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Small Business Is Bleeding in the Pandemic: Evidence and Policy from Bangladesh

Co-Author:  Monzur Hossain

Small businesses in Bangladesh are usually started out of necessity and operate informally. They generally lack access to bank credit, possess little capital, and sell their output locally. The very nature of these small businesses makes them extremely vulnerable to the shock of COVID-19.

As of the end of June, a total of 145,483 cases of COVID-19 had been identified in Bangladesh, with 1,847 people having died. Cumulative case per million population in Bangladesh are slightly lower than in Pakistan, but much higher than in India, as shown in Figure 1. Recent trends in the daily number of cases suggest that the country is still far from slowing down the pandemic. The economy is thus in for a difficult time ahead.

In Bangladesh, micro, small, and medium enterprises (MSMEs) contribute about 25% of GDP, comprise over 95% of industrial units, and provide 86% of industrial jobs. In 2019, there were 1.3 million SMSEs responsible for about Tk. 400 billion a month in sales and Tk.60 billion a month in wages. These numbers give us a rough idea of the potential losses of MSMEs due to lockdown under the pandemic. Many MSMEs have been forced to stop production even as they continue to incur costs in the form of wages, utility bills, rent, etc. Without assistance, most will not be able to absorb these costs beyond one month into the shutdown.

To get a sense of expectations regarding losses within SMEs, a survey was conducted encompassing 375 businesses and 365 workers. The survey was carried out by telephone from 26 April to 10 May 2020.The sample was drawn from 15 regional clusters mapped into 5 industrial sectors: electrical, light engineering, and plastics; leather processing and goods; garments; agro-processing; and handicrafts.

Survey results were presented by the authors at a webinar sponsored by the Bangladesh Institute for Development Studies. The summary finding is that SME owners expect revenue reductions in 2020 relative to 2019 to reach 66% on average. As shown in Figure 2, expected revenue losses vary by industrial sector and by enterprise size measured in number of employees. The most severely impacted groups, with expected revenue losses of more than 80%, are large manufacturers in the leather sector and small operators in the agro-processing sector. Medium and large operators in agro-processing, by contrast, expect the lowest losses at about 30%. Their relatively strong expectations presumably derive from demand for food products remaining resilient through the pandemic. That small agro-businesses anticipate being hit so hard may reflect supply and marketing disruptions. Leather, garment, and handicraft businesses generally expect revenue reductions of 60% or more. These are sectors in which purchases are more discretionary, with demand thus likely to fall. In the electrical, light engineering, and plastics sector, expectations are for revenue losses of around 50%.

For many businesses, continued viability is in question: 41% fear they will have to close if the shutdown continues for two more months while 48% imagine they will survive but with huge losses. Unpaid receivables are a problem for 73% of firms with little hope of recovering the money soon. At the same time, 75% report unsold inventory due to the shutdown. When the economy does emerge from shutdown, supply chain disruptions are expected to cause delays of a month or so in getting back to full production. As of late Arpil or early May, salaries for March had been paid either fully or partially in 98% of cases. However, about two in three workers doubted they would be paid in May. 

In support of MSMEs, the government on April 5, during the second week of lockdown, declared a stimulus package of Tk. 200 billion. Support to businesses will be delivered in the form of bank loans at 9% interest with the government providing a 5% interest subsidy. However, since only about 30% of MSMEs have access to bank finance (BIDS survey 2017), implementation of this package will pose a challenge.

For effective implementation of the stimulus package with a view to the distress that MSMEs are under, we offer the following ten recommendations.

  1. The stimulus should consist of three components: an interest waiver for existing MSME debt; debt relief amounting to 30% of the stimulus loan; and for the remaining 70% a government interest subsidy at 7% rather than 5%.
  2. A time frame for the stimulus implementation and loan repayment should be specified: for example, implementation to be completed in 3 months with loan repayment to be made over three years.
  3. A one-year moratorium on interest and principal payment could be granted to firms in distress.
  4. Identifying and targeting MSMEs for stimulus loans is complicated. Bangladesh Bank should take the lead and could coordinate with the SME Foundation and the Bangladesh Small and Cottage Industries Corporation (BSCIC) which manages 78 industrial estates for smaller firms.
  5. Default is a big concern for banks in managing any credit-based package for MSMEs. Credit guarantee is not recommended considering the record of non-performing loan culture in Bangladesh. Rather, the modalities of the Credit Wholesale Program of the SME Foundation (group-based, collateral-free and guarantor-free lending) can be adopted by the banks to contain the default rate
  6. Since 50% of MSMEs get financing from non-government organizations (NGOs) or micro-finance institutions (MFIs), it is important that these entities be involved in implementing the stimulus. The Palli Karma-Sahayak Foundation, a quasi-government network of NGOs/MFIs, can lead this effort. Bangladesh Bank’s refinancing window can be used here.
  7. The loan amount should be earmarked for wage payment and capital financing. Given our capital/labor ratio estimates for MSMEs, 60% of lending can be allocated for wage payment and 40% for capital financing. This constraint will deter employee retrenchment and layoff.
  8. Developing a database of MSMEs is important for managing implementation of the stimulus package and ensuring needed support services. A tripartite collaboration between the Bangladesh Bureau of Statistics, the SME Foundation, and the BSCIC may be sought for this.
  9. A one-stop service window is needed to provide MSMEs with all necessary support (finance, business, technical assistance) during the pandemic.
  10. Apart from the financial stimulus package, exemption from value added and income taxes may provide further relief for MSMEs.


Co-Author Monzur Hossain is a Senior Research Fellow at the Bangladesh Institute of Development Studies, Dhaka, Bangladesh.

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