If SMEs don’t survive the lockdown shock, will the economy?

The destructive effect of the pandemic-induced economic crisis is not limited to workers. Small and medium enterprises (SMEs) across the country are being wiped out.

Businesses that may have taken years and considerable amounts of money to build up are closing. And each closure takes with it the ability of the owner and any partners/shareholders to derive an income for themselves while providing employment to others and contributing to economic activity – and of course, the fiscus.

We know from long experience that South Africa was in crisis before the pandemic, and we know one of the reasons: unfavourable business conditions that are choked by economic nationalism policy rhetoric. Politics aside, at this point much of the damage due to the coronavirus has been done, and many small and medium business will simply not be returning.

What can be done?

Should government play a critical role in saving these businesses? Yes.

What are the long-term effects of the closure of significant numbers of companies? Dire.

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Crucially, how do we rebuild an economy that is needs-driven, not wants-driven? A framework that is premised on citizens as thriving participants in the economy, rather than mere consumers is essential.

The first step: discard the populist stance and conditionalities as seen in the exclusion of white-owned business in the Covid-19 Tourism Relief Fund. Letting those businesses fail displaces the workers, many of whom do not have the resources to survive once retrenched.

These are extraordinary times and playing politics about what businesses to assist will only add to the increasing unemployment numbers.

Moreover, as joblessness skyrockets, government won’t have sufficient funds to pour into the Unemployment Insurance Fund, sustain the R350 paid monthly to unemployed people, or maintain the current social grants. Politics is making the terrible situation brought about by the pandemic even worse, and misguided actions will have a far greater damaging effect.

For many SMEs, survival depends on accessing the economic relief funds on time and without complicated delays due to administrative red tape.

A pronounced effect of the pandemic has been the way it has restricted the ability of businesses to be adaptable, manoeuvrable and nimble.

Stripped of the ability to control or even plan for the shutdown of economic activity, and with no guarantee that the customer base will return, the likelihood of survival is dim.

Here’s what government can do 

First, extend relief funds to six months to offset the loss of revenue, act as stabiliser, and enable operational flexibility. In my view, the billions being spent bailing out state-owned enterprises (SOEs) could be redirected. SMEs are in a much better position to support South Africa’s recovery prospects than a failing airline for example. Relief funding can come with conditions, such as retaining workers.

Second, cutting the red tape in the application process will assist immediately and have a positive medium-term outcome for SMEs, by making cash available for their day-to-day operations. Delays are damaging, because to stay afloat without this help businesses will need to take out additional loans or cut expenses – including the wage bill.

It would be helpful if the South African Revenue Service (Sars) was given the lead role in coordinating the government’s relief programmes.

Bear in mind the kind of systems and capacities Sars has in verifying the legitimacy of companies and ensuring adherence to rules and measures designed to prevent fraudulent activities and claims.

Third, the most favourable time for government to test out a flexible labour policy and study the kinds of jobs being created is during this crisis. For example, companies in health, essential-goods production and farming have been busy, and foregoing the red tape that insists on permanent employment in these areas could assist the country in becoming adaptable to Covid-19-induced challenges.

No time to waste

In summary, a wave of jobs and businesses has been wiped out and those that remain continue to be threatened by the pandemic.

This is changing the economy in two ways – (i) consumers have lost their jobs; and (ii) the demand that stimulates economic activity and is the lifeblood of businesses’ ability to create jobs is subdued. Subsequently, the likelihood of recovery is low and the cyclical movement of worsening disparities will continue.

In theory, this changing environment should stir politicians, policymakers and business leaders into collective action about the sustainability of an economy that has kept most citizens, including SMEs owners, living from one pay cheque to another without income safety nets.

In practice, the government has mostly been reactionary, addressing current challenges and not thinking of the ripple effects that will be felt in 24 to 36 months’ time.

The point of this article is that the diversity and vitality of SMEs will always be very important to South African society and the economy. Their survival safeguards jobs. The politicising that gets done in the face of income losses is thus self-defeating.

The role of government is to create an environment that enables people and businesses to survive the crisis.

However, moving forward the economy South Africa cannot be the same. For a decent future and the wellbeing of society, it would be smart to rebuild an economy predicated on a framework that is inclusive and sustainable.

This article first appeared on Moneyweb and was republished with permission.

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