The significant disruptive potential of COVID-19

The significant disruptive potential of COVID-19

3 April 2020 10:46 pm

By Dinesh Weerakkody

According to CNN, COVID-19 is now in 85 countries. This is despite four countries still accounting for 97% of COVID-19 cases. The coronavirus epidemic has now forced nearly one-third of the world’s population into lockdown. It is a fight that many countries will face all the same. If not managed properly, according to research, the number of cases doubles every week. There is general agreement that governments need to act first to save lives. The first task therefore is to get manpower and money into hospitals. However, reducing the adverse impact of such drastic social distancing measures on their economies is also becoming a top priority. Economists around the world are therefore looking at policy mixes and recipes to reduce the economic impact of the pandemic. While the discussion often moves towards the macroeconomic impact of this pandemic, the COVID-19-induced economic slowdown is impacting the real economy, which is made up of businesses and the people that work for them. Countries do not buy or sell goods; people do. Small companies are more likely to suffer more than others in the private sector because they are inherently vulnerable. According to the ILO, as many as 24.7 million jobs are at risk. In the Bangladeshi garment sector alone, more than $ 2.7 billion in orders have been cancelled since the start of the year, resulting in the closure of thousands of factories putting four million workers at risk. Many SMEs throughout the world are currently facing severe threats to their continued viability owing to demand shocks, labour constraints and a shortage of available cargo routes. This slowdown according to economists is not a textbook slowdown. Lower rates will ease borrowing costs and improve business sentiment. Unfortunately, in this case no amount of cheap credit can stop people falling ill and dying by the pandemic. This explains why many stock markets failed to revive despite the interest rate cuts. So, it may be far better to help those affected directly until the pandemic ends. For most people, the priority now is food and paying for healthcare. While for most companies, the challenge will be liquidity. Easing the burden for them as long as the epidemic lasts will avoid bankruptcies and lay-offs. The coronavirus pandemic, on the other hand, has also enabled private, online and tech-based SMEs to emerge as potential winners by responding to the new normal.

Protecting SMEs

Recovery for SMEs will only begin once the health emergency is over, and containment of people comes to an end. Economic activity is likely to see a sharp rebound after that. The duration and depth of the crisis will depend on how far and fast the virus spreads, and how effective policymakers will be in mitigating the damage to their physical and economic health and well-being. The longer the crisis lasts, the more it is likely to disrupt the supply-side of the economy through crippled production networks and squeezed profit margins. Hopes of recovery will hinge on more sustained and coordinated liquidity injections by Central Banks, more active fiscal policies and by renewed efforts to strengthen free trade and foreign investment. SMEs cannot be understated in this recovery strategy to safeguard the current and future functioning of the global economy and the livelihoods of billions of workers throughout the world. For many debt-distressed developing countries already spending up to one half of government revenue on debt servicing, an immediate moratorium and a health-related grant is highly merited when a health emergency of this scale is prevalent, because for most governments, the priority must surely be to slow down the spread and lowering the peak. None of that will be easy because the virus’s trajectory is still unknown, as are the effectiveness of containment efforts, and consumers’ and firms’ reactions.