How SMEs Can Bounce Back from the COVID-19 Crisis

Shops and restaurants are open for business, but customers are few and far between in this once-bustling district in Singapore. Photo credit: ADB.

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Governments must have a strategy that looks at SMEs at the enterprise level to help them survive in the new normal.


Small and medium-sized enterprises (SMEs), considered the backbone of many economies, have been badly hurt by the coronavirus disease (COVID-19) pandemic. Transport and border restrictions, social distancing, and lockdowns have disrupted supply chains, dampened consumer demand, and shrank cash flow. As a result, small businesses are unable to pay store rent, workers’ wages, suppliers, and creditors, creating a spiraling effect on households and the economy.    

Governments are now grappling with policies to support SMEs, which collectively employ an average of 60% of Asia’s workforce. In addition to general macroeconomic policies, a “bounce back” strategy that looks at the enterprise level is needed to help SMEs survive the pandemic and in the new business environment that will emerge afterward.

SMEs can also benefit from policies that promote the flow of goods and services within and across borders and that support their increased participation in regional and global supply chains.

This policy brief is based on presentations at the Policy Actions for COVID-19 Economic Recovery (PACER) Dialogues organized by the Asian Development Bank.

Five Challenges

The world is now facing an unprecedented crisis from COVID-19. What initially started as a health crisis has rapidly evolved into one of the worst economic crises in history. For many SMEs, the challenge is to hurdle, not just one crisis, but a series of crises—health, economics, and business—with stages that largely depend on the speed by which the government can contain the spread of the virus and jumpstart the economy.

Figure 1: Key Challenges for Micro, Small, and Medium-Sized Enterprises

MSMEs = micro, small, and medium-sized enterprises.
Source: Survey on the impact of COVID-19 by the Asia–Pacific MSME Trade Coalition, 31 March to 6 April 2020.

The first pan-Asian survey on the impact of COVID-19 on SMEs in the region, conducted by the Asia–Pacific MSME Trade Coalition from 31 March to 6 April 2020, revealed that the pandemic’s impact on small businesses has been immediate. According to the survey, these are the five major challenges that face SMEs:

  1. Lack of operational cash flow: Almost 50% of SMEs surveyed have less than a month or just a month of cash reserves.
  2. Low customer demand
  3. Business closure due to state lockdown policies
  4. Reduced opportunities to meet new clients
  5. Issues that entail changing business models and strategies and providing new products or services

Unless these issues are addressed through government policy interventions and other initiatives, many SMEs are in danger of closure. As it is, according to the Asia–Pacific MSME Trade Coalition, nearly one-third of SMEs expect to lay off 50% or more of their workers to survive.

Mitigation and Recovery Measures

Governments have started to put in place a wide array of measures to mitigate the economic impact of the coronavirus outbreak on businesses. Some have focused on more general policies that are intended to cushion the blow for the economy and for all businesses.

Many countries are also deploying a wide range of policy instruments to support SMEs and particularly the self-employed during this extremely difficult time. The immediate focus is addressing short-term liquidity. Such policies take various shapes, and here are some of the most common:

  • Tax Deferment. Income taxes, property taxes, excise duties, and other payments remitted by businesses to the government are deferred to ease liquidity constraints that SMEs face.
  • Credit. Government increases the availability of credit to SMEs using several approaches: direct lending through state-owned banks, reducing interest rates on special loan programs or relaxing monetary policy by the central bank, expanding the use of credit guarantee schemes, or extending grace periods on existing loans.
  • Wage Subsidy. Government covers partially the cost of enterprises in providing wage and income support for employees temporarily laid off, or for companies to safeguard employment.
  • Enterprise Pivot. Government encourages SMEs to adapt to the emerging business environment by “pivoting” or shifting to another business model or other products and services.

In addition, the government can also advise on how SMEs can weather the pandemic, manage their cash flow and their workforce, and provide other information that can guide them on the road to recovery.

