Are Zombie Firms on the Rise in the Wake of COVID-19

Radio, COVID-19, Economy, Frontier Centre

Since the 1990s zombie firms have been on the rise; in fact, the Bank of Canada states that the number of zombie firms in the country is higher than in other countries. These zombies are anything but the fictional ones referred to in movies, these ones are very real! A zombie firm refers to any business who is unable to pay its debt-servicing costs from its current profits over an extended period of time. The measures taken during the COVID crisis by the federal government and the Bank of Canada to tackle the economic downturn are leading to a direct increase of zombie firms. The federal government’s economic response included wage subsidies of 75% for all employers who experienced a loss in gross revenues of at least 15% in March and 30% in April and May. In order to improve market liquidity, the Bank of Canada has lowered interest rates and began purchasing Government of Canada securities and Canada Mortgage Bonds. While this had reduced the financial pressure on firms at the time the creation of really low-interest-rate environments — consequently creating the perfect conditions for zombie firms to rise. Zombie firms have lower labour and factor productivity that hinder potential growth and investment opportunities for productive firms. Although it is critical that governments focus on flattening the COVID curves, it is equally important for governments to address the rise of zombie firms and ensure that economic measures are getting to the productive firms.