June 24, 2021 Global Indicators Briefs No. 1 The Evolving Effect of COVID-19 on the Private Sector Nona Karalashvili and Domenico Viganola T his brief provides a descriptive analysis of the evolving e ect of the COVID-19 pandemic on the private sector of 40 countries. It focuses on the essential aspects of business operations: namely, rms’ survival, production of goods and services, and jobs. Firms have su ered massive demand and supply shocks, a ecting nearly all sectors. ese shocks and the consequent drop in revenues have dried up rms’ cash ows, depleting their working capital and putting the private sector under considerable nancial distress. is brief also examines the e ect of the pandemic on rms’ liquidity, providing general assessments of the variation of these e ects by country income level and rm characteristics. Firms in lower-income countries seem to have been hit harder across several measures, such as declines in sales and the incidence of overdue nancial obligations. Within countries, small and medium-sized enterprises (SMEs) with 5 to 99 employees seem to have fared more poorly than large rms. While some signs of a recovery in terms of sales and capacity utilization are emerging, the recovery is fragile, as it bypasses important aspects such as liquidity and job creation. For a full post-pandemic recovery, it is important that sound businesses that are facing a temporary liquidity problem survive, and the workforce rebounds. Survey of Businesses across 40 Countries declared by the World Health Organization (WHO): that is, March 2020 or later. In addition to rms whose With the COVID-19 pandemic ongoing, research permanent closure has been con rmed, the second into its impacts is still relatively limited but growing fast, measure includes rms that have not been possible although often focused on one or few countries, e.g. to trace—or even to nd a working line of Bartik et al. (2020), Crane et al. (2020) for the United communication—and therefore have been assumed to States, Dev and Sengupta (2020) for India, and have closed. ese include rms that could not be Adams-Prassl et al. (2020) for the United Kingdom, the contacted having exhausted all attempts using all United States, and Germany. is brief covers 40 communication lines, but exclude rms with a working countries, providing descriptive and comprehensive answering machine or fax line. assessments, using data from the Follow-up Surveys to the World Bank Enterprise Surveys (WBES), described in Overall, 2.6 percent of rms have been con rmed to detail in box 1. A more detailed analysis of some of the have permanently closed since the onset of the pandemic, issues discussed in this brief and using cross-country data while 16.8 percent have been assumed to have can be found in e.g. Apedo-Amah et al. (2020), and Muzi permanently closed ( gure 1). is average masks a et al. (2021). considerable cross-country variation. As expected, the assumed exit rates are higher than the con rmed exit rates The Effect of COVID-19 on Firm Closures given the di culties of contacting business owners and managers imposed by the nature of the pandemic, but the e WBES COVID-19 Follow-up Surveys include two measures yield consistent patterns by sector. data from the last WBES administered before the Con rmed exit rates are higher for relatively small rms, pandemic, allowing estimates to be made of rms’ exit and the retail and services sectors compared to rates during the crisis, for each country (Aga and Francis manufacturing, with con rmed or assumed exit rates 2017). Two di erent measures of rm exit are used: (1) higher in the relatively low-income countries. con rmed exits since the pandemic was declared; and (2) assumed exits. e rst measure is more conservative, Temporary closures have been widespread. Since given that it refers to rms that have directly reported the onset of COVID-19, almost half of private rms have having permanently closed after the pandemic was had to put their operations on hold, partly due to the Affiliations: Nona Karalashvili, World Bank Enterprise Analysis Unit. Domenico Viganola, World Bank Enterprise Analysis Unit. For correspondence: nkaralashvili@worldbank.org, dviganola@worldbank.org. Acknowledgements: We are grateful to Jorge Luis Rodriguez Meza, David C. Francis, and Mohammad Amin for helpful comments, and Nancy Morrison for excellent editorial