Economic Impact of COVID-19 Lockdown on SA SMEs
- By Professor Stephen Mutula
Small and Medium Enterprises (SMEs) account for the majority of businesses worldwide and contribute immensely to job creation and economic development.
The International Labour Organisation (ILO) estimates that SMEs represent about 90% of businesses and more than 50% of employment globally, while they also provide the main source of employment in sub-Saharan Africa accounting for 89.2% of all employment with the majority of economic units being informal (92.4%). Most of the workers in this sector are self-employed and work every day to earn a living and pay for their basic household necessities. Overall, SMEs are therefore important drivers of the growth of economies throughout the world, including in South Africa.
SMEs however, face significant challenges because of their character – smallness, overwhelming competition from large businesses, low savings, limited capacity to work from home, limited access to technology (eg high cost of data), lack of access to credit, poor skills base, unsupportive policy and legal frameworks, limited access to external markets, and limited access to infrastructure such as space, electricity, and more.
SMEs will find it extremely difficult to cope and survive the lockdown. COVID-19, an epidemic of the acute respiratory tract, has exacerbated the challenges faced by SMEs and made their survival during the lockdown and thereafter increasingly uncertain. The Bureau of Economic Research (2016) estimates there are more than two million SMEs in South Africa of which only 33% are in the formal sector, the remainder being in informal sectors.
Stats SA (March 2020) estimates that more than nine million people are employed by SMEs in South Africa out of a total of 10.2 million employees in the country, excluding the non-agricultural sector. Since COVID-19 broke out in Wuhan, China, in December 2019 and quickly spread to largely all countries and jurisdictions around the world, the SMEs sector in South Africa has probably been the worst hit in the country.The actual scale and economic impact of COVID-19 will need a comprehensive national study across the country, however - in view of the importance of the sector - it is imperative to provide a preliminary opinion of the impact of the lockdown on small business enterprises in South Africa.
SMEs in this country are diverse, heterogeneous and exist in all sectors of the economy. They are defined in terms of the number of people employed or the rand annual turnover. In this regard, SMEs are firms with an annual turnover of up to R220 million or employing a maximum of 250 people full time (* Department of Small Business Development 2019).
The rand annual turnover classification also varies across the spectrum of different economic sectors such as agriculture (R35 million, mining R210 million, manufacturing R170 million), etc.
When President Cyril Ramaphosa announced the lockdown initially for 21 days, then extended it further for another two weeks, most businesses, the majority of which are SMEs, had to close as they are not classified as a providers of essential services. As the lockdown has continued, SMEs have suffered irreparable damage and will most likely never be the same as jobs have been lost, some of the businesses have gone under, and the livelihood of millions of South Africans destroyed. This is reflected in the increasing number of businesses, estimated at over 50 000, reported to have applied for the new coronavirus benefit from Unemployment Insurance Fund (UIF) with employees working for businesses running the risk of being declared redundant already. This number keeps rising by the day. Though the government of President Ramaphosa has announced a raft of measures to assist SMEs, such as the safety net initiative, the situation remains that most SMEs will not benefit because they are not even registered and will not meet the criteria to access this funding.
Additionally, most financial institutions with whom government can partner to provide relief to SMEs, are wary of providing the enterprises with credit because often the SMEs lack collateral and many are in arrears on the repayment of their loans, while others will disappear as their survival rate is low. Furthermore, though government has moved to cut base lending rates, and provide other forms of support, this will not benefit SMEs to a large extent since the majority of them are largely labour intensive. It is also anticipated that the cut in base lending rates will likely not be sustained for a long time into the future as government looks to recoup quickly and restore the fiscus amid the growing and unsustainable public debt. This is exacerbated by the contraction of the economy and downgrading of the country by the rating agencies making borrowing for government and businesses more expensive.
The consequence of the downgrade will also be felt in the reduction of direct foreign investments into the country, which will further reduce job creation both in the formal and informal sectors. The government must work towards a coherent industrial policy to foster indigenous private-sector firms through comprehensive and sustainable stimulus packages directed at SMEs and the entire economy to save millions of South Africans from losing their jobs, and businesses closing down.
The situation has been made even bleaker following the recent Reserve Bank estimate that the South African economy could shrink by between 2% and 4% this year as a result of the coronavirus and that there will be limited scope for an economic rebound next year, with growth unlikely to exceed 1%. Consulting firm McKinsey & Company has also warned about far-reaching economic ramifications of the pandemic, which is already disrupting millions of people’s livelihoods, with disproportionate impact on poor households and small and informal businesses.
The government must therefore expand and deploy emergency measures and review policy responses to help mitigate the negative ramifications of the pandemic on SMEs and the whole economy. The measures should include mobilising resources from the private sector, especially partnering with financial institutions to assist SMEs by providing financial relief and access to credit after the lockdown to enable them to restart their livelihoods. Strategic measures should also be taken to lift the lockdown for SMEs in the less risky sectors so the subsistence of most households which depend on them is not jeopardised and put at risk.
A national wide assessment of the economic impact of COVID-19, especially on small and medium scale businesses, must be undertaken to assist government in organising and galvanising response that optimises time and resources.
Professor Stephen Mutula is UKZN’s Dean and Head of the School of Management, IT and Governance.
Bureau for Economic Research (2016). The Small, Medium and Micro Enterprise Sector of South Africa Research Note 2016 | No 1. Commissioned by SEDA.
ILO (2018). World Employment Social Outlook Trends 2018. Available at: https://www.ilo.org/moscow/news/WCMS_615590/lang--en/index.htm [Accessed 14 April 2020).
The consulting firm McKinsey & Company (April 2020). Coronavirus: Leading through the crisis. Available at: https://www.mckinsey.com/featured-insights/coronavirus-leading-through-the-crisis
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