Regional : Supporting Recovery by Micro, Small, and Medium-Sized Enterprises in the Pacific from the Effects of the COVID-19 Pandemic

Finance / Small and medium enterprise finance and leasing

Pacific economies have been severely impacted by COVID-19 pandemic. ADB estimates the losses from COVID-19 pandemic to range from 6.4% to 9.7% of the global gross domestic product. The losses could be higher in Pacific DMCs due to their remoteness, small size, wide geographic dispersal, narrow economic base, and exposure to disasters triggered by natural hazards. The ability of most Pacific DMCs to cope with multiple shocks is limited by weak capacity and a lack of resources. The health of their economically vulnerable and poor populations is at risk, as health infrastructure is inadequate to respond to the pandemic. Recognizing this, Pacific DMCs moved decisively to restrict international and domestic travel. These restrictions, combined with the introduction of physical distancing measures, helped Pacific DMCs contain the pandemic but negatively affected tourism and trade. Given the decline in tourism and trade, ADB projects an average economic contraction of 6.1% across all Pacific DMCs in 2020. Although most Pacific economies are expected to start recovering in 2021, their economic performance is not likely to recover to pre-COVID-19 levels in the short-term because of uncertainties related to the pandemic and its anticipated prolonged impact on businesses and employment levels.

MSMEs have been particularly impacted across Pacific DMCs and lack the financial capability to withstand the effects of a prolonged economic downturn. They are critical to employment and livelihoods but lack the capacity to diversify or consolidate operations. In Asia and the Pacific, MSMEs generate 42% of economic activity, and their closures will have a long-term impact on economic outputs and employment. About 89% of businesses in Pacific DMCs, most of which are MSMEs, reported adverse effects from the pandemic, and 91% faced reduced revenues. The economic disruption caused by the pandemic has also affected access by MSMEs to supply chains and markets. By August 2020, 31% of businesses had closed (30% temporarily and 1% permanently), and 36% reported a partial reduction in operations.

With support from development partners, most Pacific DMCs have provided immediate financial support to MSMEs to respond to the pandemic. While the designated MSME agencies in respective Pacific DMCs have supported their governments in implementing these support measures, they acknowledged lacking capacity and tools to prepare for, and support, the post-pandemic recovery of MSMEs. Apart from the short-term recovery, most Pacific DMCs need to enable the legal and regulatory environment to support the operations of MSMEs. Inefficiencies in the regulatory and administrative procedures, including complicated tax administration, have resulted in high costs to start, operate, and close businesses. COVID-19 is changing business dynamics, and designated agencies have identified the need to review and adjust legislation to suit MSMEs' needs in the post-pandemic period. Many Pacific DMCs have supported MSMEs, including those in the informal sector, through programs under respective ministerial plans and specific sector policies. However, these programs are not integrated at the national level to support the formalization and development of MSMEs, and most MSMEs continues to operate as informal enterprises. The informality of MSMEs has limited their access to broader entrepreneurial support, development programs, and financing. Inadequate data on MSMEs has also been identified as a significant challenge in Pacific DMCs. Supporting MSMEs in a manner that extends beyond recovery and gives them incentives to formalize require structured government support that accelerates needed reforms to create an enabling business environment.

MSMEs in the Pacific have limited preparedness for a protracted economic downturn and lack business capabilities necessary to adapt the environment created by the pandemic. It has also accentuated their access to finance by stressing the income levels of MSMEs. The pandemic disproportionately affected women-owned businesses. MSMEs owned by women operate under the same regulatory, institutional, and pandemic-related conditions as those owned by men. Still, they must overcome additional gender-specific barriers to cope with disruptions caused by COVID-19.

Recovery of COVID-19-affected MSMEs sustained and their vulnerability to prolonged economic downturn reduced

Capability of MSMEs to recover from the effects of the COVID-19 pandemic and grow in the post-pandemic period improved

Enabling environment for recovery and development of micro, small, and medium-sized enterprises strengthened

Micro, small, and medium-sized enterprises access to business development services and finance improved

Virtual inception missions with all six participating DMCs were carried out between July to September 2021 to confirm MSME recovery needs and priorities. The consultations also helped ADB to develop the TA work and implementation plan.

Once the borders opened for international travel, in-country consultations missions were fielded to Fiji, Samoa, and Cook Islands from July to November 2022. Consultation mission to Solomon Islands was fielded in February 2023. Consultation mission to Vanuatu is scheduled to be carried out in April 2023, followed by in-country mission to Tonga at the end of second quarter of 2023.

As of March 2023, the TA implementation progress across the six countries varied. 73 micro, small and medium-sized enterprises (MSMEs) have been approved and provided direct business development services (BDS) by the National Business Advisor. This meets 49% of the total of 150 for the life of the program (36 are women-owned or managed MSMEs).

The MSME Development Expert undertook individual missions to the Solomon Islands and Tonga to build MSME pipelines for direct BDS.

The Gap Analysis/Transition Roadmap support of the Sugarcane Growers Fund was concluded in October 2022 with the in-person presentation of the Final Report to the Ministries of Sugar and Economy (now Ministry of Finance, Strategic Planning, National Development, and Statistics).

A situational analysis of access to childcare was completed for the Cook Islands. The report has been shared with the Cook Islands Ministry of Internal Affairs.

Inputs were provided to the Central Bank of Samoa (CBS) on the draft Moneylending Bill 2020, which the CBS Assistant Governor well received.

An evaluation of the COVID-19 facilities launched to assist the MSMEs in the Solomon Islands through the development bank was completed and shared with the relevant stakeholders, including the Development Bank of the Solomon Islands.

Drafting of the new Strategic Plan for Business Assistance Fiji (BAF) to position it as a key BDS resource is on-going.

Consultants: To be selected and engaged by ADB

QCBS (80:20) - Firm (70 person-months international, and 100 person-months national consultant services)$2.20 million

Individual selection- National Project Support Consultant (30 person-months)$0.35 million