assistance. Objective and disclaimer: Global Indicators Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Global Indicators Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Global Indicators Briefs No. 1 Box 1 Firm-level Data Collected during the COVID-19 Pandemic from Representative Samples e World Bank Enterprise Survey (WBES) e WBES are rm-level surveys of a representative COVID-19 Follow-up Surveys were conducted with sample of the nonagricultural, nonextractive, and rms that had recently completed the WBES before the formal private sector with ve or more employees. onset of the pandemic. In the Follow-up Surveys, a total Survey weights are applied to obtain population of 35,496 rms across 40 countries were interviewed estimates. When data are aggregated across countries, between May 2020 and March 2021, with 26 countries only the latest rounds of surveys are used, and survey covered in two rounds of surveys, approximately three months apart. Table B1.1 summarizes the coverage. weights are rescaled so that each country is weighted Cross-country comparisons should be treated with due equally. All the rm-level WBES and follow-up data are caution, given that the surveys were conducted at publicly available on the Enterprise Survey (ES) data di erent points of time in di erent countries. portal: https://login.enterprisesurveys.org. Table B1.1. WBES Follow-Up Survey Data Used in this Brief Countries Surveys Obs. Fieldwork range Low-income 5 5 1,205 06-2020/01-2021 Lower-middle-income 8 15 8,202 05-2020/02-2021 Upper-middle-income 12 16 8,663 06-2020/03-2021 High-income 15 30 17,426 05-2020/02-2021 Total 40 66 35,496 Source: World Bank Enterprise Survey (WBES) Follow-up COVID-19 Surveys. Note: Obs. = observations. restrictions imposed by national and local governments. e WBES Follow-up Survey on COVID-19 reveals Rates of temporary closure are lower for larger rms, that 30 percent of the rms con rmed to be permanently manufacturers, and rms located in higher-income closed were optimistic about the possibility of re-entering countries, suggesting greater adaptability to the the market at some point in the future. Although SMEs conditions imposed by the pandemic. e average were more likely to have permanently closed since the duration of temporary closures is around 10.4 weeks. is onset of the pandemic, they were also more likely to state period is fairly stable across di erent rm types and the intention of reopening. is is consistent with the idea countries at di erent income levels. that SMEs have lower entry and exit costs, are generally Firms that Have Been Confirmed or Are Assumed to Be Permanently Closed since the COVID-19 Figure 1 Pandemic Was Declared Smaller rms, retail and service rms, and rms located in lower-income countries were hit hardest by the pandemic. All countries (latest rounds) All countries: Small (5-19) All countries: Medium (20-99) All countries: Large (100+) All countries: Manufacturing All countries: Retail All countries: Other Services High-income Upper-middle-income Lower-middle-income Low-income 0 5 10 15 20 25 30 35 Percent of firms % of firms confirmed permanently closed % of firms confirmed or assumed permanently closed Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Note: The figure covers the period from March 2020, when the World Health Organization declared the COVID-19 pandemic, to March 2021. Small, medium, and large designations of firm size refer to the number of employees. 2 Global Indicators Briefs No. 1 Figure 2 Demand and Supply Shocks during the Pandemic Demand and supply shocks were massive in all country income groups and across all business sizes. Decreased demand Decreased supply 100 84 79 71 73 80 65 66 Percent of firms 64 56 58 58 55 52 48 60 46 40 20 0 Low-income Lower-middle-income Upper-middle-income High-income Small (5-19) Medium (20-99) Large (100+) Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Note: The figure covers 40 countries. Small, medium, and large designations of firm size refer to the number of employees. more exible, and perhaps are even more resilient than Drops in sales — perhaps most direct materialization larger rms, at least in their intentions to bounce back of demand and supply shocks — have also been widespread from adversity (Applegate and Lampert 2021). and deep, showing similar patterns. e latest rounds of the surveys indicate that, on average, around 