The domestic recession exacerbated by the Covid-19 pandemic is still to affect small and medium enterprises (SMEs) particularly hard. These smaller firms are typically more vulnerable than their larger counterparts, due to, among other factors, their limited financial buffers and reliable access to credit.
A recently-released International Monetary Fund (IMF) report stated that the effects of the current crisis on SMEs are likely to be even more severe than in previous crises, as SMEs such as restaurants, hotels, as well as arts and entertainment, are most prevalent among the hardest-hit businesses.
Consequently, the report stated that liquidity and solvency risks are bound to increase, putting both SME jobs and debt at risk.
These large projected increased risks call for further and urgent government support. While standard advice usually involves providing liquidity to illiquid solvent firms and restructuring insolvent firms to facilitate swift resource reallocation, this time around is different.
“The magnitude of the shock, the uncertainty about its duration, and the macro-financial amplifiers associated with mass bankruptcies justify ampler-than-usual recourse to solvency support. This comes over and above the need to cut the legal and financial costs of bankruptcy procedures to alleviate risks of overwhelming bankruptcy courts,” reads the report.
For SMEs, the IMF said combining grants with a temporarily higher future corporate tax rate would act as an equity injection and such an approach could raise tax administration challenges and would need to be carefully calibrated.
“All these options would entail larger fiscal risks, however, given that equity-like injections into SMEs may attract not only viable firms but also those that are unviable and gambling for resurrection,” stipulates the report.
Meanwhile, according to a survey conducted by the Namibia Statics Agency (NSA), 87.9% of business respondents are adversely affected by the coronavirus pandemic within the last few months, compared to the 96.5% reported in May 2020.
According to Alex Shimuafeni, CEO of NSA, the impact in Namibia is expected to pick up again, with 92% of businesses expecting to be affected towards the end of the year.
The survey further revealed that 48% of the businesses indicated they traded partially, while 20% were temporarily closed as a result of Covid-19. Only 31% of the businesses reported as trading at full capacity during the period of enumeration.
“A reduction in local demand impacted 61.6% of the businesses and this effect will increase to impact 71.8% of businesses in the future. Only 23.7% of the businesses managed to obtain government relief packages during this period,” said Shimuafeni.