Corruption and inconsistent policies destroying domestic shoe industry

Inconsistent government policies are hindering the domestic shoe manufacturing industry and helping foreign shoes walk away with the Sri Lankan market. Corruption and inconsistent tax policies, say the local footwear industry, are destroying the domestic industry despite new opportunities created by free trade.

The local footwear industry has been asking the government to control the inflow of low-priced foreign footwear and for support to expand into export markets. The government responded by increasing duties on imported shoes, up to Rs 300 per pair.

However, the shoe industry says the benefits are lost because the government also increased duties on imported shoe components like shoe soles, inners and shanks that are essential industry inputs.

“They have increased the duty on shoe components to a minimum duty of Rs 100. This is a very unbearable duty, most of our small manufacturers are very badly affected,” said Sarath Padmalal, former President of the Footwear Association of Sri Lanka. The shoe industry says the increased taxes on shoe components push up the prices of domestically made shoes, once again out-pricing local shoes against imported shoes. As a result, although the government policy is to develop the domestic shoe manufacturing industry, inconsistent tax policies are doing the opposite.

Meanwhile corruption at national borders continues to undermine government policy at the cost of government revenue.

The footwear industry points out that corruption at Customs, allows large volumes of low quality, low-priced footwear to enter the island.

“These shoes are mainly coming from Bangkok, China and Hong Kong. They are brought in as hand luggage and through private baggage houses. If you go to the airport at night you can see hand-carts full of these items being wheeled out. The most common items are footwear, handbags and clothes,” said Padmalal.

Shoe manufacturers point out that if these footwear items were charged the stipulated duty of Rs 300 per pair, they cannot be sold for as low as Rs 150 in the local pavements.

Corruption at national level is depriving the government of its revenue and is also destroying a domestic industry and employment generation potential.

The industry is now calling on the government to reduce the import duty on shoe parts to allow it to compete against imports. At the moment only about 10% of production capacity is spent on export production and a majority of producers are entirely dependent on the local market.

However, industry experts say the footwear industry has a ready made export opportunity in the European Union (EU).

Beckoning opportunity
The EU, faced with a similar problem of low priced footwear disrupting its domestic markets, imposed anti-dumping duties on both Chinese and Vietnamese shoes in April this year. The duties were revised in October and a new set of taxes that are valid for two years are now in place. Under the new EU directive the anti-dumping duty on Chinese footwear is now fixed at 16.4% and 10% for Vietnamese footwear, for the next two years.

The added layer of anti-dumping duties increase the price of Chinese and Vietnamese shoes and give smaller producers like Sri Lanka an opportunity to compete in the European market. Industry experts point out that Sri Lanka has an added advantage because of the GSP+ scheme that allows duty free exports into the EU. However, Sri Lanka must move fast, as other countries like India and Cambodia are also eyeing the opportunity.

“These duties are valid for two years. So we should push at this moment to get contacts in the EU market to export to the EU,” said Assistant Director of the Export Development Board (EDB) S de Saram.

To make the most of the moment the government, in its 2007 budget, provided for duty free imports of material for the processing and manufacture of leather and leather products which includes footwear. These goods were also exempted from VAT. Machinery and equipment was also made duty free.