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EU Boost Not Enough to Revive Sri Lanka Garment Industry

The Sri Lanka garment industry has fallen well behind rivals such as Bangladesh despite a recent move by the European Union to restore Sri Lanka to its highly favorable Generalized System of Preferences Plus program.

The country will find it hard to catch up with Bangladesh, which has powered ahead in textile and apparel production in the last few years. Production and labor costs remain high compared to competitors, and analysts are skeptical that the government will be able to meet its goal of doubling exports by 2020.

The EU, which is Sri Lanka's biggest export destination, absorbing some 36% of total shipments, reinstated the country into the GSP Plus program in mid-May, removing import tariffs on more than 6,000 products, including clothing. Sri Lanka was dropped from GSP Plus in 2010 for human rights violations, but remained in the less-favorable GSP program, under which its exports were taxed at 9.6%.

That had an impact. Total apparel exports fell from $4.7 billion in 2014 to $4.6 billion in 2015 and 2016, according to JAAFJoint Apparel Association Forum – the Sri Lanka association that guides Sri Lanka apparel industry. Exports to the EU in 2014 stood at $2.1 billion, but dropped to $1.9 billion in 2015 and 2016.

The slump has continued in 2017, with apparel exports falling another 5.8% in the first five months, compared with the same period in 2016. But JAAF is fairly optimistic that they can now receive at least an additional $400 million worth of orders from the EU initially, which will increase further, now that they have regained GSP Plus. Some say it will not be possible to meet the government's target of doubling exports by 2020, although 2022 remains a possibility.

Analysts say that Sri Lanka needs to do more to catch up with countries such as Bangladesh, which is now the world's second-largest clothing exporter after China. Bangladesh accounts for 6.4% of global clothing exports, compared with Sri Lanka's 1.2%.

Part of the reason for this is that Sri Lanka has fallen behind in terms of value chain creation. Bangladesh, for example, has set up spinning mills and knitting mills, which allow manufacturers to cut production costs and improve efficiency. This also puts Bangladesh in a good position to sell large volumes of cheaper apparel such as knitwear, woven shirts, sweaters and sweatshirts.

According to the World Bank's "Stitches to Riches" report, released in April 2016, the minimum monthly wage in Sri Lanka is $120, compared with $70 in Bangladesh. Sri Lankan labor laws also limit factory workers to 57.5 hours per week, with fixed weekly holidays. This compares with Bangladesh's working limit of 60 hours and Vietnam's 64 hours.

Gugnani said Sri Lanka should amend these labor laws. "It's important for Sri Lanka to look at providing lower minimum wages in backward and remote regions... where the cost of living is comparatively lower," he said. "The industrial clusters in these regions can focus on basic products with minimal value addition and large volumes."

To cut production costs further JAAF has requested exemptions from Sri Lanka's 2% nation-building tax and a 7.5% port and airport development tax on the importation of machinery for the sector. "We don't have a problem with the government taxing our profits, but we have sought an exemption on some

Industry participants are urging the Sri Lankan government to look at reducing duties, offering input tax rebates on raw materials sourced locally, and providing subsidies to factories that improve efficiency, to promote competitiveness with Bangladesh and Vietnam.





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