#1UN DP Economic Impact Assessment of COVID-19 in Bosnia and Herzegovina Findings and Recommendations May 28, 2020 This Report has been produced with the support of the United Nations Development Programme (UNDP) in Bosnia and Herzegovina. Its contents are the sole responsibility of the authors and do not necessarily reflect the views of the UNDP.#2Our approach & methodology Primary data analysis g METHODOLOGY SURVEY DATA ANALYSED Descriptive statistics . Analysis of weighted survey results Survey results weighted using raking method, which ensures the sample as a whole will match the structure of the Bosnian economy. Descriptive statistics include cross-sectional analysis, which covers all topics across different questions regarding vulnerable groups, sector differences, firm characteristics, and regional differences. Cluster analysis • Utilized to identify sectors that are similar in terms of employment of vulnerable groups and other labour market indicators Analysis of Variance (ANOVA) Performed to test how firm size relates to future business expectations UNDP Economic Pulse Survey Focused on business aspects, including: . • Expected impact on turnover Adaptions plans, including layoffs and wage reductions Project-specific survey Henceforth: "Impact Assessment Survey" • The Impact Assessment Survey complemented the Economic Pulse Survey by also covering: • Long-term business expectations • Employment outlooks of identified vulnerable groups 2#3Overall COVID-19 Impact Primary data analysis 00 0-0 IMMEDIATE IMPACT March-April 2020 Significant direct impact • Containment measures selected as most significant negative impact channel. Far-reaching indirect impact • The indirect immediate impact extended well into all of the economy through changes in customer and firm behaviour. About 50% of all firms declared at least some decrease in turnover. SHORT-TERM IMPACT 3 to 6 months Further economic downturn expected About half of firms expect turnover to continue to fall. Temporary cost reduction measures planned Over 50% of firms plan wage reductions, firms in more impacted sectors also likely to indicate layoff plans. Approx. 41% of firms declared that they are ready to lay off at least part of their workforce. Expected layoffs (% of workforce) MEDIUM-TERM IMPACT Beyond 6 months More optimism regarding cost reductions Less firms reporting wage reduction and layoffs than in short-term horizon (38%; 32%) Directly-impacted sectors at great risk of ceasing operations Firms in directly impacted sectors (Accommodation, Food Services, and Transport) and smaller firms at high risk of ceasing operations. 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% or less 10% to 30% 30% to 50% More than 50% ■3 to 6 months Over 6 months No expected action Source: Impact Assessment Survey 3#4Findings for target industries & SMEs Primary data analysis TARGET INDUSTRIES Directly impacted sectors - containment measures • Accommodation & food services Transport Does your company continue to perform regular business activities? FIRM SIZE Direct Impact • Smaller firms already due to lower accounting liquidity and less future secure orders. • Sectors with large percentage of SMEs more prone to downturn. Such industries include: • Accommodation & food services 100% 80% 60% 40% 20% 0% • Retail • Construction Agriculture, Forestry, and Fishing Food Products A Textiles Wood Chemicals Fabricated Metals Electrical equipment Retail C10 C13 C16 C20 C25 C27 G No Other Yes - Transportation and storage Accommodatio n and food service ICT J Source: Economic Pulse Survey (selected sectors) Indirectly impacted sectors – supply chain disruptions Textiles & fabricated metals as two sectors experiencing most significant issues with their supply chains. Indirectly impacted sectors - time horizons Within 3 months, indirect impact is expected to significantly affect the whole of the economy. 43% of all firms in Accommodation and food services believe they will have to cease operations. • Textiles • Wood Fabricated metals Indirect Impact • • Smaller firms more prone to going out of business in both short and medium time horizons, characterized with less secure future orders and lower turnover expectations. Larger firms more prone to partial disruptions due to extensive supply chains. Two-sided vulnerabilities . Demand side more dependent on a specific segment of the industry, thus more prone to complete shutdowns Supply side smaller number of workers means that health risks are more detrimental to operations. 4#5- Findings for selected vulnerable groups – females Primary data analysis • • • FEMALE WORKERS Larger initial shock experienced by firms employing majority of females. Larger initial shock also experienced by women-owned firms. Both trends partially result from larger proportion of females being employed in directly impacted sectors, particularly: Accommodation and food services Male-owned firms slightly more likely to contact public authorities for support. Troublesome, considering larger initial negative shock on women-owned firms. Cluster analysis reveals that women working in these two industries are more at risk of being laid off than males in the same industries: Agriculture, forestry, and fishing (very high value for female employment reduction) Accommodation and food services Initial direct impact from lockdown measures No shutdown after adjustment of business operations No shutdown Smaller shutdown Partial shutdown Large shutdown Complete shutdown 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% ■Female minority workforce ■Female majority workforce Source: Impact Assessment Survey 5#6Findings for selected vulnerable groups - precarious workers Primary data analysis UNSKILLED WORKERS • • Unskilled workers already adversely affected, and will continue to be adversely affected. Firms employing a significant percentage of unskilled workers were more