عربي

From the valley of death to the oasis wadi

From the valley of death to the oasis wadi
Image courtesy of Shutterstock

It has become evident that the Covid-19 crisis is like no other. While its persistence and long-term impact on society as a whole remain unclear, it has proven to be extra punishing for the livelihoods of those who work in small and medium enterprises (SMEs), the entrepreneurs who earn a living from their neighbourhood businesses and the individuals who work in these establishments.

The startup and SME sectors combined contribute up to 40 per cent to gross domestic product (GDP) and up to 50 per cent to private sector employment in the Middle East and North Africa (Mena), according to the International Monetary Fund. They are the engine of employment and they sustain a huge part of society. When they suffer the whole society suffers, and when they thrive the whole society thrives.

These businesses are contagious, both negatively and positively. They have a multiplier effect on consumption across all sectors, be it retail, entertainment, travel and tourism, food and beverage, finance or logistics.

According to the Wamda Research Lab, Covid-19 has resulted in a negative impact on 71 per cent of the startups in the region, of which 22 per cent have suspended operations, and 21 per cent are witnessing a high decrease in demand resulting in significant losses. Since the outbreak hit Mena, these startups have either pivoted to maintain business or scaled back their operations to survive.

It is not only about the livelihoods of individuals who own and work in SMEs in countries where there is a slowdown, but also the ripple effect on the countries where these individuals and expats come from. Most SME workers in the GCC are expats, the fact that they support their families through the remittances they send back home, results in an even bigger wave of impact across borders.

So what can be done to help SMEs and consequently the wider economy from suffering so much?

To begin with, any support programme tailored to SMEs needs to be viewed as an investment rather than a cost or a burden, and it is down to governments to step up their support to SMEs first, and most aggressively. In a severe crisis like this pandemic, it is governments that are the supporters of the last resort, it ought to be part of governments’ purpose and their investment in the wellbeing of societies.

Even in the most economically-liberal countries in the world like the US, it was the government that stepped in so aggressively with stimulus packages through the Pay Check Protection Program  which gives loans to SMEs to keep their employees for two months on the payroll. According to Small Business Administration, “the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75 per cent of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees”.

In the European Union (EU), where SMEs represent more than 99 per cent of businesses and employ two out of every three people, the European Commission has taken several steps to prolong the survival rate of this crucial sector of the economy. These have included liquidity measures to mobilise financial support SMEs while EU countries, national and commercial banks have also quickly put measures in place to facilitate the provision of financing to SMEs adversely affected by the Covid-19 outbreak. Enabling SMEs to preserve cash has become top priority with governments in several countries in Europe instructing companies to put staff on furlough, whereby the government pays part of employee salary. 

As other governments think of such stimulus programmes, they are really investing in society in a time of need so that it stays on its feet and maintains productivity, thus maintaining economic activity, which is a return on investment to the stimulus providers. It is also viewed as a government partnership with the private sector by supporting small business entrepreneurs, who avail certain incentives in return. This keeps the sector healthy so that the economy thrives and consumption is sustained. The multiplier effect then takes hold and as a consequence, society as a whole continues to thrive or at least the impact of a downturn is limited. This view looks at the world as a two-way process of benefit, it is a holistic view of the economic cycle of investment and empowerment for prosperity.

So, what do SMEs need to weather the financial crisis?  The answer is very simple, SMEs need cash flow - funds to bridge the downturn period and safely escort them to the return of economic activity where they can self-sustain.

- They obviously need clients who are able to pay, so that they have the capacity to operate and cover their costs. When capacity is cut down by 50 or 70 per cent, costs need to go down in parallel. - Some companies with difficult and unsustainable business models will die regardless and so they need to be left alone, but the majority that were thriving or even just surviving before the crisis do not need to shut down. This can all happen if we bridge the valley of death reflected in no cash flow coupled with the same cost structure and far lower revenue.

- What is ideal for SMEs at this point is to get direct salary support from government, or at least salary support matching funds where government matches the salaries already paid by owners.

- Moreover, SMEs need loan guarantees, especially if the company can show a history of good cash flow.

- Cost reduction by getting rent support, utilities and VAT/customs duties subsidies are all factors that contribute to preserving cash flow that contribute to companies’ survival.

It all comes down to cash flow until the economy gets back to some normalcy. However, the required support cannot be just a delay of liabilities to a future date which will then pose a long-term burden, it should be a combination of carrying and easing the cash flow challenge as well as some cost relief. If we are able to achieve this, we will keep SMEs alive and hence help the economy bounce back so that the economic cycle goes back, slowly but surely.

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