THE TIMES KUWAIT REPORT
More than a year and a half into the ongoing COVID-19 crisis that has left a global trail of physical and fiscal casualties, the world is only beginning to show signs of limping back to normalcy. Abatement in the virality and intensity of the global pandemic in many places, and rapid uptake in national vaccination drives, especially in many developed countries, has led to the timorous prognosis that the worst of the pandemic could now be behind us.
On the economic front, vestiges of revival and growth that are visible in several markets have given rise to hope that the COVID-19 fueled global recession, described as the deepest since the end of World War II, is finally drawing to a close.
In Kuwait, at the onset of the global pandemic in March 2020, the government imposed strict curbs on mobility of people and business activity that extended for over five continuous months, arguably one of the longest business closures in the world. Impact of the prolonged restrictions had a profound impact on business activities and on the country’s overall economy.
While large enterprises with deeper pockets were able to tide over the health crisis and emerged relatively unscatched from its economic repercussions, the same cannot be said of Small and Medium Enterprises (SMEs) that constitute the majority of businesses in the country. To say that many of these smaller outfits were devastated by the economic impact of the health crisis would be an euphemism. A report by the Higher Steering Committee for Economic Stimulation, found that the initial six months of restrictions led to a drop of nearly 80 percent in revenues of over a quarter of SMEs.
While the exact number of SMEs in the country varies based on the definition of which businesses qualify as small or medium enterprises, a report by Kuwait’s leading asset management and investment banking firm Markaz puts the number at around 25,000 to 30,000 firms. The figure, which is based on the definition of SMEs as entities that employ less than 50 Kuwaiti people and have an asset base of less than KD500,000, and revenues of less than KD1,500,000, would place nearly 90 percent of Kuwait’s businesses in the SME category.
Given the extent of the sector, both in its span across the country and in its depth with multiple sub-sectors, SMEs are one of the most efficient economic models to accelerate the pace of economic and social development in the country. They improve the productivity of the labor market, and also help diversify the economy away from its overreliance on hydrocarbon resources.
Moreover, since they require only a relatively small amount of initial capital to start, SMEs could serve as cost-effective incubators for hiring, training and developing skills of young nationals. Incidentally, all these attributes that SMEs help to drive are the same goals that the government professes it needs to undertake in order to take the country forward on the path of progress and development.
Considering their importance in supporting the government’s plans to diversify the economy, increase engagement with the private sector, and encourage entrepreneurship among young nationals, it would appear axiomatic that the government would encourage the growth and development of a strong and vibrant SME ecosystem in the country. However, other than setting up the National Fund for SME Development (SME Fund) in 2013, and the occasional support to the sector, the authorities have by and large ignored SMEs.
The SME Fund was established with the aim of supporting entrepreneurship among young nationals, combating unemployment, and enabling the private sector to drive economic growth. The Fund, with a KD2 billion corpus, was intended to support the growth of a dynamic SME ecosystem in the country. However, figures show that from 2016 until the suspension of business activities due to the COVID-10 crisis, the National Fund had disbursed funds to only around 870 SMEs at a cumulative cost of around KD150 million, or around 7.5 percent of the Fund’s KD2 billion capital.
When the unprecedented economic and social repercussions from the COVID-19 crisis left most SMEs struggling for access to liquidity, to repay loans and to avoid bankruptcy, the government’s response was tepid at best. Most SMEs have limited cash reserves — one study found that nearly two-thirds of small businesses operating in the country have a liquidity not exceeding KD10,000. The sudden loss of revenue brought on by consequences of the health crisis, along with simultaneous demand and supply shocks, and the decision by authorities to introduce a total shut-down of non-essential businesses, had an acute impact on the cash flow of many SMEs.
The production and demand loss, as well as sustained bottlenecks in supplies also affected the ability of SMEs to bounce back and resume work when the government began relaxing the restrictive measures following recent improvements in the epidemiological situation. But, by then, thousands of expatriate workers had returned to their home countries due to job losses, lack of salaries amid work suspensions. This severe labor shortage that continues unabated, added to the woes of SMEs and further curtailed the relaunch of businesses.
At the start of the pandemic in late March 2020, amid early signs of its impact on local business activity, the Cabinet announced decision 455/2020 to provide loans to SMEs on concessional terms through the National Fund for SMEs and local banks. The government also relieved SMEs from having to pay their social security contributions for a period of six months. The soft loans and flexible repayment terms from banks were intended to help businesses with their working capital requirements, including paying rents and salaries and other contractual obligations. The Central Bank of Kuwait (CBK) also extended incentives to banks to lend to SMEs by reducing the risk weights for SME loans.
The law provided SMEs with the opportunity to apply for a maximum loan value of KD 250,000 with a tenor of a maximum of four years at 2.5 percent interest rate. The government agreed to cover 100 percent of the interest for the first and second year, and 90 percent for the third year, as well as 80 percent for the fourth year, with the balance being borne by the borrower. When the initial response from banks did not prove to be sufficient, the government announced that along with paying the interest on behalf of the SME clients, it would also guarantee 80 percent of the loan offered by banks.
