Micro, cottage, small and medium enterprises (MCSME) are at the centre of the economic crisis brought on by the Covid-19 pandemic and containment measures. The crisis has revealed the vulnerability of MCSMEs to the supply and demand shock. A large number of them are facing existential threats in the next few months. This could have an adverse impact on the recovery prospects and on the financial sector, which is already strained by non-performing portfolios.
In their response to the crisis, the government has been quick to acknowledge the specific circumstances of MCSMEs and have put in place Tk20,000 crore subsidized loan to support them. With the crisis still rapidly unfolding, it is too early to draw conclusions on the effectiveness of the measures taken. However, it is of the essence that the support announced are put into practice as rapidly as possible. Administrative procedure to access new funding must be transparent and simple to enable rapid and easy access. MCSMEs have expressed concerns that delivery of funds could take too long.
Many countries have introduced deferral measures, to allow small businesses to postpone payments of VAT, utility bills, debt repayments and so on. Many countries are providing further financial support for MCSMEs, from loan guarantees to direct loans and grants. In some sectors, despite loan guarantees, banks may be reluctant to provide additional credit because the spread allowed is inadequate to cover operating and supervision costs. The Tk20,000 crore concessional loan support announced will be hard to implement if this is not complemented by refinancing from the Bangladesh Bank (BB) and backed up by guarantee from the government.
Monitoring the impact of the pandemic as well as the impact of policy measures on MCSMEs is essential for introducing mid-course corrections. BB will need to ensure that the funding provided is not gobbled up by insider lending or connected lending. Such cases will have to be dealt with quickly and sternly to signal to all concerned that the authority is not taking the lapses lightly.
While the government measure is specifically aimed at MCSMEs and the self-employed, they understandably focus primarily on financing working capital, and not on enhancing the entrepreneurial potential of such firms. The current crisis has demonstrated the value of the entrepreneurial capacity and innovativeness of many MCSMEs and the importance of the ecosystems in which they operate. Fintech companies have introduced new modes of finance. Many MCSMEs are experimenting with innovative new forms of production and sales, often leveraging digitalization. In particular, several start-ups are playing an important role in finding solutions to the crisis, from investing for the development of vaccines, to producing protective equipment, and developing working methods and technologies to cope with containment measures.
Such initiatives need publicity and policy support. The latter does not mean financial support only. More important are easing the regulatory barriers that often kill such initiatives even in the womb. Some governments have put in place measures to support these innovative practices and entrepreneurialism through structural policies. To enhance longer term resilience of MCSMEs and their potential for growth after the crisis, it is important that the responses to the pandemic include structural policies such as reforms of the securitization law. Immoveable collateral security with high limits on downpayments leads to denial of credit. Reforms of the Companies Act, including provisions to promote greater formalization, faster business registration, provision for single-person company, and transparent resolution of insolvency through exit are crucial among others. BB should consider extending the moratorium on payment of loans for micro, cottage and small enterprises in particular beyond June. The Government should also explore a waiver of taxes for MCSMEs.
Many MCSMEs were already under pressure long before Covid-19, particularly those in traditional cottage industries, like weaving, the demise of which would represent a cultural loss. A case in point is handicrafts. This sector has been making a significant contribution to the national economy since the seventies. It has served as a tool for the development of Bangladesh's heritage and culture as well as poverty alleviation. Handicrafts are a nontraditional export sector with a very high intensity of labor. A large section of the rural population, estimated at about one crore artisans, especially women living on the margins directly depend on it for their livelihood. All the raw materials of the handicraft industry are indigenous such as jute, hogla, date leaves, palm leaves, paper, terracotta, tile, embroidery, bamboo, cane, carpets and so on. Handicraft exports earn over $150 million per year. The size of the local market of this industry is around Tk6,000 crore.
Bangladesh's handicrafts are in turmoil today due to the deadly coronavirus. Hundreds of orders from local and foreign buyers have already been cancelled. According to the Bangladesh Handicraft Manufacturers and Exporters Association (Banglacraft), the size of cancellation of purchase orders of exporters is about $40 million. Handicraft entrepreneurs have also suffered large losses at the local level, estimated at around Tk600 crore. With Pahela Baishakh and Eid in mind, almost all the entrepreneurs invested heavily in the production of handicraft products. Now due to the disruption in transportation, many entrepreneurs are not even able to bring these products to their warehouses. The livelihoods of millions of people in rural areas are at risk.
MCSMEs generally are on life support. Amid social distancing and quarantine measures that have wiped out final demand, the support through the banking system will serve only to roll over existing debts for many firms. In many cases, debt will rise even further. When such firms collapse, the job losses will be particularly painful as most MCSME workers lack social protection. Support needs to be geared to maintain jobs and provide enough for MCSME employees to pay for basic living needs. If the lockdowns are extended, other ways to support the MCSMEs will have to invented. In other words, there is a grace period, but it is limited.
The myriad layers of shock in this crisis means that the government will be constantly playing catch-up. Although Bangladesh's external and fiscal buffers are more robust than many low middle-income countries, the policy responses to date will only cushion some of the impact and not fully offset the economic damage. The good news, however, is that even in an unprecedented event like Covid-19 where both the supply and demand sides of the economy are being hammered, the creativity and ingenuity of MCSMEs is leading to new ways of doing business that will help them emerge stronger in the long term. Government could help them innovate by promoting e-commerce and easing regulations on digital trade. Digital trade has been experiencing a surge of activity since the introduction of measures to contain the spread of the virus in Bangladesh.
The effective delivery of MCSME policy responses requires a coordinated approach across all levels of government, to allow for concerted action, cooperation and mutual learning.