likely to already shutdown down completely or to reduce operations to a significant extend. Sectors employing a significant number of employees working routine-task jobs that require little formal education and experience are more likely to consider layoffs and wage reductions. YOUNG WORKERS (15 - 30 years of age) • • No noticeable differences in initial impact However, firms employing significant number of young employees more prone to short and medium-term cost reductions (layoffs and wage reductions), than firms not employing a significant percentage of such employees. Sectors employing a significant proportion of young workers may be subjected to indirect effects later on due to decreases in demand and complications in trade. Such sectors include: Height 0 2 4 6 8 00 Other Service Activities Wholesale & Retail Accommodation & Food Service Professional Activities Information & Communication Manufacturing Administrative & Support Service Agriculture, forestry and fishing Construction • ICT • Fabricated metals Financial & insurance activities Real Estate Transport & Storage Cluster Dendrogram Cluster dendrogram results for vulnerable groups (unskilled, disabled, female, minorities, not including young workers) on the labour market Source: Author's own elaboration. 6#7Urban-Rural and entity differences Primary data analysis URBAN RURAL DIFFERENCES i ENTITY DIFFERENCES (FBiH & RS) • • Rural-based firms more likely to have already seen significant (10%+) decrease in turnover (77%, as compared to 68%) Urban firms more likely to be able to adjust their operations or implement partial shutdowns. Short-term and medium-term perspectives show that rural- based firms more likely to cease operations. Rural-based firms have less secure orders for their products or services. • This identifies a key issue rural firms must act upon in order to ensure continuity of the business. Secure orders for over 3 months • • • Firms from Republika Srpska slightly more directly affected than those in Federation of Bosnia and Herzegovina. (32%; 26% - direct shutdowns). • No noticeable difference in future business expectations and impact channels. More firms in FBiH considering cost cutting measures in short and medium-term perspectives ⚫ Firms in Republika Srpska significantly more likely to seek support from Chamber of Commerce than from other public authorities During the crisis, did you establish or maintain contact with any of the following institutions? Rural Urban 0% 5% 10% 15% 20% 25% Source: Economic Pulse Survey 40% 30% 20% 10% 0% Professional Associations Chambers of Commerce Unions Public Authorities Financial Institutions 7 FBiH RS Source: Economic Pulse Survey#8Recommendations based on survey results Primary data analysis GENERAL SUPPORT Detailed framework and assumed timeline for financial support measures for employers and employees. Temporary basic income for self-employed. Trade margin regulations based on reliable sectoral and product market assessment. Branding and promotion of domestic products. Appropriate protective measures that decrease discriminatory practices Specifically those related to disproportionate wage reduction or employment termination. 8#9• Recommendations based on survey results Primary data analysis SUPPORT FOR TARGET INDUSTRIES Directly impacted sectors Immediate public support needed for following sectors: . Accommodation & food services Retail Transport Mechanisms of support include: Payment deferments and tax delays Vocation retraining and job search support for individuals working in these industries Public authorities should enforce proper hygiene guidelines in the workplace, both to keep employees safe but also boost consumer confidence Evaluation of working hours Indirectly impacted sectors Impact channels include: supply chain disruptions, decrease in demand, and vulnerability due to firm size. Mechanisms of support include: • Payment deferments and tax delays, • Subsidies for small firms • Supporting SMEs in transition to e-commerce • Enabling work-from-home environment Wage subsidies 9#10Guiding Principles for Sustainable Recovery Legacy ways of doing business have to be reconsidered and adapted. Accurate, consistent, timely and transparent information is essential - especially in context of BiH with its complex government organisation and structure. Large interventions make a difference - state or entity level interventions are crucial to utilise maximum resources and reach a wider population. Disruption in global markets can be considered a chance for BiH export-oriented firms to move from traditional, more outsourcing business models to product owners' models -> Impact on brain drain Support to young, start- up or early stage firms that do have an innovative component, incl. boosting resilience of those businesses for similar crises in the future. Governments should use an opportunity to adopt new and innovative tools to improve public service - e.g. digital signature as impediment for full-scale implementation of digital transformation Business in BiH (especially manufacturing and export- oriented businesses) will have to consider scaling up their offering portfolio to be more competitive against firms coming from greater industrialization centres. Constructive and persistent social dialogue between governments and social partners plays a crucial role. Reimagining business models, shifts towards new realities and new market demands must include strong consideration of environmental policies, standards and best market practices. 