COVID-19 has led to an unprecedented situation in the world of business, as offices were closed and working from home became a norm. Restrictions on traveling, trade and activities taken to prevent the spread of COVID-19 have led to one of the most severe recessions with global economic output declining by 3.4% in 2020. IMF data suggests the GCC region contracted by 4.8% in 2020. Although firms of all sizes were impacted, SMEs, including Shariah compliant ones, were the most distressed owing to their nature.

Moreover, SMEs were particularly hit hard because they are over-concentrated in sectors that were directly impacted by the pandemic such as food and beverage, retail, tourism, entertainment, services like home repairs, cleaning services, construction labor, etc, and accommodation.

A study from the JPMorgan Chase Institute found that half of all small businesses only have enough cash on hand to support 27 days of their usual outflows, which makes it difficult for the SMEs to weather such unforeseen tough times. This impacts the overall economy as the SME sector encompasses 90% of businesses and 10% to 40% of all formal employment in the Middle East and North Africa (MENA) region.

The past few months have also proved to be an interesting time for entrepreneurship. Consumers’ buying and lifestyle habits have changed. A lot of companies are catering to these new set of opportunities. About 45% of MENA SMEs picked faster access to revenue as the biggest benefit of a cashless economy to business.

Review of 2021
SMEs have successfully attempted to align themselves with the structural shifts by making certain structural upgrades to their business models like adapting to advanced technologies. In the UAE, Searchie offers a talent acquisition software which uses artificial intelligence to screen and shortlist candidates based on a video interview. In response to the pandemic, Searchie leveraged the market conditions and adapted its software to provide services for screening patients.

According to the OECD, up to 70% of SMEs globally have increased their use of digital technologies in response to COVID-19. However, SMEs are hampered in their growth efforts due to a finance gap. The MENA region accounts for 88% of SMEs, with a financing gap of US$195 billion.

The easing of containment restrictions and increasing vaccination rates in 2021 have led to SMEs performing around their pre-COVID-19 levels. A key driver of this growth is the increasing funding from venture capitalists. Global venture investment in 2021 summed to US$643 billion, compared with US$335 billion for 2020.

Government support by taking an expansionary stance to help distressed SMEs was extremely crucial to aid SMEs. The Saudi government unveiled a SAR70 billion (US$18.7 billion) economic package to support the private sector, especially SMEs.

The Central Bank of the UAE lowered its main policy rate twice and disclosed a AED256 billion (US$69.69 billion) stimulus package. Also, the government aid combined with shortages of raw materials caused by supply disruptions has led to record-high inflation levels.

Consumer prices in the GCC states are projected to have risen by 2.1% in 2021, compared with 1.2% in 2020, as revealed by the GCC Statistical Center. This has deteriorated the profitability of SMEs as the price of raw materials and wages have increased dramatically.

Preview of 2022
SMEs will have to find a way to deal with the inflationary pressures and have a healthy bottom line, reflecting their need to ascertain whether they can pass on the increasing expenses to their customers.

COVID-19 has stimulated the need of not being dependent on a handful of sources of revenue but to have more varied sources of revenue. Diversification is a key theme in all six GCC countries particularly Saudi Arabia, which has embarked on a massive economic and social reform program called Vision 2030.

Additionally, because of inflation pressures, central banks plan to increase the rates, hence making it difficult for SMEs which are heavily dependent on credit to fund their expenses or expansion plans.

However, the strengthening economic recovery paves the way for moderate growth ahead.

Conclusion
In general, OIC member countries have been successful in containing the spread of COVID-19 infections and in the treatment of affected people with a case recovery rate of 53.4% compared with the global rate of 38%. Entrepreneurship grew at a record pace in 2021, with more than 4.6 million applications for new businesses filed through October 2021, according to business formation statistics from the US Census Bureau.

SMEs have proved to be extremely thoughtful and resilient given the challenges they faced and continue to face. The future presents many challenges but also sizeable opportunities for the ones that continue to innovate and adapt in this dynamic and fast-paced environment.

Pankaj Gupta is the founding partner and CEO of Gulf Islamic Investments. He can be contacted at [email protected].