70.0 percent Widespread and Deep Shocks to Demand and of businesses have experienced decreased monthly sales Supply compared to the same month one year ago, varying from 40.4 percent in Hungary (Round-2, Jan/Feb-2021) to 97 e pandemic triggered massive demand and supply percent in Guinea (Jun-2020). e change in sales has shocks, penetrating all parts of the world and nearly all averaged -29.1 percent, with the same two countries at the sectors ( gure 2). e latest rounds of the surveys indicate extremes, with average change of -13.6 percent in that around two-thirds (64.6 percent) of businesses Hungary and -56 percent in Guinea. e incidence of experienced decreased demand for products or services decline in sales, as well as the average change in monthly compared to the same month one year ago, on average, sales, varies sharply with the income level of the country. with the share varying from 37.6 percent in Estonia at is, lower-income countries have a worse sales pro le (Round-2, Feb-2021) to 95.8 percent in Guinea than higher-income countries ( gure 3). is pattern (Jun-2020). Similarly, on average, around 57.5 percent of di ers from the patterns reported in some of the early businesses experienced a decreased supply of inputs research (such as Goldberg and Reed 2020) that suggested compared to one year ago, varying from 24.8 percent in a smaller health impact of the pandemic in lower-income Montenegro (Feb-2021) to 93.3 percent in Guinea. Both countries, but is consistent with later analysis (such as these shocks were felt considerably less by large rms Liang et al. 2020). Notably, foreign-owned rms were (those employing 100 or more workers) (consistent with considerably and statistically signi cantly less likely to Adian et. al. 2020); by rms in higher-income countries have experienced decreased sales, and saw a lower drop in (consistent with Hu and Zhang 2021); and, for the sales, on average. A look at the evolution of sales in demand shock, by foreign-owned rms. Among the 26 countries with two rounds of surveys o ers some hope. Of countries where two rounds of the WBES Follow-Up the 26 countries with two rounds of the surveys, 12 are Surveys have been implemented, 15 have seen a strong showing a statistically signi cant rebound in sales, though (though far from full) rebound on this measure of demand still far from a full recovery; 10 show no sign of change; shock, with the important exceptions of Latvia, Lithuania, and the same 4 European countries mentioned previously and the Slovak Republic, where the indicator has (Latvia, Lithuania, Slovak Republic, the Czech Republic) deteriorated over time (the remaining 8 countries show no have su ered a deepening drop in sales. Perhaps predictably, discernable change across the survey rounds). Interestingly, capacity utilization (measured for manufacturing rms), fewer countries are seeing a rebound of supply (11 as well as the share of rms that decreased total hours countries, all with a rebound of demand), with the same 3 worked, follow the same pattern as the demand and countries (Latvia, Lithuania, Slovak Republic) and the supply shocks and sales. ese patterns appear comparable Czech Republic showing deterioration. is suggests that across aggregated sectors of manufacturing, retail, and rms in some countries may be forced to work through other services, suggesting a near ubiquity of the impact of bottlenecks of supply chains. the pandemic. 3 Global Indicators Briefs No. 1 Figure 3 Changes in Monthly Sales during the Pandemic Average change in monthly sales is around -29 percent, and it increases as GDP per capita increases. 0 1,000 10,000 sales compared to one year Average change in monthly -10 y = 8.51 ln(x) - 110.8 HUN ROU EST CYP t-stat(x) = 6.96 BIH SRB SVN POL MLT ago, percentage -20 BLRGRC HRV BGR PRT GTM SLV SVK CZE LVA ITA -30 GEO MDA RUS NIC MKD MNE LTU ZMB HND -40 MOZTCD MAR MNG TGO -50 JOR ALB NER ZWE GIN -60 GDP per capita PPP (current international $) Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19; World Bank World Development Indicators. Note: The figure covers 39 countries. The dotted line represents the logarithmic trendline for the relation between county-level average change in monthly sales and GDP per capita. The figure uses International Organization of Standardization (ISO) country codes. PPP = purchasing power parity. The Effect of COVID-19 