Monitoring the impact of COVID-19 May 2021 May 2021 Monitoring the impact of on firms in Zambia COVID-19 on firms in Zambia Results from Two Rounds of World Bank Enterprise Survey Follow-ups on COVID-19 Authors: Arden Finn, Gemechu A. Ayana, Rajee Kanagavel The COVID-19 pandemic and its negative economic effects create a need for timely data and evidence to help monitor and mitigate the social and economic impacts of the crisis. To monitor the impacts of the COVID-19 pandemic and related containment measures on formal firms in Zambia and to inform the policy response, the World Bank is implementing several rounds of phone-based surveys of firms. The surveys in Zambia are follow-ons from the baseline Enterprise Survey that was conducted in Zambia immediately prior to the pandemic. These phone surveys allow for a better understanding of the effects of and responses to the COVID-19 pandemic on firm operations, hiring and firing, and expectations of future operations and labor demand in order to better tailor and implement interventions and policy responses and monitor their effects. This note summarizes the results of Round 2 (R2) of the survey, conducted between December 19, 2020 and February 18, 2021. The information presented in this report is based on the sample of 570 firms that responded to both round 1 (R1) and round 2 (R2) surveys. Nearly 5 percent of the businesses reported to have permanently closed in Zambia since the onset of the pandemic. Small and medium-sized firms are the most likely to have ceased operations entirely, while medium-sized firms are most likely to have suspended operations temporarily. This represents a strong improvement since round 1 of the survey in which 21 percent of firms were temporarily closed. More than 70 percent of Zambian firms report that they are still experiencing depressed demand for their goods or services compared to the situation before the pandemic. On the input supply side, the largest firms have been far more able to source input materials than have small and medium enterprises. The recovery of employment in firms has been bimodal – around 40 percent of firms have increased their permanent workforce since the middle of 2020, and around 40 percent have decreased their permanent workforce. Large (100+) firms have been the most successful at raising permanent workforce numbers, while medium (20-99) firms have been the most likely to have shed permanent workers. Female workers were most likely to have been laid off in the manufacturing and retail sectors. The share of Zambian firms directly exporting fell in the second half of 2020, as did the shar e of total sales coming from exports. The drop has been most significant for large firms. In mid-2020 the share of total sales that came from exports was around 22 percent for large firms. By the end of the calendar year this had dropped to around 8 percent. Around one quarter of Zambian firms are concerned about falling into arrears on outstanding liabilities. A very small minority (3 percent) report receiving government support of any kind. When asked about the most needed support to minimize the impact of the pandemic, the most common answers were the deferral of tax payments to service providers, and access to loans at subsidized interest rates. Monitoring the impact of COVID-19 May 2021 on firms in Zambia The first round of the Zambia ES follow-up survey on COVID-19 showed that enterprises in the country experienced rapid and deep declines in performance. Results from the second ro und, conducted in late 2020 and early 2021 show some signs that the overall environment is improving, although significant challenges remain. This section of the report focuses on the changes in operating performance and labor between the first two rounds of the phone survey. BUSINESS CLOSURES AND WORKING HOURS Medium sized firms are the most vulnerable to temporary closures during the pandemic. Nearly 5 percent of the businesses reported to have permanently closed in Zambia since the onset of the COVID-19 pandemic in early 2020. Small (5 to 20 employees) and medium (21 to 99 employees) sized businesses were far more likely to have closed than large companies (Figure 1). In Round 1 of the survey, the dire situation facing businesses is shown by the fact t shat around one in five reported being temporarily closed. The situation had improved markedly by Round 2, however, with 2.6 percent of firms being temporarily closed at the time of interview. Businesses operating in the retail and services sectors were the worst affected by temporary closures in both rounds of the survey. The average duration of temporary closures doubled between Round 1 and Round 2 from 7.3 weeks to 14.6 weeks on average higher than the average duration reported in the rest of sub-Saharan Africa (8.2 weeks). At the same time, the share of firms that reported reducing their total working hours in the first place shrank from 58 to 43 percent between rounds. Taken t ogether, these results show that firms are recovering somewhat, but amongst those that are not, there are increasing pressures to shut up operations temporarily. Figure 1: Percentage of firms that were permanently or temporarily close by survey round Confirmed permanently closed since COVID-19 (% of firms) Confirmed temporarily closed at time of interview (% of firms) Confirmed temporarily closed since outbreak of COVID -19 (% of firms) Source: Own calculations from Round 1 and Round 2 of the Zambia COVID-19 Business Monitoring Phone Survey. Monitoring the impact of COVID-19 May 2021 on firms in Zambia SUPPLY CHAIN DISRUPTIONS AND DEPRESSED DEMAND Reduction in demand remains a concern particularly for