ENTERPRISE S URVEYS ENTERPRISE NOTE S ERIES COVID-19 A Struggling Recovery for the Private Sector in North Macedonia 2022 Filip Jolevskii and Sanja Madzarevic-Sujsterii A s the COVID-19 pandemic has continued to take its toll on human life, businesses in North Macedonia have continued to struggle despite a return to some normalcy. is note examines the state of the private sector in North Macedonia by comparing the performance of businesses during the period of adjustment to the pandemic in April 2021 with the initial impact in September 2020 and the baseline before the crisis, drawing on a standard round of the Enterprise Survey in 2019 and two follow-up surveys in 2020 and 2021. While the second round of the follow-up survey revealed signs of ENTERPRISE NOTE No . 40 some early-stage recovery, on average rm sales were still worse o than at the outbreak of the pandemic. Small and medium enterprises (SMEs) have been facing di culties obtaining nancing and were more likely to be overdue on their nancial obligations than in fall 2020. A quicker and stronger recovery could be promoted through sound policies that aim at increasing access to nancing, enhancing digitalization, and improving rm management and human capital, as well as the e ective implementation of insolvency procedures. e COVID-19 pandemic has a ected the Sales Are Recovering, but Are Still Below economic well-being of individuals and rms alike. To Pre-crisis Levels assess the impact on rms, the World Bank has been examining the performance of rms before and during While the recovery from the COVID-19 crisis was the pandemic. In October 2019, the World Bank underway in spring 2021, many businesses continued completed a standard round of the Enterprise Survey in to deal with declining sale revenues. e fall 2020 North Macedonia, comprised of a representative analysis showed that the initial shock of the pandemic sample of 360 nonagricultural, privately owned rms resulted in an average sales decline of about 30 percent that employ 5 or more workers. A year later, following between September 2019 and September 2020. e the outbreak of the coronavirus, the same businesses rst round of the survey showed a somewhat were re-interviewed for a rst-round follow-up to assess indiscriminate impact across sectors, sizes, and regions, the impact of COVID-19 on their performance. Firms WORLD BANK GROUP with the foreign-owned rms being least a ected. In faced a sharp drop in sales due to containment measures April 2021, businesses continued to su er, with an and a related decline in demand. More than one-third average year-on-year decline of about 7 percent, despite of jobs in the sectors surveyed have been supported April 2020 being one of the months with the most through the state-funded job retention program; unfortunately, some 13 percent of jobs were lost severe restrictions to mobility and operations. (Jolevski and Madzarevic-Sujster 2021). To examine However, for some, such as rms based in Skopje, those the recovery process, a similar survey was administered that are foreign owned, or those engaged in provision of again on the same sample of rms in May 2021.While services, the recovery has been underway, while sales there are some signs of a recovery taking place, many have continued to decline for manufacturing rms and indicators remain below the pre-pandemic levels. those in the western part of the country (Figure 1). i Economist, Development Economics ii Senior Economist, Macroeconomics, Trade & Investment Global Practice Figure 1 Firm monthly sales are still below pre-crisis levels Percent, year-on-year Foreign Domestic Western Region Skopje Eastern Region Retail Other Services Manufacturing Large (100+) Medium (20-99) Small (5-19) -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 Percent April 2020–April 2021 September 2019–September 2020 Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Firm Closures Accelerated permanently closed (Figure 2).1 In September 2020, permanent closure of rms was less than 1 percent. e persistent decline in sales has resulted in a Business closures were more prevalent among the greater share of businesses ceasing operations for good, manufacturing sectors and non-exporting rms (Figure as many liabilities remained overdue (Bosio et al. 3). 2020). While the COVID-19 pandemic exhibits some signs of a Schumpeterian cleansing of unproductive Government Assistance Has Remained rms—and in particular small rms lacking Important to Protect Jobs innovation, the reallocation of resources requires further examination to determine whether this process e decline in sales and closures of rms have had a is welfare enhancing (Muzi et al. 2021). Since the onset direct impact on the labor market. Net employment of the COVID-19 pandemic, at least 2.5 percent, but levels for rms that were successfully interviewed in all no more than 16.1 percent, of businesses have three surveys–the standard Enterprise Survey, and both COVID follow-up surveys—exhibited a net decline in Up to 16 percent of surveyed firms Exit rates have been higher for Figure 2 closed permanently Figure 3 non-exporting firms Percent of firms Percent of firms Service Non-exporters Manufacturing Exporters 0 5 10 15 20 25 0 2 4 6 8 10 12 14 16 18 20 Confirmed closures Assumed closures Confirmed closures Assumed closures Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. 