The impact of COVID-19 on small and medium-sized enterprises in Azerbaijan
Preliminary Impact of KOVID-19 on Small and Medium Business (SMEs) in Azerbaijan: Results of the First Phase Research
In addition to its major impact on human health, Coronavirus 2019 (KOVID-19) has had a significant impact on the global economy, and unfortunately the fight against it in the world is not over yet. Following KOVID-19, the Center for Social Research (STM) conducted a survey to better understand the Small and Medium Business (SME) landscape in Azerbaijan. In addition, the survey also aimed to reflect the views of SME owners on how they assess government support mechanisms in response to the KOVID-19 pandemic. This document presents the main results of the first phase of the survey.
The document will be updated during the second phase of the study.
SMEs and KOVID-19
It is widely recognized that economic development and growth in any country depends to varying degrees on Small and Medium Business (SMEs) (Kozubikova et al., 2017; Mura, Sleziak, 2015; Freel et al ., 2010; Rajnoha, Lesnikova, 2016). In other words, SMEs are the engine of any economy. SMEs are now in the spotlight due to Coronavirus Disease 2019 (KOVID-19) as restrictive measures imposed by many countries around the world put businesses at risk. Attempts to control the spread of the virus have prompted many countries to suspend economic activity in recent months.
Given that the world has not seen a crisis of this magnitude since the 1930s and 1940s, the current situation caused by the pandemic is not easy. Since the launch of KOVID-19, the world economy has begun to decline. With the spread of the disease, politicians, researchers and scientists are trying to measure the economic impact of the crisis. But there is no clear road map. The experience of each country is different and is expected to be different in the future. Uncertainty is probably the best word to describe this moment in our history.
In general, KOVID-19 is considered to be one of the biggest blows to the global economy to date. As a result, the global economy is in recession and the economy is expected to suffer further in the near future. In the face of this problem without a president, Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz of the Boston Consulting Group (BCG) remind us in an article in the Harvard Business Review on March 27, 20201 that recessions and their recovery come in various “shock forms”. They recall these forms of shock with reference to the 2008 global financial crisis (GFC). The forms of economic shock in this article are described as V, U and L. What determines the form of shock is how hard any crisis hits the supply side of the economy. According to the authors, the shock form of the least damaging recession is V. At the same time, it should be noted that it is still unknown what the situation will be like and what kind of shock this or that economy will have. Given the great uncertainty surrounding the disease itself, it is thought that extreme caution should be exercised in predicting future scenarios.
The International Labor Organization (ILO) estimates that 2.7 billion workers, or about 81 percent of the world’s workforce, have been affected by the quarantine. This is particularly noticeable in the tourism, travel, food service, hospitality, manufacturing and retail sectors (ILO, 2020). An analysis by the Organization for Economic Co-operation and Development (OECD) states that “the impact on SMEs is particularly significant due to their high sensitivity to external shocks and their ability to withstand low levels.”
In recent months, many other international organizations have made predictions about the economic impact of the disease. One of them is the United Nations Conference on Trade and Development, which presents the World Investment Report 2020. The organization estimates that there will be another 5-10% decline in 2021, compared to a 40% decline in 20203.
In addition to getting acquainted with these indicators from various sources, we must take into account that these figures do not fully show the effect of KOVID-19. At the same time, economic inequality, which was very common in the world before KOVID-19, is expected to become a more serious problem with KOVID-19. However, this is not yet reflected in the figures. In the face of such a situation, the position of states and aid policies play a decisive role. Some countries have so far achieved their goals of overcoming the crisis, while others have not been as effective as they should have been.
Initial effects of KOVID-19 in Global Markets
First of all, it should be noted that the impact of KOVID-19 will be significantly different in different sectors of the economy, and this requires serious research and analysis for the future. Since this is not the subject of this study, it should be noted that this section focuses primarily on the initial impact of KOVID-19 on SMEs in other countries. We can only estimate the long-term effects of the economic stagnation and crisis caused by quarantine.
As noted earlier, in many economies, SMEs go through a difficult and uncertain period. During this period, states have already taken measures to protect their domestic economic ecosystems4. Assistance to SMEs is a key part of most government assistance packages related to the KOVID-19 crisis. In general, the packages include indirect financing of suppliers through buyers, direct financial assistance, guaranteed recovery of overdue payments, tax credits and other financial incentives to enterprises.
