# 1. Introduction

It took three weeks for a quarter of businesses in the United Kingdom to shut down when mobility restrictions were announced at the end of March 2020.<sup>2</sup> In the United States and other places contraction has been equally sharp.<sup>3</sup> By July 2020, five months after the coronavirus COVID19 started to spread globally, the global economy was facing unforeseen and rising hardship; millions of workers remained unemployed; while trade, investment and financial markets had collapsed. Yet, the impact of the pandemic has not been equally spread across countries, sectors, and firms of different sizes.

This study focuses on how Small and Medium Enterprises (SMEs), employing fewer than 100 workers, have been experiencing the shock. The study discusses differences in the impact of the pandemic across firms of different sizes, but also their responses and how development finance can support them best in low- and middle-income countries. The focus on smaller firms is meaningful for many reasons. SMEs are the largest source of employment and delivery of goods and services in lower income economies; hence disruptions to this segment have major social and welfare implications for the poor and rural populations. What is more, permanent closures of small enterprises result in a loss of intangible capital, skills and innovation capacity that risk locking countries into deep recessions long after the pandemic. A range of development objectives – whether it be supporting incomes of the poor during the downturn, providing goods and services, or setting the right foundations for recovery and industrial development of the future - are therefore directly associated to what happens to SMEs during the crisis.

The availability of data is the single most important constraint to our understanding of the effects of the pandemic on business. Beyond a handful of high-income economies, in the United States and Europe, it has not been possible to track the many dimensions of impact at the pace they have been unfolding. In low- and middle-income countries the sources of information are few. By the end of July 2020, the World Bank had released new enterprise surveys from 13 different countries measuring the virus’s impact on businesses - from Italy and the Russian Federation, to Albania and Zimbabwe (see Annex Table A1 for sample description). Despite their limitations,<sup>4</sup> the surveys, along with a variety of other sources used in this study, are telling as to how small businesses experience the shock differently than larger firms.

Without sales, half of businesses expect to shut down in less than a month according to the evidence. It is impossible to predict how many will make it through the pandemic as many close

> 2 Financial Times, 16 April 2020: _Covid-19 shuts down a quarter of UK businesses._

> 3 Washington Post, 12 May 2020: _Small business used to define America’s economy. The pandemic could change that forever._

> 4 The 13 countries for which follow-up surveys were released by July 2020 are located in two regions - Europe and Sub-Saharan Africa, with surveys in other regions scheduled for completion in fall 2020. Moreover, in all World Bank Enterprise Surveys, informal and micro-enterprises (with fewer than 5 employees) are not surveyed; neither are cooperative and 100% state-owned firms. The surveys encompass a broad range of industries: manufacturing, construction, wholesale and retail, hotels, transport and computer related services (ISIC Rev 3.1 codes 15-37, 45, 50-52, 55, 60-64, and 72).  However, this omits some sectors with a preponderance of SMEs, such as agriculture or mining, and some services sectors that are highly affected by the crisis, such as financial services, education or health services.

2