2 Employment is still below precrisis levels Financing Remains a Constraint Figure 4 e prolonged nature of the COVID-19 pandemic Change in net employment compared a ected rm nances. By October 2020, nearly 70 to the previous period percent of businesses had experienced cash ow or liquidity shortages. at share fell to about 43 percent 15 by May 2021. e reduction of liquidity among leveraged businesses can pose a risk to their ability to 10 meet nancial obligations. e most a ected rms are 5 SMEs. Twenty percent of small enterprises and 10 Percent change percent of medium enterprises were overdue on their 0 nancial obligations as of spring 2021 (Figure 5). January 2019 January 2020 October 2020 May 2021 -5 Access to new credit since the start of the pandemic also became more di cult for SMEs. More than 17 percent -10 of small enterprises and 15 percent of medium -15 enterprises that applied for a loan were rejected in their most recent application. Emerging evidence suggests that rms with better access to nance have been Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. signi cantly less likely to experience a decline in sales during the pandemic (Amin and Viganola 2021), employment of about 7 percent since October 2020, especially if they were nancially constrained even indicating that businesses continue to struggle (Figure before the crisis (Bosio, Djankov, and Jolevski 2020). 4). Of the rms that received government assistance, 91 On the other hand, only about 4 percent of large rms percent received some form of wage subsidies. Nearly in North Macedonia were overdue on their nancial half of the businesses surveyed made use of the obligations or had a loan application rejected. government-funded job retention program, subsidizing Some 37 percent of rms continued to delay about 68,700 jobs since the start of the pandemic—an payments to their suppliers. While the share of rms increase of about 37 percent since September 2020. that had delayed payments to suppliers fell since When businesses were asked what form of assistance is September 2020, this practice remains the avenue with most useful to them, the most popular response, which businesses are coping with liquidity shortages. reported by nearly 35 percent of rms, was wage Seventeen percent of rms have delayed payments to subsidies followed by tax exemptions, chosen by 25 landlords, while a majority of rms remained current percent of rms. on their nancial and tax obligations (Figure 6). Figure 5 Financial constraints eased in spring 2021, but remain elevated for small and medium enterprises 25 20 15 10 5 0 Small (5-19) Medium (20-99) Large (100+) Percent of firms overdue on their financial obligations Percent of loan applications rejected since the onset of the pandemic Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. 3 Figure 6 Delaying payments to suppliers creates a vicious circle of interenterprise arrears Percent of firms 0 5 10 15 20 25 30 35 40 45 Delaying payments to suppliers 32% Delaying payments to landlords 24% Delaying payments to tax authorities Turkey Percent of firms that are overdue on obligations to financial institutions September 2020 April 2021 Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Figure 7 There are fewer firms that see recovery taking 6 or more months than in September 2020 Percent of firms 100 80 60 40 20 0 Sales Workforce September 2020 April 2021 Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Businesses Are More Optimistic about the months to get back to normal levels of sales, and only 5 Return to (New) Normalcy than in Fall 2020 percent of rms expecting the same six-month period to return to normal levels of workforce (Figure 7). Despite the prolonged COVID-19 pandemic, businesses are more optimistic about a return to Foreign-owned Businesses Drive the normalcy. For 80 percent of rms, employment is at Recovery of the Private Sector in North normal levels, up from 71 percent in September 2020. Macedonia However, the share of rms at the normal level of sales declined from 40 percent to 32 percent between the A year after the pandemic outbreak, foreign-owned two surveys. Despite the decrease of rms at the normal businesses continue to perform relatively better than level of sales, the expected recovery times have domestic rms (Figure 8). Eighty- ve percent of shortened for both labor and sales, with only 24 percent foreign-owned businesses have returned to a normal of rms expecting that it would take six or more level of sales, compared to only 30 percent of 4 Figure 8 The pandemic has had very different effects on domestic and foreign-owned firms Percent of firms with increased demand for products or services from April 2020 to April 2021 Average change in monthly sales from April 2020 to April 2021 Share of monthly sales that are exported Percentage change of permanent full-time workers since December 2019 Percent of firms that currently are at normal levels of sales -20 0 20 40 60 80 100 Foreign Domestic Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Figure 9 Exporting firms have fared better than non-exporters during the pandemic Percent of firms with increased demand for products or services from April 2020 to April 2021 Average change in monthly sales from April 2020 to April 2021 Share of monthly sales that are exported Percentage change of permanent full-time workers since December 2019 Percent of firms that currently are at normal levels of sales -20 -10 0 10 20 30 40 50 60 Non-exporters Exporters Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. domestically owned rms. Sales by foreign-owned practices. ese factors matter more for recovering sales businesses have grown 5 percent compared to April than the rm’s export orientation. While nearly 2020 at the height of the pandemic. Sales declined by two-thirds of foreign-owned rms enjoyed an increase about 7 percent for domestically owned business, in demand for their products or services, this was