The Textile Industry in Sri Lanka is as old as the history of this Island nation. It is recorded in the great chronicle ‘Mahaansa1, that when King Vijaya and his men landed in Tammannapura’ 257 years BC, “Kuveni”, a local princess was spinning cotton yarn. It shows that Sri Lanka had a textile industry and that even in those days women were involved in the industry. History does not record any significant economic activity connected with textiles since then, until the recent past when the “Wellawatta Spinning and Weaving Mill” was established in the late 19th century. The mid 70s showed an increase in activity in the garment trade. With the establishment of the Export Promotion Zone in Katunayake under the former Greater Colombo Economic Commission (GCEC), an upsurge in the garment sector was seen in the 80s which subsequently became the highest gross foreign exchange earner surpassing the traditional exports such as tea, rubber and coconut. Further more, continuously over the last few years the Garment sector maintained its leading position while sustaining a steady growth. The development of the garment industry did not occur entirely by design, but to a considerable extent by “accident”. It is the quota system under Multi Fibre Arrangement (MFA) that worked as a catalyst in the industry, attracting foreign investor interest and it is not a planned approach by the Sri Lankan policymakers, except for the granting of tax incentives. It should be pointed out that there have been a number of countries where the impact at the end of the MFA has indeed been a catastrophe for their garment industries. Lesotho, Philippines, Fiji, Turkey, Nigeria, Kenya, El Salvador and Mexico all have had significant job losses during the last year. Recently Oxfam, an international NGO, issued an interim report as part of their study looking at the impact of the end of the MFA on the country’s garment industry. This report made headlines because it suggested that during the first nine months of 2005 some 15 garment factories have been closed leading to a loss of 3,000 jobs. In fact the picture may have been worse than suggested because they indicated that as many as 22 additional factories may have been closed; Oxfam is looking into this while preparing their final report. Keeping in mind that this is only representing part of the total picture, it is worth noting that these were mostly small or medium scale producers — average employment was only 200. (Of the 15, there was one “large scale” producer which accounted for 592 of the job losses.) Almost all of these closed factories had large EPF defaults and many owed back wages to their workers. And according to Oxfam, 14 out of 15 of these factories were from ruralareas. This should come as no great surprise because of difficult commercial environment is in Colombo, it is considerably more difficult in the rural areas. The government plan for 300
Garment Factories in rural areas
appears to be an attempt to introduce a
bigger and better programme than
President Premadasa’s 200 garment factory
programme in 1992.
There are, however, several major
differences between then and now. One
of the major incentives that President
Premadasa had to offer was increased
access to export quotas to those firms
that signed up for the programme -
with higher levels available to those
firms willing to locate in the most difficult
areas. He also offered very liberal
tax concessions and easier access to
credit through the State banks due to
which the industry flourished based on
exports under quota and never diversified
to non-quota and non traditional
markets.
Back when MFA quotas covered substantially
all exports in garments to the
developed countries, a producer is
being given a quota was virtually guaranteed
a sale of the finished garment.
The system was set up in such a way as
to allow even relatively inefficient garment
producers to be able to manufacture and survive financially.
Some of the least efficient producers
were operating in the countries
mentioned above, where the end of
quotas has led to significant reductions
in production levels.
At that time, Sri Lankan producers
that shifted their factories to more costly
rural areas were essentially competing
with high cost producers in places
like Lesotho, Fiji, Nigeria and El
Salvador. Today, it is more likely that
they would be competing head-to-head
against producers in countries like
India, Bangladesh, Vietnam and
Cambodia, or even China. One of the
biggest changes between then and now
is that there is no longer anything like
a guaranteed sale for what is produced.
Firms must fight for every sale and do
so on the basis of price, speed of delivery.
Before the end of the MFA quota
system, prices everywhere tended to
reflect the high costs of inefficient producers,
while today more and more
prices are being determined by the
most efficient producers such as China.
The reason - buyers are now free to
shop around to find the lowest prices
whereas before they had to shop
around to find producers in countries
that had quota available for the types of
garments they needed.
The impact of the end of the MFA
quota system on the prices of garments
exported by China has been dramatic.
Looking at several types of garments
that are important for Sri Lankan producers
- the average export price from
China fell by about 50 per cent almost
immediately after quotas were lifted.
Not surprisingly, the immediate
response to the increased competitive
pressures has been to look for a quick
fix or easy short term solution aimed at
changing relative market access. Some
thought that Sri Lanka’s qualification
for the EU’s enhanced Generalized
System of Preferences (GSP plus)
would be a panacea.
But this overlooked the fact that
both the EU and the US have offered
virtually duty free access to their markets
through GSP systems to developing
countries for many years - but less
actual increased trade has resulted.
The main reason being that whenever
preferential market access is granted,
criteria are inevitably established to
ensure that the good is actually produced
in the country and not simply
shipped thereby someone aiming to
take advantage of the preference. These
criteria, so-called rules of origin, are
typically difficult to document and
even harder to comply with. This
should not be surprising, since there
are always producers who are not anxious
to face increased competition in
the countries granting the preferences.
As a result, it appears that GSP plus will offer little actual benefit because of
the restrictive rules of origin that go
along with the program.
In the important US market, there is
some chance that Sri Lanka would be
able to gain preferential access for a
limited time, as one of the countries
most adversely affected by the tsunami.
A bill that would relax US trade barriers
have been in the US Congress for
some time and may yet become law. But
this will also certainly impose relatively
tough rules of origin aimed at ensuring
that garments manufactured in
China, India and elsewhere are not simply
being transshipped through Sri
Lanka.
Neither of these measures is going
to help the Garment Industry to overcome
the enormous challenge being
faced. At best, they may provide a brief
respite from the pressures. But even
this looks doubtful.
Still Srilanka is standing in the forefront
in this sector. However prx war
will be significant factor and for this
the only way to get competitive is to
introduce rebate of 5-7 per cent to the
exporters and pioneers of this particular
sector, to narrow the prx gap. At
Present the Duty in Europe for bed
linens from Pakistan 15.4 per cent,
India 16.2 per cent, Bangladesh and
Srilanka with Gsp 0 per cent and
Without Gsp 12 per cent. Gsp from
Bangladesh and Srilanka has certain
criteria of either double transformation
of fabric imported or 50 per cent
value addition if fabric of SAARC origin.
In both cases the eligibility for
Srilanka is unpractical at this moment
when Srilanka has hardly any processing
units of bed linens. Any foreign
investor before putting up a processing
unit will always analyze the demand
factor, and confirm sale guarantee is
enough to attract foreign investment
compare to the tax incentives.
The reason is that if the rebate is
announced on Garment Sector, the
input will be more than the out put as
already there are big turnover companies
and who are still doing well in this
post -quota period, while Small and
Medium Enterprises need survival.
Emphasizing on this sector, the relation
between Pakistan and Srilanka
can strengthen, as Pakistan produces
very good quality of wider width fabrics
and Srilanka is always known for
its value addition. The need of time is
to make both ends meet. |
