The Covid-19 pandemic has hit Asia-Pacific particularly hard. In addition to the severe health crisis, the pandemic will have far-reaching and long-term social and economic impacts.
The IMF expects growth in Asia to stall at zero in 2020 — the worst performance in 60 years, with the 1997 Asian financial crisis and the 2008 global crisis paling in comparison.
One of the defining characteristics of the region is the significant presence, geographic dispersion and importance of micro, small and medium-sized enterprises (MSMEs). While the sector is characterised by high heterogeneity, MSMEs across the region have historically shared the same set of challenges in terms of access to finance, technology and opportunity to grow.
However, this has not prevented them from being engines of economic growth, contributing significantly to national GDP and being symbols of self-reliance and national pride.
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According to a 2018 report by the Asian Development Bank, MSMEs make up over 96% of all Asian businesses, providing two out of three private sector jobs. In Thailand, SMEs account for more than 90% of enterprises in the country, employ ¾ of the national workforce, and in 2018 supplied 43% of GDP growth.
The reliance on MSMEs even in large economies such as India is significant as they provide employment to more than 111 million people and contribute to around 29% of Indian GDP and 33% of the total manufacturing output of the country.
The pandemic has been a game changer for MSMEs across the region. The large-scale quarantine and social distancing measures imposed by governments, which have required businesses to shut down operations, have had a crippling effect on small businesses that have little to no financial buffer to continue to pay employees and overhead costs.
Business closures have resulted in soaring unemployment and disruption of supply and value chains that are the bread and butter of MSMEs. Yet their entrepreneurial spirit has not died.
In fact, MSMEs have been innovating and finding ways to provide vital services in the Covid-19 response, such as production of personal protective equipment and food delivery services. But they need more help to survive this crisis and be ready to contribute to the economy once the lockdown ends.
TARGETING STIMULUS
Governments across the region are now developing large-scale stimulus packages to bail out the financial sector and support recovery efforts across a broad spectrum of industrial sectors. A significant portion of these packages should be directed towards the MSME sector to ensure a broad-based recovery.
India, for example, recently announced a $55-billion allocation towards MSMEs through measures such as government-backed, collateral-free loans, subordinate debt and equity infusions.
Yet this move will primarily benefit enterprises that are already working within the realm of the formal banking system. More than 81% of the MSMEs in the country are self-financed, with only around 7% borrowing from formal institutions and government sources.
In Thailand, the central bank’s 500-billion-baht soft loan package will not be offered to many small and medium-sized enterprises (SMEs) affected by the pandemic because of credit constraints.
The Indonesian government’s first $725-million stimulus package, announced in February, provided fiscal incentives to support the tourism, aviation and property industries. A second $8-billion stimulus package includes special measures for SMEs, but they emphasise a good credit history and capacity to pay back the loan. These are some of the emerging good stories across the region, but clearly, there is room to do more.
Servicing the MSME sector is hindered by institutions and service delivery systems that have struggled to meet the needs of small businesses even before the pandemic. At the same time, the conservative banking sector with its traditionally limited financial inclusion is struggling to reach businesses in this sector.
The pandemic presents a rare opportunity to reconsider existing paradigms of development and equitable growth. Now is the time for governments to effectively harness the MSME sector’s contribution to national development and economic growth by tapping into advances in digital governance.
NEW INCENTIVES
Going forward, policymakers will need to consider new ways to incentivise businesses at all levels. Finding practical ways to support MSMEs as they reimagine supply and value chains will go a long way to ensuring that recovery from the pandemic safeguards the progress made towards the UN Sustainable Development Goals.
A resilient post-Covid future also demands the finance sector to innovate and deepen financial inclusion. MSMEs are in fact bankable and financiers need to look more favourably at new approaches.
These include green financial products and environmental, social and governance investment solutions that manage investment risk and reach a wider clientele by taking advantage of advances in fintech, including facial recognition, AI-based credit assessment, online banking services, microfinance and SME insurance.
Green banking services and financial products geared towards MSMEs would contribute positively to building back better and greener. A greener recovery approach would also be a way to mitigate the downside risk exposure of banks.
MSMEs hold the key to broad-based economic recovery. We must seize the opportunity to support this sector for a strong, inclusive and sustainable Covid-19 recovery.