on Firms’ Permanent and Jordan) have undergone considerably deeper cuts Workforce compared to the previous rounds (see gure 4). If anything, the opposite seems to be occurring, with a Adjustments to the workforce were probably among statistically signi cantly higher share of rms across the the most di cult choices faced by businesses. On average, rounds in almost all these countries reporting a decrease of among surviving rms, a staggering 36.5 percent of rms decreased their total number of permanent workers (compared to December 2019), varying from 15.9 Average Percentage Change in percent in Chad (Jun-2020) to 66.0 percent in Latvia Figure 4 Permanent Full-Time Workers since (Round-2, Feb-2021). Firms on average reduced the size December 2019 of their permanent workforce by 6.7 percent, with a considerable cross-country variation, as illustrated in Firms decreased their total number of permanent gure 4. Large rms (employing 100 or more workers) workers by nearly 7 percent, on average, with little were less likely than SMEs to have decreased their total or no recovery yet. number of permanent workers (33 percent vs. 37 GIN percent). While the share of rms that decreased their GRC SRB0% GEO GTM PRT HND permanent workforce is roughly similar across HRV -5% NER higher-income and lower-income countries, the average CYP -10% NIC percentage decline in the workforce is much higher in HUN -15% SLV low-income countries than in high-income countries BLR -20% MNG (12.3 percent vs. 5.1 percent). Almost half of the WBES POL -25% Guinea, -20% TGO Follow-up Surveys also collected information about MAR -30% MDA changes in salaries or bene ts. Firms in higher-income -35% MLT TCD countries were less likely to have reduced salaries or Latvia, -32% bene ts due to the pandemic than rms in ITA JOR lower-middle-income countries (11.7 percent vs. 33.5 CZE ZMB percent). Moreover, a lower proportion of workers LTU ALB experienced a reduction in salaries in higher-income BGR MOZ countries, further highlighting the gaping disparities in EST LVA income that the crisis may be exacerbating across the SVK MKD BIH SVN ZWE MNE world. ROU Survey Round-1 Survey Round-2 ere are no clear signs of a rebound in the permanent workforce so far. In almost all 26 countries Source: WBES Follow-Up Surveys on COVID-19. where two rounds of the WBES Follow-up Surveys are Note: The figure covers 38 countries. International Organization of available, the workforce gures in the second round are Standardization (ISO) country codes are used. similar to those in the rst round. Two countries (Latvia 4 Global Indicators Briefs No. 1 Figure 5 Share of Firms Experiencing Decreased Liquidity since the Onset of the Pandemic ree-quarters of rms have experienced a decrease in liquidity, and this share decreases as GDP per capita increases. 100 MNG TGO GIN ZMB JOR 90 TCD MAR ZWE HND MDA NER SLV GTM GEO ITA GRC Percent of firms 80 MOZ NIC BGR MLT SVKPRT 70 ALB MKD LTUCZE MNERUS HRV LVA CYP POL ROU 60 BLR y = -7.62 ln(x) + 149.03 HUN SVN EST t-stat(x) = -4.70 BIH 50 SRB 40 1,000 10,000 100,000 GDP per capita PPP (current international dollars) Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Note: The figure covers 39 countries. The dotted line represents the logarithmic trendline for the relation between county-level average share of firms experiencing a decrease in liquidity and GDP per capita. International Organization of Standardization (ISO) country codes are used. PPP = purchasing power parity. their total number of permanent workers since December since the onset of the pandemic. Around 20 percent of 2019. is could partly be attributed to the nature of this rms have been overdue on obligations to nancial crisis, with safety issues preventing people from going institutions. Looking at the set of countries that back to work. If this pattern continues in the near future, completed two rounds of surveys indicates how nancial it may suggest a longer-than-transitory imprint of the constraints have evolved since the onset of the pandemic. pandemic on employment, especially when coupled with e share of rms delaying payments to non nancial an increasing share of rms rebounding to the 2019 levels institutions for more than one week increased of their total hours worked per week, or overall capacity substantially between the rst and the second round of utilization (measured for manufacturing