Government Support and Firm Performance During COVID-19

Assessing the impact and policy responses in support of private-sector firms in the context of the COVID-19 pandemic 1 March 26, 2020 Key messages COVID-19 is damaging otherwise healthy firms through four channels: (i) falling demand, (ii) reduced input supply, (iii) tightening of credit conditions and liquidity crunch, and (iv) rising uncertainty. Short-term support to keep firms viable includes grants, guarantees, concessional lending, trade finance, increased bank lending, factoring, and tax credits.It may involve temporary suspension, reprofiling or even cancellation of a range of financial obligations, such as taxes, debt repayments, and rental or utility payments.Easing financial conditions and exercising regulatory forbearance might be necessary as long as conditions remain difficult. Measures should be transparent and time-bound, and where feasible, should direct scarce resources to the most affected parts of the economy, while avoiding financial instability. Tools to be considered include fintech (mobile payments, factoring), public procurement, and legal and regulatory reform (e.g. of licensing, labor laws, bankruptcy and debt enforcement mechanisms). The most vulnerable firms should not be left out of the support net, including smaller and informal firms, young firms, and firms strongly integrated in domestic and international value chains.Stronger support can be given as an incentive forfirms to maintain workers. Policy responses during the recovery phase should focus on helping firms return to their precrisis production and employment.The World Bank Group COVID 19: Assessing the Impact and Policy Responses in Support of Private-Sector Firms in the context of the COVID-19 pandemictakes into consideration the immediate implications of COVID-19 as the outbreak unfolds, as well as challenges that will remain once the pandemic is contained and recovery begins.It also draws attention to the heterogeneity of impacts across sectors, geographies, and types of firms, but cautions that certain types of policy responses used extensively in advanced countriessuch as bank lending or tax breaksmay be less effective in reaching a large share of developing country SMEs which do not pay (all) taxes and are not well linked to formal financing channels.As such, the note proposes a wider menu of options to reach vulnerable firms.To help guide policy responses, the annex also describes basic indicators to assess the varying impacts of the crisis on different categories of firms and types of workers.Without timely support, there may be persistent harm as otherwise-healthy firms are shuttered and the related jobs are permanently lost.The objective in supporting firms in the short term should be to address immediate liquidity challenges (i.e."to keep the lights on"), limit firm closures/bankruptcies (particularly in cases where more productive firms may be at greater risk of closure), and prevent widespread layoffs.It is important that this type of support is rapid, transparent and time-bound.In the recovery phase, policies should be geared towards supporting growth-oriented enterprises, promoting reallocation of resources to more efficient companies, and avoiding measures that risk propping up zombie firms (i.e., firms that earn just enough money to continue operating and service debt but are unable to pay off their debt, and in turn, unable to invest or grow, thus diverting resources away from healthy, viable firms 2 ).This note is divided into two sections.The following section provides a framework that presents the pathways through which the COVID-19 pandemic is affecting businesses.The second section delves into possible policy responses including examples of actions applied in the past or currently being deployed around the world. Pathways of the economic shockThe COVID-19 shock is impacting firms simultaneously through four distinct channels (illustrated in greater detail in Figure 1 in the Annex): 31.