off workers (Figure 10). These findings, combined with the strong association between changes in employment and changes in sales, suggest that firms that were most negatively affected by the shock are relying on multiple mechanism of adjustments of their workforce and driving the adjustments on employment.

# **4. Liquidity and survival**

Sharp increases in corporate and personal insolvency typically follow a crisis period. Firms in developing economies with shallower financial markets are most vulnerable to liquidity problems and insolvency risks (WBG, 2020). The slowdown of economic activity caused by the COVID-19 outbreak and related lock-down measures implemented to tackle the health crisis have led to severe difficulties for companies to meet their financial obligations. Fixed operating costs for firms, such as rents and interest payments, still need to be paid while the cash flow and sales that meet these obligations has contracted substantially (OECD, 2020). Not surprisingly, many otherwise sound companies are facing acute liquidity constraints that eventually might become solvency problems. Our data allows us to assess liquidity constraints and the extent to which COVID-19 has worsened the firm liquidity and risks pushing businesses into bankruptcy.<sup>13</sup> Consistent with the growing literature on the impact of COVID-19 on bankruptcy and liquidity challenges among firms (e.g. Bircan et al. (2020)), we find a significant degree of heterogeneity in liquidity constraints across countries. Nearly 88% of firms in South Africa have fallen or expect to fall into debt, while only 13% report so in Indonesia (Figure 11). In general, it appears that the problem is more acute among countries where financial development is lower (e.g. Nepal and Bangladesh). We observe instead less cross-country variation when assessing the liquidity of firms using the cash at hand measure. Interestingly, while firms in upper-middle income or high income countries (e.g. the Russian Federation and Greece) are less likely to fall into arrears, they do not have large cash at hand to cover their costs (Figure 12). It should be noted that cash availability among firms captures their liquidity position but does not imply insolvency because firms with no cash may still be able to survive by selling out their non-liquid assets when in need. It is possible that firms in upper-middle income countries with developed financial systems usually do not need to maintain a lot of cash at hand to handle their operations and instead rely on financial market transactions, given their efficiency during regular times.

Within country, differences between firms facing liquidity problems are larger than those between countries. For instance, the bottom 10 percentile of firms in Côte d’Ivoire can expect to cover only 14 days relative to the top 10 percentile, which can cover as much as 112 days of costs. Likewise, in Kenya, Senegal and Tanzania the bottom 10 percentile of firms can cover none, while the top 10 percentile of the firms can cover about a year of costs (Table 1). This finding is similar to Bircan et al. (2020) who use data on 16 emerging economies and three Western European countries to suggest similar within- country variation. Their work suggests that, for instance, about half of all small businesses in Ukraine have cash reserves of less than one month’s wages, while around 20% of

> 13The surveys measure liquidity constraints among firms through two questions: (i) Is it expected that this establishment will fall in arrears in any of its outstanding liabilities in the next 6 months? (ii) As of today, for how many days could this establishment continue paying all costs and payments with the cash available? See appendix for details.

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