small and medium firms. There have been disruptions on both the supply and demand sides over the last year in Zambia. In Round 1, more than eight in ten firms reported experiencing a decrease in demand for their product or service compared to before the pandemic. By Round 2, this had reduced slightly to seven in ten. The depressed demand effect was particularly high for small and medium firms in Round 2. The demand storyline is generally reflected when looking at supply bottlenecks, as shown in the second row of Figure 2. The performance on the supply side has been especially improved for large firms – 80 percent of which reported input supply issues in Round 1 compared to 54 percent in Round 2. About 70% of firms in Zambia experienced disruptions to their supply of raw material and inputs. This is a slight improvement over June/July where about 80% faced this disruption. The slight improvement report is unevenly distributed across different firms. Firms in Kitwe saw the least improvement while those in Livingstone and Ndola have seen a significant improvement since June/July. Manufacturing firms are utilizing only half of their production capacity to create goods. The rate at which manufacturing firms employed their maximum potential and operational efficiency to generat e output growth was 53 percent in February 2021, a small increase from July 2020. In c omparison, the capital utilization rate of Zambian manufacturing firms remains lower than that of manufacturing firms in other countries (61 percent). Figure 2: Percentage of firms experiencing a decrease in demand or a decrease in input supplies Decreased demand for product or service (% of firms) Decrease in supply of inputs and raw materials (% of firms) A large majority of firms in Zambia have made changes to their production or service provisions since the onset of the pandemic. In July 2020, 59 percent of firms reported having made changes to production or service provision, and this share reached 75 percent in early 2021. The effect was particularly concentrated in firms that export their products, with 84 percent of these reporting having changes in their production processes in Round 2 of the survey. Firms of all sizes and sectors experienced a rise in their online presence and activities.. Zambian firms appear to be more likely to have increased their online activities than firms in many other countries since the start of the pandemic. As can be seen in Figure 1, by early 2021 (Round 2 of the survey) 44 percent of Zambian firms reported having increased online activities since the start of the pandemic. The effect is particularly large for medium-sized firms. The increase in online activity was particularly high in Lusaka, where businesses of all sizes reported a rapid rise in their online presence and activities. Monitoring the impact of COVID-19 May 2021 on firms in Zambia Figure 3: Percentage of firms that commenced or increased online activities The share of the workforce that was working remotely was much smaller in early 2021 than it was in mid-2020. A far smaller share of the workforce in Zambia is working remotely in Round 2 compared to Round 1. The possibility for remote working is perhaps more limited in Zambia than in other countries, with internet penetration rates lower than in the rest of sub-Saharan Africa. Despite this, a sizeable share (one in four of employees in large firms) of the workforce was working remotely in the mid dle of 2020. By early 2021, only around 6 percent of the workforce was remote, with the share being similar across different firm sizes. Figure 4: The proportion of each firm’s workforce working remotely Round 1 Round 2 30 24 25 20 15 14 15 12 10 8 6 6 5 4 0 Zambia Small Medium Large More than half of large firms increased their permanent workforce between July 2020 and February 2021, though workforce sizes are still behind their pre -pandemic levels. There is a bimodal appearance to the recovery of employment in firms, with large firms in general absorbing labor more rapidly than medium and small firms. The first two columns of Figure 5 show the proportion of firms that have increased or decreased the total number of permanent workers, respectively. Unsurprisingly, less than one percent of firms reported increasing their permanent work force between the start of the pandemic and the middle of 2020. However, in the period from mid-2020 to early 2021, almost four in ten firms increased the number of permanent workers. More than half of large firms were able to add permanent workers between Round 1 and Round 2. This is not to say that the size of the workforce in these firms had returned to pre- pandemic levels, but it is indicative of something of a recovery. Firms of all sizes laid off more permanent workers in the second half of 2020 compared to the first round. While around 40 percent of firms in Zambia report having hired more workers between Rounds 1 Monitoring the impact of COVID-19 May 2021 on firms in Zambia and 2, the same proportion report having shed permanent workers over the period. Firms of all sizes were forced to lay off permanent workers in the second half of 2020, with almost half of medium sized firms reporting doing so. Firms based in Kitwe were the most likely to report decreasing their permanent workforce by Round 2 (61 percent), followed by Ndola (44 percent), Livingstone (42 perc ent) and Lusaka (36 percent). A high share of manufacturing firms in particular reported shedding some of their permanent workforce. Figure 5: The share of firms increasing or decreasing their permanent workforce Increased the total number of permanent workers (% of firms) Decreased the total number