the however, during the same period. case for less than one-third of domestically owned While the impact on sales results from changes in rms. In addition, as shown in Figure 3 comparing the demand for the products and the markets in which exit rates of exporters and non-exporters, the crisis these rms operate, it seems that overall, sales have exposed higher vulnerabilities of rms focused solely on remained depressed for exporting rms (those with 10 the domestic market. percent or more of sales derived from exports) (Figure e performance of rms directly a ects labor 9). More than two-third of sales of foreign-owned markets. Given the relatively better performance of businesses stem from exports, while for domestically foreign-owned rms, it is no surprise that full-time owned businesses sales from exports make up only employment rose in foreign-owned rms compared to about 16 percent of the total. Foreign ownership is the period before the crisis. e negative impact of the generally accompanied by higher technological crisis on employment was also less for exporting rms readiness, digitalization, and related management than non-exporting rms (Figure 9). 5 Emerging Policy Recommendations developing human capital and innovation support inthe short term while longer-term education reforms When it comes to access to nance for SMEs, to address this issue take root. structural issues that existed before the crisis are now Since 2013, there has been a slight improvement in ampli ed (World Bank 2020). Collateral requirements terms of local spillovers from foreign direct investment continue to be an issue. is market gap in lending and upstream linkages with domestic rms. However, could be partially alleviated by a partial credit guarantee foreign rms continue to purchase only around 10 scheme slated to be put in place at the Development percent of their inputs from domestic suppliers and Bank of the Republic of North Macedonia, continue to operate more independently of domestic guaranteeing repayment of a certain percentage of the production networks. A supplier development program loan in case of default. However, improving rm to address market and coordination failures may nancial management, accounting standards, facilitate links and upgrade rm capabilities. managerial skills, and ability to obtain international As time passes, the clarity between the permanent certi cations would also make rms more bankable and and temporary impact of the pandemic on the private ease their access to nancing. sector increases. Forthcoming data will help explain On the supply side, some steps that might help these dynamics further and can inform steps to speed SMEs now that overall crisis support has subsided and spread the recovery process. include targeting nancial products o ered by the Development Bank to start-ups and micro and small enterprises, the Development Bank’s collaboration with Notes savings houses and factoring companies to nd 1 e analysis of the exit of rms should be interpreted as a range. a ordable nancing, establishing a centralized collateral e lower-bound estimates are those for which in the survey the respondents were reached, and they indicated that they have registry for security interests in movable property, and permanently closed. e upper-bound estimates are based on the removing obstacles to bank acceptance of movable assumptions that those rms that could not be reached—despite trying to contact them twice in a six-month period—have closed collateral. their business. For detailed de nitions, see Muzi et al. (2021). e crisis also increased interenterprise arrears. Making enforcement and insolvency procedures more e ective could help reduce liquidity constraints on References rms. ese steps could also remove ailing insolvent Amin, M. and Viganola, D. 2021. “Does Better Access to Finance Help Firms Deal with the COVID-19 Pandemic? Evidence from companies from the market faster to prevent further Firm-Level Survey Data.” Policy Research Working Paper 9697, deterioration of the local market. World Bank, Washington, DC. Bosio, E., S. Djankov, and F. Jolevski. 2020. “Making Access to New Incentives for skills upgrading, digitalization, Credit Easier.” Let’s Talk Development (blog), March 25, World innovation, and development of local suppliers remain Bank, Washington, DC. Bosio, E., S. Djankov, F. Jolevski, and R. Ramalho. 2020. “Survival of important for strengthening domestic rms, which Firms during Economic Crisis.” Policy Research Working Paper were more a ected than foreign-owned rms operating 9239, World Bank, Washington, DC. Jolevski, F., and S. Madzarevic-Sujster. 2021. “ e Impact of in North Macedonia. With policy priorities now COVID-19 on Firms in North Macedonia.” World Bank Brief. focusing tightly on attracting higher–value added Muzi, S., F. Jolevski, K. Ueda, and D. Viganola. 2021. “Productivity and Firm Exit during the COVID-19 Crisis: Cross-Country segments of speci c value chains, it will be important to Evidence.” Policy Research Working Paper 9671, World Bank, adapt incentives and state aid accordingly. e Washington, DC. World Bank. 2020. North Macedonia: Action Plan for Recovery of government might consider incentives that target Growth and Jobs. World Bank, Washington, DC. e Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. e notes present evidence on the relationship between government policies and the ability of businesses to create wealth. e notes carry the names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this note are entirely those of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its a liated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6