To find out the impact of KOVID-19 on SMEs in the Middle East and North Africa (CARA) and Turkey, RAND Europe conducted an online survey in this early period. is between. The survey was conducted from May 4 to May 21, 2020 and focused on businesses owned by refugees, women and young entrepreneurs. 171 SME owners responded to the survey. The majority of respondents are from Jordan, Lebanon, Palestine and Turkey. 79% of respondents in the CIA and Turkey said the overall impact on their businesses was negative. More than half of the respondents said that KOVID-19 had a significant negative impact on the supply and demand chain, all areas of their business, including financial and distribution channels. And yet, more than half of those surveyed, 61%, think their business will not last more than four months if this continues. 85% think they will not be able to withstand more than a year (Hoorens, Hocking, & Fays, 2020). This result coincides with similar results in a survey conducted by the United Nations Development Program (UNDP) for enterprises in Turkey. Thus, 96% of respondents said that the pandemic is a serious threat to the business of entrepreneurs (UNDP, 2020).
In the Asia-Pacific region, a similar survey was conducted by Youth Co: Lab. They surveyed 410 young entrepreneurs in various sectors in 18 countries to find out how the coronavirus pandemic affected business owners and how those entrepreneurs reacted5. According to the study, as of March 31, 2020, 9 out of 10 entrepreneurs in the Asia-Pacific region, 86%, said that KOVID-19 had a negative impact on their work. Among the affected, 1 in 4 said they had stopped working altogether, and 1 in 3 said there had been a major slowdown in their work. The results in percentages are as follows:
- Completely stopped 21.96%
- Significant slowdown 27.65%
- A slight decline of 21.19%
- A slight decrease of 14.99%
- Positive effect 6.20%
- No effect 8.01%
If we look at Europe, we see that in Europe, SMEs represent 99.8% of the entire market. It accounts for two-thirds of jobs. Together, these account for 60% of value added growth (Muller et al., 2019). On the demand side of the economy, demand for SMEs has declined significantly due to the cessation of several Global Value Chains (GCCs) and declining consumer confidence in industries due to KOVID-19. On the supply side, SMEs face material and technical difficulties due to labor shortages and transport disruptions (Juergensen, Guimón, & Narula, 2020).
As for the latest figures from the survey, in Germany, 58% of SMEs experience an average 50% drop in income, while 85% of SMEs in the Netherlands are experiencing financial difficulties due to KOVID-19. 40% of companies in Belgium reported a 75% or more decline in revenue. In Portugal, 37% of enterprises reported a drop in production of more than 50% (European Cluster Collaboration Platform, 2020).
If we look at the United Kingdom, we see that SMEs account for 50% of total corporate income and 44% of the country’s workforce.
According to a recent McKinsey survey of SMEs in the United Kingdom6, more than half of entrepreneurs believe that market stagnation or recession is inevitable. More than half of the enterprises said they considered the current country’s economy to be too or too weak. The same study noted that there are differences in impact between economic sectors in the UK. According to the results, the areas most affected by the crisis are construction, agriculture and logistics (more than 90% of SMEs surveyed report declining profits in these sectors). In contrast, SMEs in finance and insurance, science and education are the least affected (Maria Albonico, Zdravko Mladenov, Ruchi Sharma, 2020).
Another important result of the survey is that 80% of SMEs say that their business turnover is declining. However, several related effects have been reported. They are as follows:
- Expectations of post-pandemic staff reductions (28%) and delays in business expansion projects (36%);
- Concerns about default on loans (a quarter);
- Concerns about the ability to retain employees (24%) and doubts about the ability to maintain supply chains (28%).
When we look at the situation of SMEs in Canada, the situation is no different. For example, when we look at a survey conducted by the Research and Market Intelligence Unit of the Business Development Bank of Canada (BDB), we see that entrepreneurs have strongly felt the impact of KOVID-19. 90% of respondents said it had a negative impact. 3% said that KOVID-19 had a positive effect, while 6% said “it has not had an effect so far” in a survey (BDC, 2020).
Before moving on to the situation in Azerbaijan, it would be useful to take a brief look at the situation in the Eastern Partnership (EaP) countries. Immediately after the emergence of KOVID-19, each country in the region approved policy measures to combat the crisis. Although it is not easy to estimate the impact of KOVID-19 in the Eastern Partnership (EaP) countries, it is clear that this situation will lead to a serious economic contraction in international trade and domestic production. For example, the Georgian economy, which depends mainly on the service sector, can be expected to shrink by about 30%.
Compared to Georgia, the economies of Azerbaijan and Ukraine are expected to be less affected by KOVID-19. According to the International Monetary Fund8, the Georgian government has developed an anti-crisis plan worth 3.4 billion GEL to reduce the negative impact on the private sector, citizens and businesses.