of permanent workers (% of firms) Women make up around one-quarter of permanent full-time workforce in Zambian firms. The proportion of female permanent full-time workers among all workers in the Zambian firms is 24 percent, lower than the average of 36 percent for other countries covered by Ent erprise Surveys. The average number of female permanent full-time workers in Zambian firms (12) is double the number of female permanent full-time workers in sub-Saharan African countries. At the same time, the number of female permanent full-time workers is higher among large firms (44) than among small (2) and medium (6) firms.The number of female permanent full-time workers is higher among large firms than among small and medium firms. The share of females that are permanent employees of firms covered by the survey is stable over both rounds. Small firms reported a slightly higher proportion of female permanent workers in Round 2 compared to Round 1, in contrast to medium sized firms which reported a small drop from 28 percent to 26 percent of permanent workers. Figure 6: Proportion of women in permanent full-time workers Female workers were laid off at particularly high rates in the manufacturing and re tail sectors. Figure 7 shows the proportion of female workers against the share of workers laid off who are female. Across manufacturing firms, females make up 19 percent of the workforce, but 25 percent of those who were laid off in the last six months of 2020 were female. For the retail sector the shares are 29 percent and 32 percent Monitoring the impact of COVID-19 May 2021 on firms in Zambia respectively. Women were less likely than men to be laid off in the food sector, with that sector compromising 18 percent women, but with a female share of 10 percent of laid off workers. Figure 7: Share of female workers laid off by sector between mid-2020 and early 2021 Three fourths of the firms experienced decline in sales in December/January compared to the same month in the previous year. While an improvement from the 86% of firms in June/July, the level indicates that most firms are still facing strong headwinds. Furthermore, the limited improvement has also been by and large uneven. Larger firms have seen a significant improvement in the share of firms reporting contractions in sales as are those in Ndola and Kitwe. On the contrary the share of firms experiencing decline in sales has gone up for firms in the manufacturing sector and for exporters. For the average Zambian firm, sales in the last months of 2020 were about a third lower than their levels in the same months in 2019.. While this is a slight improvement compared to the level reported for May/June 2020, where sales were 43% lower than the level in prior year, it clearly suggests that Zambian firms have a long way to go to recovery. Moreover, there is clear variation across firms in the trajectory of sales, with larger firms, those in Ndola and in retail sector experiencing significant improvements. As highlighted in Figure 8, the contraction in sales has in fact worsened for manufacturing sector firms. Figure 8: Average change in monthly sales compared to one year ago (%) The share of firms exporting, and the share of exports in total sales declined in November/December. Just about 6% of Zambian firms report exporting at least 1% of their sales, down from about 10% of firms in May/June 2020. While this could partly reflect seasonality of exports, the figure for November/December is below the value based on annual sales as captured by the pre- COVID Enterprise Survey. Larger firms saw a significant decline in share of firms exporting (at least 1% of their sales) from about 22% in May/June 2020 to just 8% in November/December. Similarly, share of export in total sales has declined (to 1.6%) compared to 2.6% in May/June, with the decline particularly significant for larger firms. Monitoring the impact of COVID-19 May 2021 on firms in Zambia Figure 9: Share of firms directly exporting at least 1% of sales Figure 10: Proportion of (annual/monthly) sales that are exported directly (%) LIQUIDITY AND CASHFLOW SHORTAGES A year into the outbreak of the crisis, 95% of the businesses have faced liquidity and cash flow shortages. The significant contractions in sales and other negative effects of the shock are clearly reflected in the financial health of the business. While the prevalence of liquidity challenge eased up a bit during round 2 survey, three in four businesses have faced liquidity shortages since June/July. About 38% of the businesses have consequently delayed payment to suppliers, landlord and tax authorities. Figure 10: Share of firms experiencing decreased liquidity or cash flow availability Percent of firms experiencing decreased liquidity or cash flow availability By Firm Size Fewer firms were concerned about falling into arrears in early 2021 than they were in the middle of 2020. There has been a fall in the share of firms that anticipate falling into arrears on outstanding liabilities. In the first round of the survey, four in ten Zambian firms feared falling into arrears. By the second round this had fallen to one in four firms. The improvement was particularly strong for exporting firms, suggesting that exports began to regain momentum towards the end of 2020. Smaller firms, and firms in Lusaka and Ndola also saw the significant improvements. Monitoring the impact of COVID-19 May 2021 on firms in Zambia Figure 11: Percentage of firms that anticipate falling into arrears on outstanding liabilities About one quarter of firms in Zambia are back to normal pre-pandemic levels of sales. This result, from Round 2 of the survey, is a significant