiveness Outlook: Connect, Compete and Change for Inclusive Growth. SME Competitiveness Outlook. Geneva: International Trade Centre, 2015.
² “World Has Entered Recession, May Recover next Year: IMF.” ThePrint, March 28, 2020. https://theprint.in/economy/world-has-entered-recession-may-recover-next-year-imf/390194/

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