The impact of COVID-19 on South Asian businesses
Recently expanded research on COVID-19 highlights the disproportionate impact of the pandemic on certain groups and sectors of the economy, potentially amplifying their pre-existing vulnerabilities and exacerbating inequalities. A recent World Bank Working Paper uses the World Bank Business Pulse survey covering more than 130,000 companies in 50 countries. It reports three key results for South Asia: first, businesses in the South Asia region have suffered disproportionately more from the economic burden of the pandemic. Second, even within the region, COVID-19 has not affected all businesses equally. Although exporters have remained resilient on certain metrics, businesses that are smaller businesses run by women and those in vulnerable sectors have experienced higher closure rates. The third, with digital technologies taking center stage as the pandemic continues to unfold, the South Asia region lags behind in adopting these technologies.
The impact of COVID-19 is disproportionately higher for South Asian businesses
Governments around the world have put mobility restrictions in place to prevent the rapid expansion of Covid-19 in the first weeks after its declaration of a global pandemic. About 34% of South Asian businesses have been temporarily closed, compared to 20% in other low-income countries. Additionally, average sales fell much more for South Asian companies – 64% from 2019 levels compared to 52% in sub-Saharan Africa and 46% in other developing countries. The pandemic has also increased the financial fragility of companies, and even more so in South Asia. In the first wave of the survey, which ran from May to July 2020, two out of three businesses in South Asia were already in arrears or expected to be in arrears within the next six months. This measure of financial fragility is higher than that of sub-Saharan Africa (52%) and other developing countries (43%). See figure 1.
Figure 1. Firms in South Asia are hit harder than those in other regions
Notes: All of the regressions presented in this note control for country size, sub-sector and fixed effects, as well as the timing of BPS implementation relative to the peak of the crisis (measured using data Google Mobility). See work document for more details.
Perhaps due to the aforementioned massive impact on sales and financial health, the outlook for South Asian companies for future sales and employment developments is also quite negative. The South Asian companies surveyed expected their future sales to decline by around 20% from their 2019 level. This expectation of lower sales in the six months following the survey is greater than that of the last six months. ‘Sub-Saharan Africa (1%) and other developing countries (8%).
In the South Asian region, COVID-19 has not affected all businesses equally
Micro and small businesses and those run by women have generally suffered more in terms of business closures. The probability of being open for micro and small businesses was around 70% (compared to around over 80% for medium and large companies) and for businesses run by women is 50% versus 61% for businesses led by men in South Asia. . The probability of being open was lower for South Asian businesses in accommodation services (18%) and meal preparation (50%) than for ICT and financial services (over 75%). Micro and small businesses and those in the manufacturing and accommodation subsector also suffered the largest declines in sales.
Meanwhile, exporters were more likely to stay open (83%) than non-exporters (76%). In this sense, exporters were able to manage the crisis a little better: exporting companies were also less likely to face arrears. This result shows the importance of diversifying markets, especially in times of crisis. The fact that small, non-exporting businesses account for over 80% of the region’s employment and employ a significant portion of the region’s female workforce suggests that the pandemic may exacerbate existing vulnerabilities and inequalities.
Figure 2. Compared to non-exporters, South Asian exporters are slightly resilient. Businesses run by women are more severely affected than their male counterparts.
Notes: See Figure 1. Breakdowns may not correspond to overall averages by certain dimensions (e.g. on exporter status and sex of owner) because the underlying data is slightly different, as all companies do not declare these attributes.
Given the uniqueness of the shock, many viable and productive firms could close or reduce their stock of human capital in the absence of public support. Nonetheless, the response from governments in the region has lagged behind other regions, even though the shock of the pandemic has been much more severe in South Asia. Governments in South Asia may have limited fiscal resources compared to high income countries and perhaps even other developing countries. For example, only 11% of companies had received some type of public support at the time of the survey, compared to 18% and 59% respectively in other developing and developed countries. While micro-small businesses and businesses run by women were generally the most disadvantaged in terms of public support, South Asian exporters had slightly better coverage (Figure 3). Lack of information is the most common reason for limited access to support.
Figure 3. Access to public support for businesses is one of the lowest in South Asia compared to other regions
Due to growing needs and lack of time to prepare, governments around the world have used the size and sector of business to target their support. Size and sector, for example, explain about 30 percent of the likelihood of having access to credit (Figure 4). While this approach can prevent massive layoffs and short-term business closings, it may not be the best strategy to meet the needs of businesses struggling to recover from the crisis. The type of shock experienced alone explains about 22 percent of the preference for access to credit, while size and sector together explain less than 9 percent. With limited resources, tailoring support programs to help businesses recover from shocks to support a resilient recovery is critical.
Figure 4. The nature of the shocks undergone explains the preference for a policy of access to credit, while the beneficiaries seem to be targeted by sector