Supporting SMEs during COVID 19 pandemic

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M Alamgir Khan
THE coronavirus (COVID-19) outbreak
has caused a global health emergency,
and a global economic slowdown. Trade, investment, growth, and employment are all affected, and the crisis will have an extreme impact on SMEs and their goals. During the unprecedented times, 95% of SMEs have reported that COVID19 and the subsequent lockdown has caused a reduction of their operations and 23% have reported a total loss in their exports according to SMEDA’s results of the survey “the impact of Covid-19 on SMEs”.
Leading to this are the concerns of global economic meltdown and many economists have termed this as the start of a global recession. OECD forecast that the ongoing pandemic can slow down the global DP growth by half a per cent to 2.4%. If the lockdown continues for some more months, global growth for 2020 can contract to 1.5%. So in these challenging times, it is more important than ever before to support SMEs survive these crises. The situation is worse in Pakistan. According to the Ministry of Planning, economic losses are projected at PKR 2-2.5 trillion, while employment is expected to contract by ~12 – 18.5 million people during the lockdown in the country. While many companies are playing their parts, including Karandaaz Pakistan, who is financially supporting small enterprises under the umbrella of Karandaaz Capital, and Google helping these small companies to work online with its “Going Online with Google”, initiative, State Bank of Pakistan has also introduced measures to support businesses and enhance uptake of digital financial services.
To reduce the financial expenses on borrowers, the banks cut down the interest rates three times to bring the policy rate down to 9%. Moreover, to minimise the PKR 800 billion worth additional funds for lending, SBP has reduced the capital conservation buffer from 2.50% to 1.50%. Financial institutions are also advised to extend moratoriums to MSMEs and corporate clients for easing the burden on them, accounting to estimated relief of PKR 4.7 billion according to Karandaaz report “Measures by Central Banks to Curb the Economic Impact of COVID-19”. Furthermore, SBP had priced refinancing base rate at 1% for SME lending, whereas banks were allowed to charge up to 4% from small businesses. To make the pricing structure less complicated during the ongoing crises, this base rate is reduced to nil. While SBP has taken fast and steady measure to support small businesses, a number of concerns are raised on this scheme in the report laid down by Karandaaz Pakistan, a company funded by the UK’s Department for International Development (DFID). Firstly, this scheme doesn’t specify the collateral requirement for short term scheme. Usually, banks get fixed assets as collateral from SMEs even at short term credit, which leads to over-collateralization.
In these pressing times on SMEs, something needs to be done regarding this as well. Secondly, governments throughout the world have stepped forward for ensuring credit guarantees for business interruption loan schemes to make the lending for SMEs less risky. However, SBP has not announced such an initiative. While the COVID19 prolongs, the government needs to propose better measures for SMEs that have limited resources to absorb such shocks as this sector contributes to 40% GDP in the country.
—The writer is a Communication Specialist, based in Islamabad.