Why is the Covid-19 pandemic affecting poor countries more and what is needed to support them?

Author: Daniel Perroud, Global Head of Business Development

Why does it hit these countries the hardest?

There are several reasons for this. For one thing, many of these countries have already entered the crisis with high levels of government debt which is limiting fiscal and monetary stimulus. On the other hand, these countries often only have very weak health systems, lack of access to sanitation, weak digitization, have a strong dependency on the commodity sector, on oil exports, on tourism, and have seen declines in remittances and FDI. According to the IMF, this is projected to lead to a decline in GDP in these countries of more than 3% in 2020.**

Significant growth is expected for 2021 – but this growth will not bring the countries to pre-crisis levels. One of the most important reasons is that the informal sector accounts for 90% of total employment in developing countries and 67% in emerging economies: Street vendors, market traders, construction workers, waste pickers, home-based workers, transport workers – all areas that are particularly hard hit by lockdown and containment measures. And all areas in which MSMEs are disproportionately active. Lockdown and containment measures have reduced the revenues of these companies and led to liquidity bottlenecks. Their access to finance has deteriorated significantly. Financial inclusion and access to finance for MSMEs was a problem even before the crisis and again, like in a magnifying glass, this problem is getting worse due to Covid-19, with enormous effects for the economies and people of these countries, as MSMEs build the backbone of economic growth.

What is needed?

In order to sustainably support MSMEs and give them a way out of the crisis, flexible financing schemes are needed to ensure business disruptions are limited, jobs are maintained, and path to growth is re-established. This could be achieved through a two phased investment approach, consisting of a stabilization phase and a growth and recovery phase. In the first phase, liquidity through flexible financing schemes over a period of six to twelve months would help financial institutions and MSMEs address the restriction in economic activities caused by the lockdowns implemented in response to Covid-19. In a second phase, financial support needs to be provided to resilient financial institutions to grow their MSME portfolio as well as to expand their outreach to potentially new MSME companies in order to ensure that liquidity is channelled to the MSMEs most in need and that these are able to continue to be market relevant with their product offerings in response to the crisis. For this, a thorough selection process and extensive underwriting and risk management expertise is needed.

In line with their mission and as key stakeholder in the industry, development finance institutions around the world have taken immediate action to support MSMEs in emerging and frontier markets. We anticipate the private sector will follow their example as it represents an opportunity to make a significant impact in a disrupted environment.

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*World Bank, Updated estimates of the impact of COVID-19on global poverty: Looking back at 2020 and the outlook for 2021, 2021.
**IMF, World Economic Outlook Update, 2020.

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