The COVID-19 pandemic has increasingly become a menace to global public and economic health. With the virus spreading like wildfire, individuals and institutions alike have taken a huge blow – albeit to different degrees. The disproportionate burden of the calamity on the economically underprivileged has shed light on the widespread inequalities that have long persisted and have subsequently confirmed the necessity of resilient welfare states.
In this regard, the Government of Nepal’s overall COVID-19 response has been lackluster, and especially so for the small and medium enterprises (SMEs). At the onset of the initial lockdown, that lasted for three months, around 60 to 70% of SMEs were compelled to cease their operations altogether. Due to the limited working capital of SMEs, they are unable to stay operational in the absence of a constant revenue stream and dwindling cash reserves. This turn of event is particularly concerning as the SME workforce primarily constitutes economically and socially vulnerable populations, whose livelihood largely depends on these enterprises, which are typically their only income source. Moreover, the dismissal of these workers puts them at the risk of living in poverty since most of them are unprotected and lack safety net coverage. While everyone has the right to a dignified life regardless of their contribution to the national economy, the state’s indifference towards SMEs is startling considering the sector’s share in national production; it accounts for 22% of GDP and employs 1.7 million people.
Thus far, the government has extended support to SMEs in the forms of provision of soft loans, income tax exemption for FY 2019/20 based on annual turnover, and reduction in import duties on raw materials and machinery. While such initiatives are encouraging, they are nevertheless insufficient to revitalize the SME sector. The government must form policies that are congruous with the general character of the national economy. For instance, the majority of small enterprises operate in the informal sector and are consequently excluded from the formal channels of finance. Hence, merely making loans available at a rate lower than the market rate essentially means nothing for these firms. Likewise, much of the policy responses aimed at the restoration of SMEs have failed to deliver results.
To fiscally assist SMEs – and the employees – that exist beyond the purview of the state, they must be first pushed towards formalization. Complete tax exemption for micro and small enterprises that have an annual earning of less than a predetermined threshold amount and replacement of rigid regulations with more flexible ones are examples of systemic changes that could help facilitate the transition to formalization. Furthermore, the government should redirect its resources towards skill development programs, promoting the adoption of information technology, and giving wider access to credit as ways to boost the productivity of SMEs while assuring that this translates into an increased income – and hence greater financial stability – for the workers.
Policy responses of the foreign nations
- South Korea
SMEs are integral to the South Korean economy. Accounting for 99.9% of the total firms in Korea, Korean SMEs employ 88% of the total labor force.
That being said, South Korea has been particularly proactive in providing relief to the affected SMEs. Along with dispensing emergency funds through stimulus packages and giving loan guarantees to small businesses, the government also reduced rents and insurance fees, extended the loan maturity, and postponed tax payments. Similarly, employees on unpaid leave from SMEs were handed USD 430 per month for three months as a part of the larger financial support programs for employee retention.
While the nationwide effort has been nothing short of noteworthy, Gyeonggi Province gained global recognition for its unique and innovative measure to help SMEs at the local level. The residents of the province were each given USD 85 in regional currency, in addition to the funds from the central government, the amount which was then spent locally within the next three months. The strategy of distributing basic income in regional currency was aimed at supporting local SMEs, by stimulating the consumer demand all the while restricting the use of the currency within the local economy.
Indian ecnomy’s dependence on SMEs is immense. Additionally, as in the case of Nepal, the presence of informal sector is huge and accounts for more than 80% of the non-agricultural employment. In the course of the pandemic, the finance minister has notified to the public, the ministry’s decision to allocate USD 1.36 billion towards investing in unlisted entities with the ultimate goal of getting them listed on the stock exchange. Further measures taken by India include: wage subsidies, deferral of income/corporate tax, and direct lending to SMEs.
- The OECD coutnries
The most common responses to the coronavirus outbreak for the OECD member countries entailed “income and profit tax deferrals, loan guarantees and direct lending to SMEs, and wage subsidies”. Furthermore, measures like reducing the work hours and allowing temporary/sick leave while guaranteeing sufficient financial support to the employees, have also begun to gain traction. On the contrary, the implementation of structural policies encompassing innovation, training, digitalization, and new markets among these countries has been relatively minimal.
Lessons to be learned
As seen from the policy responses of a handful of nations, there are several different approaches that could be assumed to strengthen SMEs. While structural changes are absolutely imperative to bring lasting impact to the SME sector, especially in the current context of Nepal, the short term measures are equally invaluable in serving as a reinforcement to overcome the hurdles imposed by the pandemic. For instance, South Korea’s decision to distribute basic income to all its residents depending on their earnings has been effective in acting as a cushion for SMEs. Again, although universal basic income is not without flaw and has a problem of its own when taken as a long term solution, it is nonetheless resourceful in providing a temporary relief. Hence, Nepal should come up with necessary short term masures to help SMEs persevere, and in the meantime, work on structural and systemic reforms.
Thumbnail picture source: https://www.investopaper.com/news/small-medium-enterprises-generate-highest-profit-in-nepal/