Panel Study IV: Impact of COVID-19 on Small- and Medium-Sized Enterprises in Iraq - June 2020 to June 2021

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SMEs continue to slowly recover from the initial economic hardship brought on by the COVID-19 pandemic. Employment numbers and revenues continue to increase among surveyed SMEs, but they remain below pre-pandemic levels.

As of 24 August 2021, almost two million cumulative confirmed cases of COVID-19 and 20,262 deaths had been reported in Iraq, representing a fatality rate of 1.1 per cent.1 After the first COVID-19 case in late February 2020, the Iraqi government restricted mobility by implementing lockdowns, curfews, school closures, and restrictions on businesses and travel into and within the country. These initial measures had relaxed by September 2020, which likely allowed for some level of economic recovery by June 2021.

The United Nations’ International Organization for Migration (IOM) in Iraq, Food and Agriculture Organization (FAO), and the International Trade Center (ITC) jointly conducted a panel study following the same 893 small- and medium-sized enterprises (SMEs) in Iraq. The businesses were surveyed in four rounds between June 2020 and June 2021.
The recovery from the economic slowdown produced by the COVID-19 virus has been sluggish in the surveyed SMEs.

About one out of four of the businesses across the sectors included in the study—agriculture, automotive, carpentry, chemical, construction, education, food production, general trade, hospitality, manufacturing, medical services, general services, materials (metal and plastic), technology and textiles—are very concerned about recovery from the COVID-19 crisis.

The principal strategy to reduce the pandemic’s spread in Iraq involved a range of mobility restrictions, with limited assistance available to firms. Only three per cent of the SMEs in Iraq reported receiving aid from the government or non-state organizations. About half of the firms that did not receive COVID-19-support said they were not aware of such programs, while others mentioned that the available assistance did not meet their business’s needs.

According to SME owners, when asked hypothetically what kind of government support would help them the most to cope with the COVID-19 crisis, the top answers were financial programs (58%), support for self-employed persons (46%), and rent subsidies (37%) in June 2021 (Round 4). Reduced mobility restrictions, the most-desired government support in June 2020 (Round 1, 58%), is the least-desired approach in June 2021 (Round 4, 5%), reflecting the relative relaxation of many such restrictions since the original round of surveying.

In June 2021 (Round 4), the surveyed SMEs have increased their marketing efforts (31%), requested leniency in paying financial responsibilities (31%), and sourced from new suppliers (24%) to cope with the COVID-19 crisis. Although there was an increase of six percentage points in online services between June 2020 (8%) and 2021 (14%), managing technology is still challenging for the small firms in the sample.2 Teleworking went down from six per cent to three per cent between Rounds 1 and 4. In June 2021, only 16 per cent of the firms in the sample reported taking steps such as raising additional capital to face future crises.

In all rounds, the mobility restrictions to slow the spread of the virus reduced access to inputs (reported by 15% of firms in the sample) and lowered domestic sales to consumers (reported by 64% of firms in the sample). SME owners in education and technology are the most affected by the access to inputs (reported by 33% of firms surveyed). Firms in general trade were the most affected by the reduction in sales (reported by 71% of firms surveyed). The surveyed SMEs also reduced the demand for inputs to produce final goods (reported by 40% of firms surveyed) and they saw a decline in the supply of inputs (reported by 33% of firms surveyed).3

The health crisis created by COVID-19 also increased other problems such as clients not paying bills (46%), reduced investments (36%), and temporary shutdowns (40%).

Carpentry and construction are the sectors with the highest delay in payments (57%). Education and technology werethe sectors with the largest reductions in investments, and temporary shutdowns (60% each). On the contrary, food, agriculture, and hospitality are the sectors less affected in these three categories.

The COVID-19 crisis and movement restrictions resulted in a drastic reduction in employment opportunities, revenues, and production among the surveyed SMEs. However, the labor market has slowly recovered after the pandemic outbreak. On average, SME owners had two fewer workers in June 2020 (Round 1) than in February of the same year (pre-COVID-19). The difference shrunk to only one employee fewer by June 2021 (Round 4) compared to February 2020.4 As in other countries in the region, more men than women are participating in the labor market. Before the pandemic started, among surveyed SMEs the gender ratio among employees was 1 woman per 14 men. The gender ratio among SMEs in the study reached 1 woman per 20 men by August 2020 (Round 2), suggesting a widening of the gender gap during this period. Although the gender ratio declined to 1 woman per 13 men in December 2020 (Round 3), it increased again to 1 woman per 16 men in June 2021 (Round 4).

The switch from laying off employees as a coping mechanism to taking on informal debt could have contributed to the recovery in the labor market. The principal informal channel is borrowing money from friends and family, reported by 41 per cent of business owners in June 2020 (Round 1) and by 38 per cent of business owners in June 2021 (Round 4). Between December 2020 (Round 3) and June 2021, 80 per cent of the SME owners who indicated they had taken on debt had done so for reasons related to the COVID-19 crisis.

By the end of the study period in June 2021, SMEs’ average monthly revenues still hover at around half of pre-COVID-19 levels. After the original recovery in earnings between May and July 2020 (of 44%), the increase in revenues has been modest 4 The percent decline in the number of employees between February and June 2020 is 35 per cent and between February 2020 and June 2021 is 19 per cent. during the last year. The surveyed SMEs had a small reduction in revenues between July and August 2020 and April and May 2021 (2% reduction respectively during each period).

Since the beginning of the pandemic, the risk of permanent shutdown of businesses decreased significantly. The first survey of SMEs in June 2021 (Round 1) found that 63 per cent of businesses were at risk of shutting down. After the relaxation of lockdowns and curfews in September 2020, 37 per cent of SMEs were reporting this risk (Round 2). By December 2020 and June 2021 (Rounds 3 and 4), this rate reduced to 28 per cent of surveyed SMEs. Among businesses reporting a risk of shutdown in June 2021, 28 per cent said the shutdown could be within the next six months or more and about half of the firms did not know when the permanent shutdown could occur.
The COVID-19 crisis has negatively impacted the production and sales of the surveyed SMEs. Between December 2020 and June 2021, only firms in Kirkuk did not see a decline in production. On the contrary, about half of the firms in Kerbala and Missan had a decline in sales, followed by firms in Baghdad and Erbil (reported by 34% of firms in each location).

The decline in production and sales varied among sectors, ranging between an average of 50 per cent at the lowest and 80 per cent at the highest. Even among one of the least affected sectors during the study, food and agriculture, 98 per cent of firms reported a decrease in production between February (pre-COVID-19) and June 2020 (Round 1), 83 per cent of firms between June to September 2020 (Round 2), and 68 per cent of firms between September with December 2020 (Round 3), and 64 per cent between December 2020 and June 2021 (Round 4). Additionally, according to the 4th round, 19 per cent of firms in the food and agriculture sector were at risk of shutting down, 38 percentage points less than Round 1.