Micro, Small, and Medium Enterprise Access to Finance Emergency Support and Recovery Project

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Micro, Small and Medium Enterprises (MSMEs) play an important role in the Lao economy, accounting for around 99 percent of registered firms, and the bulk of the informal economy, estimated to account for 30 percent of the economy. The contribution of MSMEs to GDP, estimated at under 20 percent, however, lagging that of SMEs in Thailand (40 percent), or Malaysia (32 percent). Most MSMEs are micro enterprises with fewer than 5 employees. Reinforcing the importance of MSMEs in the country, the 2013 Economic Census conducted by the Lao Statistics Bureau found that MSMEs accounted for 82 percent of total employment. MSMEs are therefore critically important for the livelihoods of the Lao people and improving the performance and prospects of the sector will be critical to minimizing socio-economic disruptions.MSMEs have been greatly impacted by economic disruptions resulting from the ongoing COVID-19 crisis. MSMEs face a sharp reduction in demand and income, as well as disruptions in supply chains, while future investments to ensure social distancing at the workplace will put additional strain on company finances. Tourism has basically come to a standstill in the second quarter of 2020, while a lockdown in April and May limited demand for other services and brought production in many firms to a standstill. According to a survey by the Lao National Chamber Lao National Chamber of Commerce and Industry (LNCCI) in May 2020 a significant percentage of firms expect to suffer large decreases in revenue, with 50 percent of firms seeing a more than 80 percent chance to permanently cease operations. Across the board, firms expect to lay off a large percentage of their workforce-see Figure 1. Among the hardest hit sectors are ‘accommodation and food service’, entertainment and recreation, and the education sector. In contrast, less than half of respondents from ‘Financial and Insurance Services’ industry’ expect a business failure. The WB financed SME Access to Finance Project has incorporated market principles to lines of credit to successfully demonstrate demand for credit at market rates. The project aimed to provide long term funding sources for commercial banks provided a long-term funding source to commercial banks to stimulate lending to SMEs at longer tenors. Four participating commercial banks on lent the funds to MSMEs at market-determined rates. The line of credit is fully disbursed, portfolio at risk has been low (but increasing due to the COVID-19 crisis), and banks have successfully applied World Bank safeguard instruments. The project also invested in building capacity in commercial banks to develop MSME lending strategies and provided technical assistance to SMEs to strengthen management skills, improve financial management systems and develop proper business plans and accounting systems. Government is keen to pursue additional programs to support the ability of SMEs to survive and recover from COVID-Interventions need to address banks’ risk-averseness to lend to MSMEs given that economic disruptions have reduced cash flows, account for economic uncertainty and its impact on MSME performance and avoid increasing financial sector vulnerabilities that could contribute to a crisis. A well-designed line of credit and risk sharing facility could achieve government’s objectives to preserve MSMEs while upholding commitment to financial stability. Leveraging the existing SME A2F project offers an opportunity to build on a well-performing project to deliver relevant support to SMEs while ensuring that banks are able to charge a sustainable interest rate and have access to a risk sharing facility. The project aims to increase enhance access to finance for MSMEs in the context of the COVID-19 emergency and recovery. It will achieve this through a combination of lines of credit to MSMEs (for emergency and recovery phases of the crisis), intermediated through select financial institutions, to MSMEs and technical assitance to support government establish a Partial Credit Guarantee (PCG) facility to backstop bank lending to MSMEs. The project will also invest in strengthening the capacity of financial institutions to implement crisis management strategies and develop MSME finance business strategies, technical assistance to support MSMEs obtain access to finance, and capacity building to DOSMEP to strengthen its ability to forumulate and implement policies to promote SME development. While the project is focusing on emergency response to the crisis, it will also have a longer-term impact on the economic recovery by providing a flexible approach to addressing financial needs of the MSMEs during the crisis and in the recovery phase.