Free-Trade-Agreements essential to enhancing Sri Lankan apparel’s resilience

Apparel sector in urgent discussions with Government on FTAs to boost exports

With fears of a global economic recession looming, the Joint Apparel Association Forum (JAAF) is actively stepping up engagement with top Government and Foreign Ministry officials to expedite negotiations on Free Trade Agreements (FTAs) to help boost exports and strengthen the industry’s resilience.

Elaborating on the progress thus far, Deputy Chairman of JAAF and Chief Executive Officer and Managing Director of Omega Line Felix Fernando outlined key priorities for the industry moving forward. Following are excerpts:

Q: What progress has been made in engaging with the Government to address challenges faced by the apparel sector?   

A: There has been strong progress made and we are appreciative that the Government has given weight to our concerns. Most recently, we had separate meetings with the Secretary to the President, the Prime Minister and President. During these meetings, we voiced our concerns over the various challenges faced by the industry resulting from both local and global volatility.   

In fact, even in August, we saw a 20% increase in turnover generated by the sector. If this trend continues, we anticipate apparel sector earnings to increase to approximately USD 5.6 billion by the end of 2022.

However, it is difficult to anticipate industry performance moving into 2023, given the geo-political tensions and economic volatility created by the situation in Europe – which is home to many of Sri Lanka’s most valuable markets. Currently, the US, EU and the UK comprise about 86% of our total exports.

In such a challenging environment, it is essential for Sri Lankan apparel entities to diversify their markets. Hence a central focus for our discussions with Government has been the urgent need to finalize FTAs with countries like China, India, Japan and Australia.  

,JAAF was pleased to note that the Secretary to the Prime Minister has been appointed to head a task force to expedite the Chinese FTA, and we are already seeing promising signs of progress. We are also pleased to note that JAAF has already been called in for these discussions although they remain at a preliminary stage at present.  

Q: What role will economic reforms play in the apparel sector’s ongoing revival?

A: Fundamentalreform in economic policy is absolutely critical. Sri Lanka is a small country with 22 million people, which means we simply cannot generate the economies of scale necessary to directly produce everything we require within a closed economy – especially if we hope to continue having access to quality and reasonably priced goods.

Therefore we have to focus on export development in order to fund imports of commodities and goods imperative to keep our economy moving. Fortunately, the Government and the industry are in complete agreement on this point. 

We also have must remember that at present, Sri Lanka is not competing on a level playing field. Our main competitors, countries like Bangladesh, Vietnam, and some African nations have duty concessions in global markets, which we do not have. Sri Lanka’s only concessions are for the UK and the EU markets, and those come coupled with a variety of strict conditions pertaining to the origin of raw materials which means that utilisation of these preferences remain around 50% for apparel. 

Securing new FTAs can help reduce barriers for Sri Lankan apparel exporters to diversify, hence the Chinese FTA is our first priority. We hope to gain clarity on a timeline for these negotiations from the Department of Commerce in the coming weeks, but further progress will also depend on our sovereign debt restructuring negotiations with China.  

Further trade concessions will help to better integrate Sri Lanka with regional markets. If for example we are able to penetrate the Indian market, even 10% would be equivalent to 100 million people, where we are presently limited to supplying just 8 million pieces. JAAF has reiterated its request to have this quota increased.  There’s also opportunities to lobby for the including of apparel into the new round of Canada’s GPT+ scheme. To move forward on such opportunities, we definitely require the support of the Government and diplomatic corps.

Q: How have import restrictions impacted the apparel industry- especially in terms of the raw materials needed?

A: As the sector was permitted to use its foreign remittances for the purpose of payment for imported raw materials, for the most part, the industry was able to meet its requirements without an issue. The export figures for recent months bear testament to the industry’s ability to deliver during this difficult period.. However, the crisis also meant a significant tightening of financing and this has been particularly challenging for the SME sector as they operate on small margins, and mainly provide support services to the main exporters. This is a sector which provides livelihoods for approximately 40,000 people, hence it is critical that we support them. 

In many instances, they lack the working capital and foreign currency needed to purchase machinery and spare parts in order to expand capacity to service larger orders. Despite all the struggles faced, SMEs are still surviving for now, but without formal programmes to support them, this may not last.

Most SMEs depend on the larger exporters and manufacturers. Once their orders are cut down, SME orders also decline. With the higher cost of living in Sri Lanka, salaries have also been adjusted across the apparel industry, but with orders declining, employees may see a reduction in earnings, impacted by the decrease of production incentives and overtime. This will affect employees’ monthly earnings and we need to be conscious of the cascading potential social impacts this could have, as their buying power is also weakened.

Q: How would an economic downturn impact orders from the US and EU moving forward? 

A: Both markets last year recorded strong sales. But they may have overestimated demand as most buyers’ inventories are still full. Thus, they don’t want to restock for at least another 4 to 6 months.

Recently, the US increased its lending rates by 0.75%, and there is a possibility that certain commodity prices might decline. If that happens, this whole situation can change, but it’s still too early to predict.

Logistics and energy costs increased exponentially not just in the US but also in the EU, primarily due to the Ukraine war. If these issues ease by December, orders may pick up. But this is a global issue and not unique to Sri Lanka. Although the first 8 months of the year had a growth in exports, we envisage a decline in our apparel exports by 25-30% for the remainder of 2022.

This is the reason it is crucially important for the Government to be proactive about FTAs, as with easier access to these markets, exporters would be more competitive.  We expect help from the Government in these areas to help exporters.

We also need more Foreign Direct Investments (FDIs) to increase export turnover and capacity. The Government needs to step up and face a range of issues if we are to achieve these targets. We understand the Government is under severe pressure from the IMF to increase revenue, but we are concerned by the move away from a dual rate that motivated the export sector, leading to an increased corporate taxation for exporters at  the standard rate of 30%, which is double from the earlier rate.  The argument is that no sector should be given priority, but applying one rule to all is not feasible.  At this present time, the country needs the foreign exchange and that comes through with exports. What should be understood is that exporters shouldn’t be discouraged with unrealistic conditions which don’t look at the cascading impact on the macro picture.