Export or perish?

Export or perish has been the slogan since the Sri Lankan economy was liberalized in the last quarter of the century or so and the Sri Lankan apparel industry has made vast strides in exports mainly to the US and the European markets.

The apparel industry made a very valuable contribution to the industrial export of the country and also provided valuable employment opportunities both in the rural and urban areas in particular.

The expansion of the trade especially in the rural sector had spin off benefits to the village and the rural population.

This was possible mainly due to the understanding of the authorities who created the necessary infrastructure when possible and mainly due to the courage and entrepreneurship of the investors who took up the challenge and the risk which contributed largely to the success of the industry in the past.

With the advent of the post quota regime the industry faced fierce competition from Bangladesh, China and India.

Due to the dialogue of the government of the day the commitment of the garment industry in marketing the ethical practices and the high compliance the EU accordingly granted the importation of Sri Lankan ready made garments duty free access under certain stipulated conditions which is commonly known as GSP Plus scheme.

This gave the Sri Lankan exporter much fillip which helped the industry to increase the exports to the EU since the scheme came into operation.

Under the GSP Plus scheme it opened the doors for 7,200 items to enjoy the facilities and the apparel industry is the main beneficiary but it also gave great opportunities for both the traditional and non-traditional exports.

Due to very fierce competition since the post quota period many factories could not survive the highly inflationary environment in Sri Lanka when ad hoc wage increases, increase in factor cost and a very strong Sri Lankan Rupee added to the woes of the industry especially the small and medium (SME) sector.

In addition to these factors the banks who up to this time made good profits from the trade started to look at the very industry they supported and thrived on a negative outlook.

Bank policy

The banks follow a policy of giving the customer the umbrella when the “sun was shining has taken it away when its raining”. The garment industry which had about 800 factories until 2005/06 has now shrunk to less than 290 factories, the SME sector being the main casualty.

The large groups have survived (only a few had shut down) and the surviving have spread their risk by moving their operations to India and Bangladesh who will benefit at the expense of Sri Lanka. Hence there will be foreign exchange gain to these countries which will be a loss to Sri Lanka and unlikely to be regained.

Sri Lanka inflation which reached a record of almost 30 per cent currently stands at year on year inflation of 20.20 per cent which is still high by any standard.

Current Situation

Strangely and for inexplicable reasons the Sri Lankan Rupee has emerged as the strongest currency in the world to day. In comparison, the currencies in our competing countries devalued realistically thereby making their exports remain competitive and Sri Lanka apparel exports made to struggle further.

With global crisis which came into play in early November the apparel industry will definitely be up against the insurmountable problem of remaining competitive to both US and EU markets.

In the last month our competitors in India, Bangladesh and China in particular have floated their currencies to realistic levels and depreciated their currencies by almost 22-25 per cent. In addition the Euro and the Sterling Pound depreciated against the US Dollar.

Under these conditions the SME of apparel industry in particular and exports in general will not be competitive and likely to perish sooner than later.

It is recorded that the Official External Reserves have declined to USD2.6 Billion which is reported to be adequate for two and a half months of imports and reserves.

Taking the above into consideration the authorities will need to keep the industry and the country as a priority and do what is best for it to be sustained. If the SL Rupee is not permitted to float to realistic levels the dreams of the authorities will not be realized whatever their dreams may be.

The apparel industry eagerly awaits the factual situation of the Christmas sales in both US and EU markets. One thing is certain and that is the order booking from thereon will be less and order booking will be later than normal.

In case there is immediate realization and the SL Rupee is devalued to the correct value the SME of the apparel industry in particular and exports in general may have one last chance to survive.

Garments set to shrink

We like to bring to notice of the authorities an impending disaster which will have a huge impact and extensive socio economic ramifications even if belatedly not corrected.

1) We are in a global economic downward spiral the likes of which has not been seen since the great depression of the 1930s

2) Consequently the developed countries which are the market for our Merchandise will see a Major drop in demand and even stagnation or deflation.

3) As a consequence we are seeing our main markets, the UK and the EU both having rapidly depreciating currencies.

4) Our major competitors namely India, China and other South Asian countries have moved fast and decisively through the wisdom of their monitory authorities to devalue their currencies so as to offset the drop in demand and protect their Exporters.

5) In Sri Lanka there is no coherent response from the authorities and our currency is being held at unrealistic levels by the practice of intervention.

6) In addition it appears that we will lose the advantage of the GSP plus scheme in the coming year which allowed the preferential tariff entry with the EU Market.

7) In view of the above and our high inflation rate we have lost capacity in the garment sector from 800 factories to under 300 factories at present.

8) We appeal to the authorities not to destroy a pioneering and historically successful industry that still has so much to offer our country and its people.

9) We urge the monetary authorities to be proactive like our competitors and allow the Sri Lankan Rupee to float to a realistic level so that our apparel exports in particular and exports in general can remain competitive and survive this crucial and critical period.

(By the Policy Committee of the Sri Lanka Garment Buying Offices Association and Sri Lanka Chamber of Garment Exporters.)