SMEs in Azerbaijan before KOVID-19
Like many other countries, Azerbaijan is particularly interested in the policy of promoting and strengthening small and medium-sized businesses and entrepreneurship in the country, especially after the devaluation of the Azerbaijani manat in 2015. Against this background of growing interest, the recent development of SMEs in the country has been as follows:
- The Government of Azerbaijan adopted the Strategic Roadmap for the Production of Consumer Goods in 2016 to support the development of SMEs and strengthen economic diversification. In this endeavor, the Ministry of Economy requested the support of the Organization for Economic Cooperation and Development (OECD) to support the implementation of the SME Roadmap.
- On December 28, 2017, the President of the Republic of Azerbaijan signed Decree No. 1771 “On further improvement of small and medium enterprises.”
- The Small and Medium Business (SME) Development Agency of the Republic of Azerbaijan was established by the Decree of the President of the Republic of Azerbaijan dated December 28, 20179. The Charter and structure of the Agency were approved by the Decree of the President of Azerbaijan dated June 26, 201810.
Returning to the depreciation of the exchange rate, which led to increased attention to SMEs in the country, we can say that the negative impact caused by it, the economy recovered only in 2018. That same year, the recovery saw a 1.4% increase in GDP. Although this increase was mainly due to higher oil prices and accelerated gas exports and production that year, growth in the non-oil sector was 1.9%.
Against the background of recent developments, the government is trying to make progress in improving the business environment for SMEs in Azerbaijan. According to the State Statistics Committee11, in 2018, the number of SMEs in Azerbaijan was 7,068. In December of the same year, a new definition of SMEs was introduced by the Ministry of Taxes and the State Statistics Committee to eliminate differences in methodologies. The new definition is in line with the definition of the European Union (EU) and is based on the criteria for the number of employees in deciding whether a business is small or medium.
Despite ongoing efforts to develop this sector, the economic potential of SMEs in Azerbaijan is still not fully used. For example, in the Organization for Economic Cooperation and Development (OECD) countries, SMEs account for 60-70% of jobs, while in Azerbaijan this figure is 42.9%. While SMEs accounted for 60% of value added growth in OECD countries, this figure was 13.4% in Azerbaijan.
The table below shows the distribution of SMEs by economic sectors.
Source: OECD et al. Adapted from (2020).
Complex measures are being taken in our country to develop small and medium enterprises. These measures reflect all possible directions to achieve the highest goal of improving the business environment. The Small and Medium Business Development Agency (SMBDA), which directly supports the development of small and medium-sized businesses in the country, provides various services to these businesses and, most importantly, coordinates and regulates the activities of government agencies in this area, is always with businesses.
In order to organize this important and strategically important activity, the Agency has mobilized small and medium business houses and SME development centers, as well as SME-friendly networks.
In line with global challenges, the Agency has established Public-Entrepreneurship Partnership Development Centers, particularly in the area of important contract engineering, such as public-business partnerships.
In order to ensure sustainable economic development in Azerbaijan, increase the role of small and medium business in economic development, its share in GDP and employment, strengthen competitiveness, ensure efficient and effective access of SMEs to financing resources, provide daily consumer goods mainly through SMEs, Important priorities, such as expanding SME access to foreign markets, are shaping the Agency’s strategic vision.
That is why in a very short time the Agency has become one of the most strategic actors in the country’s business ecosystem. The center carries out its activity on the basis of the most advanced management principles and has the most reliable friendly mission for business entities.
SMEs in Azerbaijan after COVID-19
The fall in world oil prices in 2020 and KOVID-19 had a negative impact on the Azerbaijani economy. The country is now trying to recover from the effects of the pandemic very slowly. According to the International Monetary Fund (IMF) forecast for April 14, 2020, in 2019, Azerbaijan’s Gross Domestic Product (GDP) will increase by 2.3%. This year, it is projected to decrease by -2.2% due to the pandemic and increase to 0.7% in 202114. In this case, as in other countries, the negative impact of the pandemic will be mainly on SMEs. To reduce the negative impact, the government has adopted a number of fiscal and monetary policies.
- On March 19, 2020, the President of the Republic of Azerbaijan issued a decree on reducing the negative impact of the Coronavirus (KOVID-19) pandemic and, consequently, sharp fluctuations in world energy and stock markets on the economy of the Republic of Azerbaijan, macroeconomic stability, employment and entrepreneurship. on measures ”signed Order No. 1950. After that, the Cabinet of Ministers approved the “Action Plan”.
- The Agency for Small and Medium Business Development of the Republic of Azerbaijan organized webinars and other online awareness-raising events to inform entrepreneurs about the large-scale state support mechanisms implemented by the state in connection with the pandemic, to study the effects and needs of entrepreneurship, responded to entrepreneurs’ requests. Coordination measures with entrepreneurs and government agencies were organized in compliance with quarantine rules.
