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IFC: Growth of SMEs key to restoring economic stability

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Weavers make rattan baskets in Kampong Speu province’s Odongk district. Photo supplied

IFC: Growth of SMEs key to restoring economic stability

In an interview with The Post, the IFC's resident representative in Cambodia Asad Yaqub stresses the importance of dynamic small businesses as a cornerstone of developing economics.

How do you see the impact of the Covid-19 outbreak affecting Cambodian businesses and the economy?

This is an unprecedented crisis, with devastating health, economic and social effects being felt around the world. Beyond the health impacts on people from the Covid-19 pandemic, we are expecting a major global recession.

Our estimates suggest a much deeper global down-turn than the recession that followed the 2008 financial crisis, given declines in production, investment, employment and trade.

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Asad Yaqub, IFC resident representative in Cambodia. Photo supplied

We know that businesses are shutting down as countries take important measures to fight the disease.

The crisis is rippling through developing countries, which are especially vulnerable.

While Cambodia is among the few countries which have so far avoided a health crisis, it is already experiencing hard hits to its economy.

The most affected sectors – tourism, manufacturing exports and construction – contributed to more than 70 per cent of growth and just over 39 per cent of total paid jobs in 2019.

With these areas particularly impacted by Covid-19, it’s now estimated that at least 1.76 million jobs are at risk, according to a recent World Bank report.

Micro, small and medium enterprises (MSMEs) accounting for more than 90 per cent of the economy are among those most impacted. How do you perceive their challenges?

This is not an issue affecting Cambodia alone – it’s global. Companies are scaling back operations and laying off employees. The stress is especially great on MSMEs, which are highly vulnerable to global shocks.

The longer the disruption, the greater the damage will be, which will make a global economic recovery difficult in the near to medium term.

Even before the Covid-19 pandemic, about 131 million or 41 per cent of formal MSMEs in developing countries were constrained in accessing the credit they need to survive and thrive, and the MSME finance gap in developing countries had been estimated to be about $5 trillion.

As a result of the crisis, MSMEs are experiencing shocks on both the supply and demand sides as well as financial shocks.

Access to capital has been recognised by IFC as an issue for SMEs. Is the current outbreak compounding the issue?

Developing countries are facing a deteriorating trade and financial environment. We are seeing much tighter financial conditions for developing countries, characterised by large portfolio outflows, currency depreciations and a rise in spreads.

Given this situation, most MSMEs are working with clients to defer payments and work out the solutions to fit the times, and in these circumstances they may also seek some form of grace on loan repayments from their lenders.

How can IFC help?

We understand the challenge is immense and this crisis is rippling through developing countries, which are especially vulnerable.

IFC is moving quickly to soften the economic blow through financing that will help companies continue to operate and pay their workers.

IFC is providing $8 billion in fast-track financing to our private-sector clients to sustain economies and protect jobs during this unprecedented global crisis.

The bulk of IFC’s financing will go to client banking institutions, enabling them to continue to offer trade financing, working-capital support and medium-term financing to companies struggling with disruptions in supply chains, especially small and medium enterprises.

We firmly believe that supporting the private sector is critical to restoring economic stability and preserving jobs.

Commitments under the Working Capital Solutions, the Global Trade Liquidity Program and the Real Sector Crisis Response Envelope in response to Covid-19 currently amount to $500 million, with many more across all regions expected in the coming weeks.

In addition, since March 17, IFC has deployed $1.8 billion to support small and medium-sized enterprises involved in global supply chains through its Global Trade Finance Program – almost 54 per cent of this volume is deployed in low-income and fragile countries.

In Cambodia, IFC has just increased the trade limit for Acleda Bank to $15 million, enabling the lender to

improve its capacity to cover payment risk in granting trade financing to local businesses, mostly SMEs.

We are working with our existing client institutions around the globe to provide near-term support and help sustain operations into the recovery period to continue providing finance to productive small businesses.

On the advisory side, IFC is also working with financial institutions to strengthen their risk management and build their capacity to provide practical tools and advice to help SMEs to manage stresses related to the crisis, as well provide them with skills and job training to help them rebuild their business.

How will businesses and the economy recover from the crisis?

Clearly, in countries all across the globe, measures like tax relief and fiscal assistance are aimed at easing immediate pressures.

Our experience from past shocks, including the global financial crisis in 2008, has taught us that keeping companies solvent is key to saving jobs and limiting economic damage.

To help ensure a robust recovery, further efforts will be needed to continue ensuring macroeconomic and financial sector stability, as well as an enabling business environment for firms, especially SMEs.

Diversifying trade, reducing logistics costs and upgrading labour skills will help increase an economy’s resilience and competitiveness in the long and medium term.

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