Policy Implications

The economic impact of the pandemic on small businesses varies greatly, mainly depending on the speed of government response to the spread of the virus. As such, policymakers need to take into account and weigh the implications of the policy instruments they plan to deploy.   

Here are some of the pros and cons of each policy instrument:

Pros: The COVID-19 crisis struck just when businesses were due to pay their taxes in the second quarter of 2020. The tax deferrals by the government (usually by 3–6 months) during the lockdown period helped ease the pressure on cash flow.

Cons: As businesses were unable to operate during the lockdown period, they have less profit and thus have less tax payment to make. This adds fiscal pressure on the government and consequently reduces its ability to fund more relief and recovery programs for the sector and the economy as a whole. It will also lessen its ability to extend tax deferments or other concessions to further assist businesses.

  1. Pros: Extending direct credit, credit guarantees, or a grace period on debt payment enables SMEs to obtain working capital so they can stay in operation and pay wages.
    Cons: Fresh credit incurred, or deferred payment still have to be paid, potentially causing difficulty for the SME to repay at a later time. This increases the risk of having nonperforming loans, causing instability in banks and the financial system.
  2. Pros: Lower interest rates on borrowings reduces the cost of credit for SMEs and eases their liquidity position.
    Cons: Reducing interest rates may not effectively stimulate the economy if interest rates are already low. It might also just keep insolvent firms temporarily afloat.
  3. Pros: Extending a government credit guarantee encourages private lenders to assist SMEs as this reduces their credit risk.
    Cons: Enabling commercial banks to disburse the government loan subsidy may not be effective as banks tend to favor larger firms as less risky and view the transaction only from a profitability angle. The government needs to replenish the credit guarantee fund to sustain the scheme. It takes time to develop an effective credit guarantee scheme.

Pros: A government wage subsidy helps the SME keep its workers employed and earning wages. This in turn serves as social protection as it eases the pressure on other types of social assistance.

Cons: A wage subsidy is costly as it requires a large financial outlay for the government, which effectively becomes the “private sector’s salary paymaster.” Some countries are not prepared to administer the subsidy and this causes bureaucratic bottlenecks and delays in releasing the payout. The scheme is also not easy to administer in the case of enterprises in the informal sector.

Pros: The lockdowns have shown the government and SMEs the importance of pursuing the e-commerce agenda and digital technology, particularly in digital finance, online sales and delivery, and customer service. The pandemic also put to the test the agility of SMEs to change their business model, with some immediately redirecting their production to needed products (e.g., masks, personal protective equipment, ventilators).

Cons: Some countries are not ready to pivot to digital due to low ICT investment and poor connectivity.

Policy Implementation

It may still be too early to assess the effectiveness of the policy instruments that some countries have adopted as part of their bounce-back strategy to assist SMEs. However, here are some examples of how countries have implemented them: 

  • People’s Republic of China. Extension of the deadline for filing tax returns; lower value-added tax (VAT) on medical services, catering and accommodation services, some personal services, public transport, and on masks and protective clothing; VAT reduction from 3% to 1% on the cash accounting scheme for SMEs.
  • Republic of Korea.  Up to a 9-month extension for SMEs filing a tax return and reduced VAT for small businesses with annual turnover below 48 million won.
  • Indonesia. Income tax exemption for manufacturing workers making less than 200 million rupiahs per year. Waiver on 10% consumption tax on hotels and restaurants in 10 tourist destinations for 3 months.
  • Thailand. 300% deduction on salary payments made.
  • Japan. Considering a temporary consumption tax rate reduction from 10% to 5%.

  • Malaysia. Central bank provided 2 billion ringgit for SMEs loans through commercial banks, supported by a credit guarantee covering 80% of the loan value; also capped the interest rate on special loans at 3.75%.
  • Viet Nam. Banks to provide additional 285 trillion dong at preferential rates: 0.5 to 1 percentage point lower than current rates.
  • Cambodia. $50 million in low-interest loans to SMEs in agriculture through the Rural Development Bank.
  • Japan. ¥500 billion in lending to micro, small, and medium-sized enterprises (MSMEs) in its first stimulus package (increased to ¥1.6 trillion in the 2nd package).
  • Philippines. Loans of ₱200,000 per micro and ₱500,000 per SME after the lockdown.

