From left: Sharad Amalean, Finance and Mass Media Minister Mangala Samaraweera, SLAEA Chairman Felix Fernando, German Ambassador to Sri Lanka Joern Rohde and SLAEA Deputy Chairman Rehan SLAEA at the AGM held at Hilton Residencies on Tuesday
Pic by Daminda Harsha Perera

By Chandeepa Wettasinghe
The apparel industry has set its sights lower for the medium term with a US $ 8 billion annual export target to be reached by 2022 over the delays in regaining the duty free access to the European Union (EU) via GSP Plus and due to the economic and political uncertainties in key Sri Lankan export markets.

Over the past two years, the Sri Lanka Apparel Exporters’ Association (SLAEA) had had a target of achieving US $ 8.5 billion exports by 2020.

“Actually, we were expecting GSP Plus to come earlier and we needed to revise the target based on the changes in economic conditions,” SLAEA Chairman Felix Fernando told Mirror Business. There had been some delay in applying for re-entry into GSP Plus. The government had faced domestic unrest and criticism over recommitting to implement human rights conventions that Sri Lanka had signed in the past, to become eligible for the facility.

The unilateral duty waiver from the EU was reinstated this May after losing the trade benefits in 2010 over allegations of human rights abuses during the latter stages of the civil war.

Economists have pointed out that there would be challenges for Sri Lanka to regain the lost businesses due to the competitors with GSP Plus and other preferential benefits stepping in over the past six years.

Also, weighing on is the uncertainty of retaining the GSP Plus facility, as during a recent visit to Sri Lanka to observe the progress of the reforms, an EU delegation noted that progress was slow and Sri Lanka cannot afford to sit back and relax after regaining GSP Plus.

The EU absorbed over 40 percent of Sri Lankan garment and textile exports and the loss of the GSP Plus facility had stricken a hard blow to the local apparel industry.

According to the Central Bank, Sri Lanka’s apparel exports grew from US $ 2.5 billion in 2001 to US $ 4.2 billion in 2011 but from then till 2016, during the period of having no preferential access to the EU, apparel exports grew at a slow pace, reaching just US $ 4.9 billion. Fernando said that with regaining GSP Plus, the industry would surpass the US $ 5 billion mark for the first time in 2017. According to the Central Bank data, Sri Lanka’s apparel export earnings stood at US $ 3.7 billion for the first nine months of the year.  However, over the first eight months of this year, apparel exports had fallen by 2 percent to US $ 3.1 billion, according to the Joint Apparel Association Forum (JAAF) data. Exports to the EU too had fallen by one percent to US $ 1.3 billion, although there was a double-digit growth in exports in July and August, due to the GSP Plus benefits.

Nevertheless, the effect of the UK leaving the EU by 2019 will have a negative impact on Sri Lankan exports, according to Fernando, if Sri Lanka and the UK could not enter a trade pact. 

“Of the exports to the EU, 43 percent goes to the UK. With the uncertainties around Brexit, the Sri Lankan authorities need to talk to the UK counterparts and we are not certain if both the countries will continue to offer the same trade facilities. Due to these uncertainties, it is imperative that we consider the other EU countries and especially Germany, where our presence is limited,” he said.The government in the past had indicated its interest in pursuing a trade agreement with the UK, although there has been no further indication of progress.

However, Fernando added that the silver lining is in the fact that all competitors will lose preferential access to the UK at the same time, ensuring a level playing field for Sri Lanka to compete.

He noted that the other key market, the US, is not doing well for apparel.
“What we see is the US retail sector is not doing so well. There was a boost in exports but that was temporary,” he said.

This temporary phenomenon was seen in July and August 2017, though over the first eight months of this year, apparel exports to the US fell by 4.3 percent to US $ 1.4 billion, according to the JAAF.

Fernando said that the industry has to expand its presence in non-traditional markets as well and that the Sri Lanka-China free trade agreement may help in this regard to enter into the Chinese market.
He noted that despite the export target falling, the industry will be attempting to exceed these expectations.

Apparel makers seek GSP Plus entry for goods produced using ASEAN fabrics 

The Sri Lankan apparel exporters are hoping for the EU to grant permission to source high-quality fabrics from the Association of South East Asian Nations (ASEAN) and export the goods produced using such under the GSP Plus scheme.

“To maximize the use of GSP Plus, the SLAEA, with our apex body, the JAAF, requested the Commerce Department to explore the possibilities of undertaking a joint request to the EU, between Sri Lanka and selected ASEAN countries to agree on cross regional accumulation for fabric,” Fernando said.

Speaking to Mirror Business, he said that currently only the fabric sourced from South Asia or Europe are eligible for GSP Plus, although fabric sourced from the ASEAN is competitive, in both price and quality.

A sizable portion of high-quality apparel exports to the EU are therefore not eligible for GSP Plus, since these garments are made using fabrics sourced from China and Southeast Asia, Fernando said.
He noted that to take advantage of an EU clause, which allows for applications for exemptions, discussions have taken place between Thailand, Indonesia and Malaysia to source fabrics. He noted that most of the fabric sourced from South Asia or even from within Sri Lanka, is of lower quality.

“Most of our top exporters don’t purchase fabric from this region. Sometimes, if we can, we buy from Hayleys or Textured Jersey, who have high-quality fabrics but they are for use in things like jerseys. For denim fabrics and undergarments, we don’t have a proper fabric producer,” Fernando said.

European fabrics are of high quality but are expensive and incur higher logistical costs, he noted.
He said that the EU has tentatively agreed to the arrangement between Sri Lanka and the three ASEAN countries but that it is now the responsibility of the Commerce Department to finalise and gain the facility for the exporters.