However there were several conditions attached to the support granted to SMEs, including that the loans would be granted only to existing clients of banks and that the business should be in a value-adding sector to the national economy. The business also needed to be operating profitably before the COVID-19 crisis, and should not have defaulted on any of its loan obligations. In addition, the SME operation had to be capable of creating national employment and needed to belong to a sector that has been affected by lack of mobility due to the crisis.
The law also stipulated that the borrower not distribute any profits as dividends during the period of loan, or use the loans to repay existing debts.
As expected, many SMEs found these terms onerous and accordingly there were few takers for the so-called ‘soft’ loans. A report from the CBK shows that as of June 2020, local banks approved only 199 loan requests worth a total of around KD110 million. Moreover, many SMEs were not interested in taking on additional loans, what they wanted was compensation from the government.
The government for its part has made quite clear that its current fiscal position preempted any discussion on free handouts. The authorities also noted that an amendment to Kuwait’s bankruptcy law, had now freed SME owners from the threat of imprisonment from debt defaults, which should bolster the confidence of business owners.
But SMEs point out that while it is true that they cannot now be imprisoned, there is nothing in the law that prevents seizure of their assets or insolvency if they cannot settle their debts.
In the absence of any serious attempts to mitigate the plight of SMEs, Kuwait Economic Society (KES) presented a public policy initiative early this year aimed at resuscitating the business environment in the country. Describing the policy paper as a catalyst in helping revive the SME sector, and a realistic, viable solution that can be implemented by policymakers, the Chairman of the Board of Directors of Kuwait Economic Society, Abdul Wahab Muhammad Al-Rasheed, said the paper had become necessary in the face of inaction by both the executive and legislative branches of government.
The KES paper proposes the setting up of a grant-based program labeled Ina’ash SME Fund that could offer relief to businesses impacted by the health crisis, while also strengthening the existing SME ecosystem. The fund calls for the establishment of a Special Purpose Vehicle (SPV) for a period not exceeding two years and with a capital of KD125 million, to be disbursed as grants to SMEs.
The fund would cover operational expenses, waive several government duties and fees, and commit the business to trade with other benefactors of the fund. The fund recipients would also be obliged to become part of a more effective online procurement program, and share data to promote further studies and research on the SME sector in the country.
The corpus for the fund would be provided through long-term bonds issued by the Central Bank of Kuwait, and by the state’s financially independent and successful entities such as the Public Institution for Social Security (PIfSS), and Kuwait Petroleum Corporation (KPC). Funding would also come from the Kuwait Fund for Arab Economic Development and the Arab Fund for Economic and Social Development, both of which already provide concessional loans and grants to developing countries around the world.
Commenting on the policy paper, Member of the Board of Directors and Head of the Public Policy Committee at KES, Muhammad Bader Al-Jouan said that implementing the recommendations of the paper to help out SMEs, would contribute to the government’s goals of reviving Kuwait’s economy. It would help diversify the economy away from its overdependence on oil income, provide gainful employment to national youth, and increase private sector participation and contribution to the country’s GDP. Urging decision makers to think about the cost of their inaction to the state budget and its recurring deficits, Al-Jouan added, “We believe that failure to properly address the [SME] situation will incur a heavy cost in the long run.”
However, more than six months since the publication of the paper, the plight of many SMEs continues to fester with no apparent solution in sight. Even if an eventual formula is found to assist businesses impacted by repercussions from the COVID-19 crisis, it is obvious that SMEs in the country, especially those run by young entrepreneurs will have to find realistic solutions to their problems on their own terms.
Analysts suggest that to begin with, re-reading the 101 on entrepreneurship should help SME owners revive their businesses. For instance, they should pay more attention to their finances by monitoring their financial position and cash flow on a continuous basis. They should pay more attention to their receivables, and bring sharper focus on their revenues by embracing digitization of their business and operating on omni-channels.
In addition, they will have to reevaluate their non-discretionary expenses with the aim of reducing operational costs, and avoid as far as possible spending on non-essentials not deemed necessary to the growth and development of their business. They could also strengthen their financial flows by considering financial bootstrapping methods such as joint utilization, inventory minimization, and limiting accounts payable.
Finally, they will have to find financing away from traditional funding sources. They could turn to external investments, including through crowd-funding, angel investments, venture capitals, or other alternate sources of funding. Or if they are reluctant to take on external investors, they could try outside sources that provide subsidy financing, or even exchange ‘sweat equity’ shares, which are given at a discounted rate to stakeholders in the business who contribute with their time and labor rather than monetarily.
Rather than wait for rescue packages or handouts from the government, SME owners need to examine the various options currently available to them and try to realize opportunities that arise from prevailing challenging circumstances. They also will need to make incremental improvements to their business on a regular basis in order to make it a lean and more efficient enterprise.
But to do all this, they first need to understand the core competencies of their business and focus on this. And, if this model is no longer proving viable, they should not shy away from deciding to restructure operations or even redefine their strategies. Adapting to change and moving with change, repeatedly if needed, should be the mantra for young entrepreneurs going forward.