Some developed countries (e.g., Australia, Canada, Singapore, Scandinavian countries, United Kingdom) provide businesses with 75% to 80% of workers’ wages who would otherwise be laid off.

Malaysia. Pivot to import substitution after trade restrictions disrupted the supply chain. The government is now promoting e-commerce to entice people to buy local products, enabling SMEs to earn and slowly embrace digital platforms. It is also increasing internet connectivity in rural areas and encouraging SMEs to tap the global market.


Whatever instruments they deploy, policymakers must ensure that vulnerable SMEs are not left out of the support net. When mapping out a bounce-back strategy, they must take into consideration the immediate implications of COVID-19 on small businesses as the outbreak unfolds, as well as challenges that will remain once the pandemic is contained, and recovery begins.

Here are some recommendations from policymakers:

Pandemic-induced trade restrictions are temporary and must not dissuade SMEs from tapping the global supply chain. The Sabah state government has been actively promoting exports of Malaysian products even during the lockdown. Trade officials, for example, visited Singapore to sell seafood directly before the lockdown. These trade ties encouraged Sabah’s aquaculture farmers to experiment with breeding and deep-sea fishing. As part of its import substitution strategy, the government also weaned farmers toward communal farming, even providing guidance on high-value crops to plant. It also enticed investors to come to Sabah and process local timber locally instead of making the state a mere raw materials supplier.

The crisis should further accelerate countries’ digital transformation and e-commerce agenda for global trade to flow. Prior to the pandemic, the Asian Development Bank has extended loans to help developing member countries increase financial inclusion. As a result of the crisis, it has modified its assistance to get more SMEs to utilize digital payments. In the case of the Philippines, digital finance is increasing competition in the financial sector and leading to wider access to funds. Countries must allow global financial technology firms to operate and spur innovation. Governments can also link up payment vendors with businesses and get more small businesses to connect to online platforms to spur trade and economic activity.

The so-called “new normal” should not lower productivity but rather increase it. The pandemic may have shrunk demand for some products in the international market. The challenge moving forward is sustaining the demand for products and creating new demand, as well as new markets. With digitalization, critical processes such as trade registration, inspections, screening, and payments, will be hastened.

The private sector must play a part in the bounce-back strategy. Businesses must assist their government on how the “new normal” could take place. They must propose standard procedures conducive to business operations.

Promote the growth of trade corridors. The “new normal” must lead to greater intra-regional trade as countries slowly relax their trade and border restrictions. Governments must help promote exports, increase internet connectivity, and shipping connectivity. In Sabah, the government is setting up a free trade zone to promote exports, as well as helping in marketing, branding, and selling the products online. 


Asia-Pacific MSME Trade Coalition. 2020. COVID-19 SME Impact Survey. “COVID-19 Impact Survey”. Asia Business Trade Association.

P. Vandenberg. 2020. Bouncing Back Support to SMEs for COVID-19 Recovery. Presented at the Policy Actions for COVID-19 Economic Recovery Dialogues of the Asian Development Bank. 8 July.

P. Vandenberg and M. Helble. 2020. Three Ways to Support Businesses and Their Workers during a Pandemic. Asian Development Blog. 3 April.


Paul Vandenberg
Principal Economist, Economic Research and Development Impact Department, Asian Development Bank

Paul Vandenberg is fascinated by the process of economic development and how some countries become rich while others remain poor. His interests include industrialization, human capital development, enterprise finance, and the labor market. He taught in the United Kingdom and India before joining ADB in 2010. He was seconded to the ADB Institute in Tokyo and later took temporary leave to teach in Thailand. He holds a PhD in Economics from the School of Oriental and African Studies in London.

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