A US$400-US$500m increase in apparel exports could come by 2018 and onwards

A US$400-US$500m increase in apparel exports could come by 2018 and onwards

Executives within Sri Lanka's apparel sector predict exporters can generate an additional US$400m to US$500m in annual sales thanks to the country regaining the Generalised Scheme of Preferences Plus (GSP+) trade concession with the European Union (EU).

Almost seven years after Sri Lanka lost this trade access status in August 2010 because of human rights violations during the previous government of ex-President Mahinda Rajapaksa, the EU readmitted Sri Lanka to its GSP+ zone in May.

The trade bloc said the current government, headed by President Maithripala Sirisena, had made sufficient progress on human rights, having committed itself to ratifying and effectively implement 27 international conventions on human rights, labour conditions, protection of the environment, and good governance.

As a result, a 9.6% duty that had been charged when exporting garments to the EU has now been removed.  

The chairman of the Sri Lanka Apparel Exporters Association, Felix Fernando, predicts that a US$400-US$500m increase in sales would come quickly, by 2018 and onwards.

For this to happen, Sri Lankan exporters will have to work hard as their clothing sales to Europe have actually been falling. Even though the EU is Sri Lanka's largest export market, accounting for nearly 31% of Sri Lanka's export receipts from sales of clothing, rubber products, tea and bicycles, apparel exports have slid since 2015. 

Fernando says the 2010 loss of GSP+ harmed the island's apparel sector, with several small and medium-sized factories closing.

He explains that from 2001 to 2004, Sri Lanka's apparel sector recorded annual growth in overall turnover of 11.5%, which then increased to 16.5% from 2006 to 2009 during which time the country enjoyed the GSP+ concession, which was granted after the 2004 tsunami.

"But after the GSP+ was removed in 2010, the annual growth went down to around 7.5%," Fernando adds.

Moreover, Sri Lanka's annual apparel exports actually fell in 2015 and 2016 to US$4.6bn in both years compared to the US$4.7bn recorded in 2014.

Exports to the EU have also seen a steady slide since 2014, slipping to US$1.9bn in 2015 and 2016, compared to US$2.1bn in 2014.

Apparel export numbers have continued to fall this year, recording a 5.8% decrease in exports for the first five months of 2017, against the same period in 2016. The total value of apparel exports to the EU stood at US$794m for January to May (2017) against US$842m in the same period of the previous year. 

Regain lost business

The GSP+ will help improve the industry, and will especially be a boost for small-and-medium enterprises

Fernando explains that while the GSP+ trade concession to Sri Lanka will not last forever, it is crucial at this moment, helping Sri Lankan exporters regain lost business and increase annual exports to the EU. "The GSP+ will help improve the industry, and will especially be a boost for small-and-medium enterprises," he told just-style.

He wants the Sri Lanka government to help leverage the opportunity with innovative export policies. "Just like in some South East Asian countries, where the head of the country himself is taking the lead, we need the same strategy and vision from our top leaders," he says.

Fernando is calling on the government to resolve ongoing problems in coordination and communication between government agencies, including the customs and Inland Revenue (tax) departments, that can impede exports.

"The government has announced that it will not be giving any tax holidays for investors, but has instead offered the industry tax allowances to set up factories in certain [economically] lagging regions," he notes.

But if doing business in such regions is difficult, maybe because of labour, infrastructure and bureaucratic problems, "it will keep even potential foreign investors away," Fernando adds.  

Chairman of the Sri Lanka Apparel Sourcing Association, Anil Wettewa, is nonetheless hopeful that GSP+ will help the island's apparel sector "regain its EU market share." "After we lost the GSP+ some buyers moved to other countries," he recalls.

Wettewa adds that his association and member companies have already launched negotiations with EU buyers to increase orders.

Fernando adds: "We have received some enquiries, and there is also a possibility where some orders from Bangladesh will come to Sri Lanka." He welcomes that Debenhams is planning to open an office in Sri Lanka – a fact confirmed to just-style by the British retailer.

Shiran Fernando, lead economist at Colombo-based Frontier Research, points out that while the GSP+ will boost earnings and export volumes, the full benefit may accrue from 2018 onwards.

"This should provide a temporary relief to overall export earnings, which have been stagnant in recent years," he says.

Labour supply constraints

Policymakers and the industry should make use of this concessionary period to boost competitiveness and address some labour supply constraints

Fernando also urges policymakers and the industry to make use of this concessionary period to boost competitiveness and address some labour supply constraints, since preferential access will be removed once Sri Lanka attains 'upper-middle income economy' status, as measured by the Word Bank. Sri Lanka is currently categorised as a lower-middle income country. 

Indeed, Felix Fernando stresses that the Sri Lanka clothing manufacturing industry has real recruiting problems – it employs around 300,000 workers directly, and 600,000 workers indirectly.

"We have an issue with labour shortage. Not all factories can go in for automation, and even if we get more orders from the GSP+ we may have a fresh issue due to this labour shortage," Fernando says.

He blames the lack of respect given to factory workers by financial and government institutions as a key reason. "Even though the industry pays well and there are many benefits for apparel industry workers in comparison to most other industries, the workers don't get the respect from even government departments or banks, and they are categorised as basic factory workers. What these workers expect is respect, but that is something they are not getting from many," he believes.

He may get a hearing in government. Speaking at a forum organised by the European Chamber of Commerce of Sri Lanka and the European Union Delegation to Sri Lanka this month, Prime Minister Ranil Wickremesinghe said: "The GSP+ is the lynchpin of building our outward-looking, export-oriented, economy, which will provide jobs and increase incomes."

Sri Lankan exporters supply international brands including Adidas, Burberry, Calvin Klein, Disney, Gap, George, Hennes & Mauritz (H&M), Hugo Boss, JC Penney, Macy's, Marks & Spencer, Next, Nike, Pierre Cardin, Ralph Lauren, Reebok, Tommy Hilfiger and Victoria's Secret.