We pointed out last Sunday the startling fact that there has been an appreciable decline in garment exports to our main export markets, the United States and the European Union (EU) countries. Garment exports have declined by 8.9 in June this year in comparison with earnings in June last year. The growth in exports of textiles and garments was only 1.5 percent in the first half of the year compared to what it was in the first half of last year. This is indeed a very unsatisfactory situation for the country’s main industrial export and the one that gave a lead to the country’s industrial export strategy.
We pointed out that there were fundamental macro economic problems that impacted on the country’s export industries. Unfavourable economic conditions have meant considerable increase in the costs of production through increases in vital input costs such as energy, transport, wages and imported raw material. The higher rate of inflation in Sri Lanka in comparison with other garment exporting countries has meant that our garment exports have become less competitive compared to Bangladesh, India, China and Vietnam. Exports from these countries are far more price competitive and are threatening our exports in both European Union countries and the United States.
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In both these large markets consumers are very price sensitive and in their own situation of a lesser economic growth, this year demand appears to be decreasing. The situation with respect to Sri Lankan exports has not been made any easier by a virtually constant exchange rate despite the rate of inflation in the country being relatively higher than those of our competitors. All our competitors have lower rates of inflation, most of them less than 10 percent or at most less than half Sri Lanka’s rate of inflation.Now news comes on the heel of this situation that the GSP plus status the country enjoyed in the past years in the European market would be withdrawn.
The garment industry is facing a predicament that is well captured by the Sinhala saying that likens it to the man who fell from a coconut tree being attacked by a bull. On the one hand, the higher inflationary conditions in the country are raising costs of production, and on the other, the country’s garment exports to European Union countries may soon have to face higher import duties owing to the removal of the GSP Plus status.
An article in the London Economist of August 14 highlighted the impending problem. According to this article: “A senior EU official familiar with Sri Lanka thinks that currently it seems unlikely GSP Plus will be renewed. At a minimum, he suggested, the government would have to make real progress on a case in which 17 aid workers employed by a French NGO were killed in 2006, and another in which five High-school students were executed, allegedly by security forces, also in 2006.” It adds that: “If the EU renewed the agreement without such progress, it might be challenged at the World Trade Organisation as happened to an EU trade sop to Pakistan in 2004.”
There are other evidence too that suggest this may be the case. Pronouncements in Colombo by visiting officials of the EU over a period of time as well as statements of EU country ambassadors indicated a need for compliance on the 27 conditions laid down on such issues as human rights, working conditions and environment. It is with respect to human rights that the EU feels there is no compliance.
The blow from the withdrawal of GSP Plus status could be massive to the garment industry. The same London Economist article says that: “According to an unpublished paper by economists at the University of Sussex, losing GSP Plus would lead to a 4% cut in Sri Lanka’s garment exports. Overall, it would cost 2% of GDP.” This may be an exaggeration as it does not take into account what adjustments would be made by the government and the industry in the face of the removal of GSP Plus.
There can be no doubt that a decline in the garment industry would be a serious blow to the country’s economy. The decline in garment exports would not only affect the trade balance and the balance of payments adversely, but impact on employment and incomes of a significant section of the population. It would be a reversal of the trend of industrial export growth that has been witnessed over two decades. It is therefore essential that policies have to address this serious situation. The issue of human rights would have to be addressed as other countries too could follow the example of the European Union. Already there have been cuts in foreign aid.
The second macroeconomic problem that must be addressed is the high rate of inflation. This requires addressing the macroeconomic policies that have created the high trend in inflation. Sri Lanka’s competitors have much lesser rates of inflation and therefore are price competitive with Sri Lanka. Many of these countries have rates of inflation that are less than half of ours. The fiscal imbalance is the key issue that must be addressed. The third issue is the adoption of a realistic exchange rate that would not hamper export industries. Unless such corrective actions are taken this situation would deteriorate.
Expecting productivity improvements in the garment industry in an environment of ever increasing prices is foolhardy. The stable exchange rate in this context of increasing costs of production is the main factor leading to the erosion of competitiveness in international markets.
It would indeed be foolish if the government does not take the emerging problem of the country’s decline in industrial exports seriously. The problem may be that the government does not recognize that overall economic conditions affect industrial exports. It is the responsibility of economic advisors to indicate the seriousness of the problem and suggest remedial actions. however unpalatable these may be. |
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