rms). surveys in 20 out of the 25 countries for which data are available (with no discernable change in the rest). is From Shocks to Financial Fragility suggests that rms continue to struggle nancially even as some early signs of recovery are being felt on the demand e unprecedented shocks and widespread fall in sales side in some countries. e cumulative share of rms that and therefore revenue have led to nancial distress of the have been overdue on obligations to nancial institutions private sector, drying up rms’ cash ow and depleting has also deteriorated in 12 out of 26 countries. ere has their working capital. What is the extent of the liquidity been no discernable change across survey rounds in this problem? Pooling the latest surveys in all the countries, 3 indicator for the remaining 14 countries, perhaps out of 4 rms have experienced a decrease in liquidity suggesting some hope for the private sector’s ability to since the onset of the pandemic (see gure 5). Although ful ll their nancial duties as economies gradually cross-country variation is considerable, two main patterns reopen. emerge. First, small or medium rms have been more likely to su er a decrease in liquidity than large ones (77.4 Firms’ nancial outlook also o ers another signal that percent, 75.0 percent, and 68.1 percent, respectively). some countries are moving toward recovery from the crisis Second, rms in low-income and lower-middle-income induced by the pandemic. e data suggest an overall countries have been more likely to su er a decrease in enhancement of rms’ expectations of being able to settle liquidity than rms in upper-middle-income and their outstanding liabilities in the short term. Figure 6 high-income countries (89.1 percent, 89.6 percent, 70.5 shows that, for the majority of the countries where two percent, and 68.7 percent, respectively). On the other rounds of the surveys are available, the share of rms hand, di erences are less marked across aggregated sectors expecting to fall in arrears in the six months following the of manufacturing, retail, and other services, in line with interview decreased between the rst and the second the nding that sales decreased consistently across these rounds, suggesting increased con dence of businesses aggregated sectors. from a nancial perspective. e majority of rms had to delay payments to Conclusion nancial and non nancial institutions. More than half of the surveyed rms have delayed payments for more is brief examines the evolving impact of than a week to their suppliers, landlords, or tax authorities COVID-19 on the private sector across 40 countries, 5 Global Indicators Briefs No. 1 Percentage of Firms that Anticipate Falling in Arrears within Six Months from the Time Figure 6 of the Survey Firms’ expectations of being able to settle their outstanding liabilities is improving in most sampled countries. a. Improved outlook b. Worsened outlook 100 Percent of firms 80 60 40 20 0 BGR HRV CYP CZE SLV GTM HND HUN ITA JOR LTU MLT MDA MAR NIC ROU SVK SVN ZMB EST GEO GRC LVA MNG POL PRT Round-1 Round-2 Source: World Bank Enterprise Survey (WBES) Follow-up Surveys on COVID-19. Note: The figure covers 26 countries from May 2020 to February 2021. International Organization of Standardization (ISO) country codes are used. using a rm-level data from 66 surveys based on more permanent workforce. Cross-country variation is than 35,000 interviews conducted with a representative considerable (consistent with Loayza et al. 2020), perhaps sample of a large share of each country’s private sector. in uenced by di erences in readiness or capacity to cope e descriptive analysis of this data shows that SMEs, with crises across many areas. While the data show that service providers, and rms in lower-income countries some countries are already on their path to recovery, the were hit harder by the pandemic. Importantly, many signs of a rebound are still feeble. Large cross-country pressures faced by the private sector and depicted in this variation shows that there is substantial room for rms as brief—including demand or supply shocks, drops in sales, well as governments to continue learning from one and drops in liquidity—were simultaneous, forcing rms another, as we all look forward to a post–COVID-19 to make many di cult decisions, including reducing their world. 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