10#11Measures undertaken so far Selection of key measures Area Economic and fiscal measures Liquidity measures Federation of BiH • Law on mitigating negative economic consequences . • Trade margins (calculative prices) are determined for certain products • • • Deadlines for filing tax returns and salary specifications have been extended Series of labour-related measures in force Guarantee fund in cooperation with the Development bank of FBiH currently in process of establishing Various entity laws focused on salary subsidies and freeze of parafiscal taxes Republika Srpska . Measures aimed to mitigate harmful consequences of coronavirus to economy of RS adopted • . Decree Law on Tax Measures for Mitigation of Economic consequences of COVID-19 Decree-Law on Solidarity Fund of Republika Srpska District Brčko Law on mitigating negative economic consequences caused by the state of natural disaster due to COVID-19 in Brčko District Deadline for filing tax returns have been extended Cities municipalities Abolition of rent payments for business premises owned by cities / municipalities, free parking, support for spring sowing etc. Entities' banking agencies have issued temporary measures related to supporting companies and private individuals overcome challenges in servicing their loans. Financial institutions can approve to clients special measures such as a moratorium, a grace period of up to 6 months, granting of an additional amount of exposure to overcome liquidity difficulties etc., under special conditions 11#12Options for interventions (1/2) COORDINATION AND TRANSPARENCY Limited readiness of authorities to coordinate crisis response efforts. Lack of confidence in government response and absence of dialogue with business community was frequently reported in focus groups. Different interpretations of measures among the business community. Coordination and transparent communication of fiscal and economic measures by below state level government is required. • • • FINANCIAL SUPPORT Mid-term and long-term access to credit remains a challenge for the business sector. Decreased creditworthiness due to COVID-19 will pose a challenge for firms in terms of accessing finance. The market would warmly welcome additional liquidity offered via relief programmes and packages introduced by international financial institutions on various levels. Option of entity loan guarantees funds would facilitate firms' access to finance in the near future. • PROVIDING LIQUDITY All key sectors, will experience loss of turnover in the 3-month period. 43% of SMES will be forced to cease operations completely. Key vulnerability factor is inadequate level of financial liquidity (34.23%). Mayor items for company liquidity are and social security contributions. - VAT • • FLEXIBLE WORK OPTIONS Large portion of firms whose business doesn't require direct contact succeeded in employing flexible work and work from home options during the pandemic. Hence, employment practices related to flexible work options can be further stipulated in employment regulation in order to boost in- country employment in sectors which traditionally have not used these options due to myriad of reasons, incl. lack of adequate regulations. 12#13Options for interventions (2/2) LOCAL PRODUCTION Majority of firms in key sectors are having some issues with their supply chain and by far the worst hit are textiles and fabricated metals (less than 30% of them have a sufficient supply of raw materials or intermediate products for their production/services) Local and global shift in supply chains towards closer supply sources indicated the need for strengthening local production. Coupled with country branding and promotion of domestic products and services, this initiative could contribute to making the market more resilient to future crises. • • . DIGITAL TRANSFORMATION 42% of survey respondents rated SDG 9. Industry, Innovation, and Infrastructure as a key goal for sustainable recovery. Digital electronic / cyber initiatives, especially related to legislative and regulatory frameworks, have to be accelerated. Lack of functioning digital signature as one of the key problems in doing business in BiH. LEGISLATION IMPROVEMENT • • • 40% of respondents from FBiH and 23% of them from RS stated that inadequate legal framework is the most important factor limiting their business. Legislation frameworks for certain industries (e.g. hotel industry) have to be improved in order to fill the gaps exacerbated during the crisis. In some instances the relief measures cannot be utilized by the businesses that should have benefited from it due to specifics how the measures have targeted the industries. • • SUSTAINABILITY 38.6% of respondents stated that the COVID- 19 will have negative impact on the achievement of SDGs by 2030, 20.93% stated that the impact will be mixed, while 12% had a positive perspective. As recognized by some of the focus group representatives, the crisis represents a unique opportunity to purse an environmentally friendly approach with recovery options. • Development of a green public procurement, changes to environmental taxes as a part of larger reforms of the tax system are examples to be considered. 13#14Things to consider for future interventions It is assumed that Bosnia and Herzegovina is in the transition from the Respond towards the Recover phase, but economic crisis triggered is still being considered as a developing situation, where ultimate effects are still uncertain. When further planning financial scale of options, following issues need to be considered: Expectations for possible next waves of coronavirus spread, having in mind that the current packages have been influenced by focusing on the current COVID-19 pandemic, while risks from the second or third wave of pandemic are still rather present. Most recent GDP, employment and other macroeconomic forecast for short and mid- term period, • • Public health measures that were undertaken and the economic situation in trade partner countries, Lessons learned from implemented shutdown measures and recovery experiences from easing of measures. Respond Recover Thrive 14#15Thank you. "The greatest danger in times of turbulence is not the turbulence itself, but to act with yesterday's logic." % 15