Firms struggle to stay afloat after losing half of sales, but still keep workers

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Two men working in firm, Turkey 2009
Photo: Simone D. McCourtie/ World Bank

 

Firms and workers in every part of the world have been affected by the COVID-19 shock. The ILO estimates global labor income has declined nearly 11% or US$3.5 trillion in the first three quarters of 2020. As a result of income losses, our colleagues in the World Bank estimate that as many as 150 million people could be pushed into extreme poverty by 2021. Without timely assistance and swift policy action, otherwise healthy firms will be shuttered permanently, and people will suffer longer. 

Data-driven policymaking will be key to guide the recovery. To help gather the timely information needed, the World Bank partnered with national statistical offices and others to implement a new series of COVID-19 Business Pulse Surveys, as well as COVID-specific follow-ups to its traditional Enterprise Surveys. They primarily target micro, small, and medium enterprises (MSMEs) in developing countries to capture the impact of COVID-19 on firm performance, understand firm adjustment strategies, and policy responses.  The surveys are agile, deployed rapidly by phone or online in about 15 minutes. The initial round of data collection took place from May to August 2020 in 51 countries—covering more than 100,000 businesses in all regions and countries of different sizes and income levels. We plan follow-on surveys quarterly, beginning in October. 

Responses showed that firms are so far holding onto workers, riding out the downturn, but their finances are deteriorating as their sales have been halved by the crisis.  

COVID-19 generated a widespread and persistent drop in sales, especially for the smallest firms. 

  • Sales fell for about 84% of firms in developing countries relative to the same period in 2019. The average decline was 49% and has been strikingly persistent. Four months after the peak of the crisis, sales continue to be over 40% lower (Figure 1).  
  • Micro and small firms (less than 20 workers) have been affected disproportionately, experiencing a decline in sales of 50% or more, while large firms (100+ workers) saw sales declines of less than 40%.   
  • Tourism-related activities such as accommodation and food preparation have been among the hardest hit and are more likely to remain closed, even six weeks after the peak of the outbreak. 
  • Broad sector- or size-groupings conceal the wide variation in the impact of the shock, presenting challenges for targeting policy support. For example, in Senegal, six retail firms with ten employees all surveyed in the same week reported sales declines ranging from 10% to 100%. 

Figure 1. Businesses have experienced a large and persistent decline in sales 

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Figure 1 Businesses have experienced a large and persistent decline in sales
Note: Columns show the change in sales controlling for number of weeks post peak mobility decline, size, sector, and country fixed effects. Error bars show 95% confidence intervals.

Firms have been holding on to workers. 

  • Less than 20% of firms fired workers. Most businesses (64%) adjusted payroll by reducing hours, wages, or granting paid or unpaid leave to workers (Figure 2).  
  • Firms that experienced larger declines in sales were more likely to lay off workers, though not drastically. A firm with 100 workers and an average reduction in sales of about 53% shrank by just four employees on average. Women-owned businesses and those with more female employees were more likely to shed workers when faced with a shock of the same magnitude. From a regional perspective, more firms in Sub-Saharan Africa laid off workers than in other regions.   
  • A quarter of firms reduced wages, and large firms were nearly 10 percentage points more likely to reduce wages than micro firms (28% of large firms compared to 19% of micro firms).  
  • Hardest-hit sectors, such as tourism-related activities, made the biggest adjustments. Firms in the accommodation sector had the highest probability of laying off workers (19%), granting leave (51%), and cutting wages (33%).  

Figure 2. Firms thus far have been more likely to reduce hours or wages than fire workers 

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Figure 2 Firms thus far have been more likely to reduce hours or wages than fire workers
Note: Columns show the share of firms that reported making each adjustment in the 30 days prior to the survey.

Finances are deteriorating, especially for smaller firms and those hit harder by the shock. 

  • Falling revenue has left most firms in financial distress (Figure 3). More than half of micro and small firms are in arrears or expect to fall into arrears during the coming six months.  
  • The likelihood of firms in low- and middle-income countries falling into arrears is almost 50 percent higher than in high-income countries, underscoring the importance of providing support to these countries. For example, a firm in Bangladesh or South Africa is more than three times as likely to fall into arrears as a firm in Greece or Poland. 
  • Differences between firms within the same country dwarf cross-country differences. For instance, the bottom 10% of firms in Cote d’Ivoire have enough cash on hand to last just 14 days, whereas the top 10% can cover as much as 112 days of costs. In Kenya, Senegal and Tanzania, the bottom 10% of firms report having zero cash on hand, while the top 10% can cover about a year of costs. This highlights the huge inequality among firms in accessing finance—and their likelihood to survive the crisis.  
  • As expected, hardest hit sectors tend to have bigger financial woes. About 62% and 56% of firms in accommodation and food preparation are in arrears or expect to fall into arrears in the next six months, compared to 35% and 43% of firms in financial services and ICT. 

Figure 3. Declines in sales are strongly correlated with more firms falling in arrears 

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Figure 3 Declines in sales are strongly correlated with more firms falling in arrears
Note: Each dot shows the probability of falling into arrears for a given change in sales, controlling for number of weeks post peak mobility decline, size, sector, and country fixed effects.

Despite the unprecedented challenges, there are opportunities to build a more inclusive and resilient economic system. Most countries have implemented firm support programs, and some are undertaking challenging reforms. Monitoring how businesses are responding to the shock and the effectiveness of government support programs and policy changes will help shape better policy.  To get there, the starting point must be more and better data to make informed policy choices.  

This is the first of a three-part blog series sharing insights generated by the surveys. Part 2 will discuss uncertainty and firm adjustment strategies, and part 3 will explore policy responses by governments and the ability of firms to access policy support. 

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