- A total of 1,082 entrepreneurs covering trade, manufacturing, tourism, construction, transport, catering and other sectors of the economy participated in the surveys conducted to study the impact of the COVID-19 pandemic on business activities, and more than 30 meetings were organized. Minimize the impact of the pandemic on business activities, protect the interests of entrepreneurs and employees, etc. Entrepreneurs’ proposals were studied and submitted to support the solution of problems.
- Taking into account the recommendations of the Financial Stability Board of the Central Bank of Azerbaijan within the implementation of the “Action Plan” approved by the Cabinet of Ministers on the implementation of paragraph 10.2 of this Order has taken additional measures15.
- On April 4, the government announced assistance to affected enterprises and individuals in the amount of AZN 3.3 billion, which is 4.1% of GDP.
- These include measures to reduce losses to entrepreneurs and support revenues.
- In addition to the measures taken by the Azerbaijani authorities, the European Bank for Reconstruction and Development (EBRD) has developed a € 1 billion “solidarity package” for clients in 38 countries, including Azerbaijan18.
- Another source of support was the Black Sea Trade and Development Bank (BSTDB). The BSTDB has signed an agreement with the Austrian Development Bank (ADB) worth € 30 million to finance investment programs and projects in the agricultural, service and industrial sectors in the Eastern Partnership (EaP) countries.
SME Survey of the Social Research Center
In light of the current situation, the Center for Social Research conducted a survey to find out the initial impact on SMEs in the post-KOVID-19 period and to find out what they thought of the measures proposed by the government and to what extent they benefited from them. The survey is the first phase of the study.
Questionnaire method and details
Due to quarantine, the survey was conducted by self-administered method. The survey was sent to 199 entrepreneurs via email. A structured questionnaire was used for this study. In total, 41 questions were prepared. Some of the questions are designed to be informative for the next survey.
The questionnaire is designed to be easy to understand and answer. The survey, conducted from May 6 to July 2, 2020, was initially piloted. The pilot survey allowed to check whether the respondents did not leave the questions unanswered or were biased against certain categories of questions.
The questions are related to the direct impact of the pandemic and the government’s support policy (“Action Plan” approved by the Cabinet of Ministers). The questions focus on business risk indicators such as the level of business operations, the company’s income, employment, income, productivity.
Characteristics of SMEs participating in the study
The SMEs selected for this survey were selected from several business databases; tried to represent large groups. These groups (n = 199) covered three major sectors: (a) the service sector (72.36%), (b) industry (20.10%), and (c) the agricultural sector (7.54%). The table below shows the percentage of economic regions that respondents choose as their place of work.
Those who stood out in the survey
When we look at the changes in the work regime during the quarantine measures applied by the state, we see that 21.61% of respondents said that they have completely stopped their operations. The number of those who suspended their operations was 21.61%. 47.24% of SMEs said that they continue to work at a reduced pace, and only 9.55% at full capacity.
The following diagram shows us the initial impact of KOVID-19 on SMEs in Azerbaijan. The majority of entrepreneurs surveyed said that the pandemic had a negative impact on their business, while 4.02% said they did not feel any impact.
The results of the survey further show that the tourism (26%), restaurant and cafe sector (22%) and education sector (14%) are among the most negatively affected by KOVID-19 quarantine. The diagram below shows the percentages for the other sectors shown in the respondents’ responses.
For clarity, it should be noted that the answer to the question “Trade” includes clothes, household appliances, electronic and telecommunications equipment, vehicles, etc. products are intended for sale. The fact that entrepreneurs working in this field go shopping online helps to understand why this field is among the least affected.
91.46% of SMEs said that they had a negative impact on their income, which in turn affected fixed costs and salaries of their employees. On the other hand, 1.01% of respondents said they had a positive impact. The number of SME owners who reported no effect of KOVID-19 was 7.54%.
78.39% of respondents said they were aware of government policies and measures to support SMEs to minimize the impact of the KOVID-19 pandemic. The remaining respondents, 21.61%, said they were unaware of state support mechanisms.
As for the satisfaction with the government’s policy in response to the pandemic, 37.69% of SME owners said they were very satisfied, 35.68% were satisfied and 13.07% were dissatisfied. 2.51% of respondents said they had difficulty answering.
The survey also found that 94.47% of respondents need government support. Only 5.53% of entrepreneurs said they did not need any help from the government.
As for the tax incentives applied by the state (tax breaks and tax holidays), more than half of the respondents said they were positive about them. 20% said they were not aware of tax breaks. About 7% said they had a negative opinion.
Although the majority of respondents were positive about tax incentives (tax breaks and tax holidays), 64.82% said they did not benefit from them. The remaining respondents, 35.18%, said they benefited from government tax breaks.
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