Israel's COVID Grants Propped Up 70,000 'Zombie' Firms

Many businesses that stopped operating during the pandemic didn't officially shut down in the hope of receiving government funds

Nati Tucker
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Jerusalem's Mahane Yehuda market during Israel's third lockdown, in December.
Jerusalem's Mahane Yehuda market during Israel's third lockdown, in December.Credit: Emil Salman
Nati Tucker

The actual number of businesses that may have closed during the coronavirus pandemic in 2020 was 70,000, according to a Bank of Israel analysis. On average, 43,000 businesses shut down ever year.

According to Tax Authority data, only 9,000 businesses shut during the first half of 2020, 33% less than during the parallel period in 2019. Nearly 18,000 businesses opened during that period, 15% less than during the parallel months of 2019. Thus, it turns out that Israel gained some 8,500 businesses during the first half of 2020.

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However in practice, many businesses stopped operating in the first half of 2020 due to the pandemic, but wanted to receive government grants being distributed to help businesses get through the period, and thus didn’t close their businesses through the Tax Authority. The Bank of Israel terms this phenomenon “zombie businesses” – companies that can’t meet their obligations and are being kept afloat only thanks to cheap money, in this case government aid money.

According to a Bank of Israel analysis, some 70,000 businesses saw their revenues drop 80% in July and August of 2020 – months when Israel was not in a lockdown – compared to those months in 2019. This would put them at a particularly high risk of shutting down.

The percentage of businesses in the real estate and services sector at risk was particularly high. Some 60% of businesses in these sectors that saw their revenue collapse are small businesses with annual turnover of up to 300,000 shekels a year. Collectively, they have revenues totaling 5 billion a year. Most of these businesses are likely self-employed individuals who had no other employees.

The phenomenon of zombie businesses was significant in Israel and around the world even before the pandemic. According to the Bank of Israel, some 12% of publicly traded companies fit this definition in 2018 and 2019, and they were concentrated primarily in the field of oil and gas exploration, real estate and industry.

In order to address the phenomenon, the central bank suggests that the government intervene to prevent nationwide financial distress from worsening, as well as finding more efficient means of distributing financial support in times of crisis to ensure that it reaches sustainable businesses.

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