improvement from Round 1 in which 9 percent of firms were operating at pre-pandemic sales levels. Around 6 percent of firms expect that they will not ever return to the pre-pandemic level of sales,1 higher than the average of 2 percent for the rest of sub-Saharan Africa. This is particularly prevalent in Kitwe where 15 percent of firms do not expect to ever reach pre-pandemic sales levels (up from 2 percent of Kitwe firms in Round 1). Almost two thirds of Zambian firms were back to operating with a normal level of workforce at the beginning of 2021. This is a significant improvement from just over half in the middle of 2020, though it is still lower than for other countries covered by the World Bank’s Enterprise Survey follow-ups on COVID- 19. Once again, it appears that firms operating in Kitwe are recovering more slowly than firms in other major cities in Zambia. Only half of Kitwe-based firms reported having returned to normal workforce levels in early 2021. Exporting firms have recovered significantly faster than non-exporting firms, with about eight in ten having returned to a normal workforce level at the time of the Round 2 interview. Figure 12: Share of firms that expect to return to a normal level or workforce and sales 80 74 70 63 62 60 54 50 40 32 30 23 18 20 9 6 10 3 2 3 0 Round 1 Round 2 Round 1 Round 2 Zambia All Countries Do not expect to ever return to the normal level of sales (% of firms) Currently at normal levels of sales (% of firms) Currently are at normal level of workforce (% of firms) 1 Note that this is for firms that are still operating, and so excludes firms that have closed or ceased operations since the o nset of the pandemic. Monitoring the impact of COVID-19 May 2021 on firms in Zambia Around three percent of firms in Zambia reported receiving government assistance of some kind. This is slightly lower than the average for SSA of about 6.4%, and woefully lower than the average value of 40% for all countries for which similar data is collected by the follow-up Enterprise Surveys. Large Zambian firms are more likely to have received assistance in early 2021. In Round 2, more than one in ten large firms received or expect to receive national or local government assistance. Among firms that received assistance, nearly two in three firms received aid in the form of cash transfers in Round 1 whereas more than four in five firms received support as fiscal relief, deferral of payments, and cash transfers from the government in Round 2. About one third of businesses indicate that they are not aware of any COVID-19 related government assistance for business. Asked for possible reason why the firm did not receive any support, 37% note that they were not aware of any such support for businesses, while 20% consider it is not worth trying since they don’t have the necessary connection to get such supports. About 5% of the firms have applied but haven’t received it. Deferring tax payments to service providers and loan with subsided interest rates remain the two most needed sources of support from government. The survey asks firms to indicate the most important support they need to minimize the impact of the shock. More than one in four firms (28 percent) indicate deferring tax payments to service providers as their most desired support. Similarly, another one-fourth of the businesses chose fiscal relief. Access to new credit is now the third most desired support compared with the results for round 1. Figure 13: The most important support mechanisms to help firms cope with the shock of the pandemic Monitoring the impact of COVID-19 May 2021 on firms in Zambia Box 1: The World Bank Group Enterprise Survey follow-up on COVID-19 As part of the efforts of the World Bank Group to understand the impact of COVID-19 on the private sector, the Enterprise Analysis unit has been conducting follow-up surveys on recently completed Enterprise Surveys (ES) in several countries. Wherever possible, these short surveys follow the baseline ES, re-contacting all establishments sampled in the standard ES using stratified random sampling. The universe of inference is all registered establishments with five or more employees that are engaged in one of the following activities defined using ISIC Rev. 3.1: manufacturing (group D), construction sector (group F), services sector (groups G and H), transport, storage, and communications sector (group I) and information technology (division 72 of group K). The baseline ES for the Zambia contains a total of 601 interviews conducted from September, 2019 through March, 2020. Two rounds of follow up surveys have been conducted so far. Round 2 of the survey recontacted all the 601 businesses interviewed as part of the ES. The data collection for round 1 was conducted between June 16 and July 17, 2020, interviewing a about 575 of the 601 businesses interviewed as part of the ES. The data collection for round 2 was conducted between December 19, 2020 to February 18, 2021, interviewing a total of 570 of the 601 businesses covered as part of the Enterprise Surveys. Anonymized firm level data for the ES, and both rounds of COVID-19 follow up surveys can be downloaded from the Enterprise Surveys Website https://www.enterprisesurveys.org/en/enterprisesurveys) The follow-up data can be merged with the baseline ES data set using the variable idstd. Distribution of completed interviews by firm size, location, and sector: Round-2 By firm size, Round 2 By location, Round 2 283 284 189 91 100 92 87 Small (5-19) Medium (20-99) Large (100+) Lusaka Livingstone Ndola Kitwe By sector, Round 2 229 139 96 67 32 Other services Retail Manufacturing Food Wholesale of agri. inputs and equipment