Publication
The COVID-19 (coronavirus) pandemic and associated containment measures are expected to cause far-reaching damage to economies around the world. Firms are suffering from reduced demand due to movement restrictions, from reduced labour supply and from constraints to sourcing material inputs. The breakup of otherwise healthy businesses in response to a temporary shock implies large social costs. Governments are therefore intent on designing emergency policies to keep businesses afloat. In this brief, the authors present simulations using firm-level tax records from Ethiopia, which vary the duration of the lockdown and the relative impact across sectors.
This note uses administrative tax data on firms to measure the direct impact of the COVID-19 containment and prevention measures (referred to as ‘lockdown’ throughout this note) on firms’ profitability, employment and exit rates. It separates the economy in three sectors, which face different size shocks and considers two lockdown scenarios: one lasting three months and one lasting five months. The three-month lockdown scenario aligns, to some extent, with the strictest period of Ethiopia’s containment measures - which were scaled up in April 2020 (at the start of the five-month State of Emergency) and partially eased from June 2020. The five-month lockdown scenario on the other hand could reflect the full period of containment and prevention measures. The simulations estimate losses to corporate income tax revenue, increases in firms’ debt levels, cuts in payroll and their mitigation through wage subsidies, and aggregate output losses from firms’ exit.
Overall, the impact on the economy is severe, with large falls in tax revenue, increases in debt and decreases in wages and/or employment. Under a three-month lockdown scenario, we estimate that only 53.9% of firms remain profitable and that almost all firms in the highly-impacted sectors register losses. The corporate income tax revenue loss is severe and in 2020 would only collect 75.0% of its baseline.2 In addition, firms accumulate losses equivalent to 0.6% of GDP, suggesting that firms will need to substantially increase borrowing to survive. Firms would cut 3.3% of total yearly payroll - wage subsidies can save a substantial share of payroll in the medium-impact sector, but will not be able to save employment in the high-impact sector (tourism, transport, personal services), where firms can’t pay their fixed costs.
This note faces important limitations: (i) it does not include the indirect impacts of the shocks which operate through firms’ trade linkages, (ii) it only models a demand shock and as such firms have no issues obtaining inputs (materials, labor), (iii) Firms do not adapt to the crisis (for example by changing products, selling online etc.). Given these limitations, the numbers in this report should be considered as plausible lower bounds arising from direct effects, in partial equilibrium. Dynamic general equilibrium models of the economy, with linkages across sectors and firms, are needed to gauge longer term effects.
Published on: 1st August 2020
