COVID-19 and SME Failures

Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova and Nick Sander

No 2020/207, IMF Working Papers from International Monetary Fund

Abstract: We estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost-minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.

Keywords: WP; bankruptcy rate; cash flow; wage bill; employment decision; ghost firm; construction company; firm coverage; COVID-19; Supply shocks; Labor supply; Wages; Global; coverage ratio; liquidity condition (search for similar items in EconPapers)
Pages: 55
Date: 2020-09-25
New Economics Papers: this item is included in nep-ent, nep-mac, nep-rmg and nep-sbm
References: Add references at CitEc
Citations: View citations in EconPapers (88)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=49753 (application/pdf)

Related works:
Working Paper: COVID-19 and SME Failures (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2020/207

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().