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The Policies of Neglect: SMEs and COVID-19 in Jordan Perspectives Blog Series


By Ramsey Mansur

In order for the majority for SMEs to survive the COVID-19 induced economic crisis there is no alternative to injecting liquidity into the economy. SMEs in Jordan have always found it difficult to access funding from traditional sources of finance, and with added instability this problem is exacerbated. Banks lend safely in Jordan (large companies, purchase of real estate, and to government), consequently SMEs are trapped between cautious lending on behalf of banks and cautious demand on behalf of consumers.

SMEs will be forced to minimize costs (which will have an abysmal effect on employment) and need to obtain funding to avoid bankruptcy and government measures in this regard have been lacking. While the initiative of extending soft loans with a one-year grace period by the Central Bank of Jordan (CBJ), JD 500 million worth, is a theoretical step in the right direction, is it enough if it only constitutes 1.7% of nominal GDP in 2018? What has been disclosed in terms of whether it is being used? While transparency has been raised like a banner by the government, there is little in the way of being able to measure the success of the initiative as no figures have been made available. 

Even in comparison to other countries who have instituted similar initiatives, this is not much in terms of a stimulus package. As a point of comparison let us take Thailand; the total funding made available by the CBJ amounts to USD 704 million, entailing roughly USD 70.4 per capita and constituting approximately 1.7% of GDP, while a similar initiative in Thailand is USD 58 billion, or USD 828.57 per capita and constituting 11.5% of GDP. There are of course differences between the two countries, but it goes to show just how limited the intervention in Jordan is. However, even the provision this small amount has faced issues. The necessity of expedience in the response has been shunted to the wayside by long and difficult processes and with approvals being in short supply. Even larger companies are facing severe difficulties in accessing this fund as requirements are more stringent than the usual. In other words, while the intervention has been propounded as a step forward, in fact it has been ineffectual.

The decrease in the compulsory reserve ratio on deposits with banks from 7% to 5% in attempt to inject liquidity has proven a lacking policy, as banks have characteristically held on to the money in anticipation of what is to come. While they decreased the compulsory reserve ratio, there is nothing extending beyond that to ensure the liquidity reached the market, consequently this policy is also ineffective. Furthermore, the CBJ has the legal capacity to force private banks to set certain interest rates, it has rather given them the choice to. Lowering interest rates is basic macroeconomic policy to stimulate economic growth through decreasing the cost of borrowing. However, without forcing interest rates lower, the CBJ has in effect done very little. Moreover, the recent government borrowing from local sources might exacerbate safe lending, as with no end in sight in regards to the effects of the pandemic or the governments financial issues, banks become incentivized to play it safe and wait for safe lending opportunities.

Furthermore, value chains for a large portion of sectors extend beyond Jordan, in both required inputs and markets. With little in the form of local clusters, this is especially important for Jordan. For instance, industry requires outputs from outside and IT caters to customers outside. Without sound and extensive financial support, we can expect these industries to suffer. Moreover, we have a large re-export sector, and are highly dependent on imports for consumer items and caloric intake, with ongoing shutdowns in other countries, this will become a major issue. It would be hoped this would be an opportunity for local suppliers, but without the requisite finance to create economies of scale this will most probably pass us by.

Jordan would risk the shutdown of SMEs in large numbers if effective action is not taken in a timely manner. SMEs were already in a precarious position in a depressed economy and laboring under a skewed and de-incentivizing tax regime; and this pandemic is bringing the institutional deficiencies of Jordan even more to the fore. SMEs are accepted as a main economic driver and significant source of employment. The consequent effects of not providing or facilitating access to finance would be reverberate at the economic, social, and political levels of the Kingdom. Furthermore, without support, there is the increased risk of SMEs joining the informal sector, and all the ills associated with it. Work conditions, social security of employees, wages could all deteriorate as more actors are forced into informality. Prior to the pandemic, Jordan already had a substantial informal sector, and with little in the form of access to finance as an incentive to remain formal, it may be expected more small businesses join the informal sector. 

Specific and separate measures should be made available women owned SMEs. The multiple roles played by women in society entails an added risk to these businesses. For instance, school closures have necessitated home schooling become common practice leading to, for the most part, an added responsibility on women and they will be the ones most probably forced to stay home to care for the children in the coming times. In many ways, existing issues facing women in regard to work and the care economy become more exaggerated as Jordan quickly cycles from an economic depression to a health crisis to an economic crisis. Consequently, measures must be taken to ensure that women owned businesses do not flounder as a result of the impending economic situation which would have dire social and economic consequences. Women owned SMEs, like others, have always found difficulty in accessing finance, and this lack access must be rectified. A fund, with streamlined procedures, should be created specifically to provide women owned businesses with loans at preferential rates with a 12-18 month grace period.

Women owned businesses should be able to access this fund, as well as any others. These loans are to allow women owned businesses to maintain operations during an economic crisis and thereby maintain what little we have in women economic participation and employment rates. Why a specific fund for women owned businesses? As shown above, these businesses already start at a disadvantage that is outside the realm of economic competition, and this disadvantage must be nullified to allow for an equal playing field. Societal, cultural, and familial roles put women businesses at an added risk that must be mitigated. What little progress has been made in recent decades in regard to the economic and social empowerment of women should not be let to slip with COVID-19 as an excuse.

The opening of the economy has come with stipulations and conditions necessary for the safety of Jordanians. However, as with any conditions and safety requirements, these come at a cost. While the cost of adjustment may be born by large companies, the same cannot be said for SMEs. Even large however should be provided with incentives to make the transition lest it come at a cost to employment levels. Even at the basest level, such as the provision of personal protective equipment, masks and gloves, the cost would be substantial on SMEs; especially when drawn out over months and perhaps years. But protective equipment is the least of the conditions, what about space requirements? How should SMEs follow these requirements with already limited cash flow problems existing either prior or due to the pandemic. Social distancing, much like environmental regulations, will pay off, however it does come at a cost, and assistance and incentives to transition to adhere to safety regulations are a necessity. Otherwise, in an already depressed economy that has not recovered from the Financial Crisis now over a decade removed, added costs and cautious demand will translate into either closures, increased unemployment or both.