Lankan garment industry urges exchange rate, inflation control

Sri Lanka’s garment industry says it needs exchange rate stability and the rate of inflation brought down, to do business.

“The rate of inflation needs to be brought down to at least 10 percent – 12 percent minimum, over the next 6 months. It needs to be brought down to a single digit, but immediately, this minimum level needs to be met. The other important thing is exchange rate stability. With the rupee depreciating at this rate companies cannot plan for the future,” said Ajith Dias, Chairman of the Joint Apparel Association Forum (JAAF), the garment industry representative body.

The garment export trade is not the only business hurt by the rate of inflation. Tea industry representatives told The Sunday Times FT recently that tea exporters are finding it increasingly difficult to compete in global markets because of rapidly increasing domestic costs of production.

The strain is already telling on the garment sector. Over the past 18 months the garment sector saw about 100 small and medium factories closing down, according to the JAAF. The industry that had about 800 factories operating at one time is now estimated to have between 350 to 400 factories.

Garment workers in the meantime are going on a campaign this month asking for another wage increase of Rs 2,500. Workers, trade unions and civil organisations say current salaries are not enough to live on.

But garment exporters say increasing salaries will only add to inflation and continue to push up the cost of living. Salary increases at this rate, says the JAAF, is not possible as garment factories are not able to increase profits at the rate of inflation.

“They want an immediate Rs 2,500 salary increase. This is a 40 percent increase on the current minimum, basic salary of Rs 6,000. How can we do that? Our retail prices are the same as five years ago, or lower. Our margins are wafer thin. The costs of all other inputs are also going up. So how can we accommodate this type of salary increase and continue to stay in business?” said Dias.

“Even if salaries were increased, it will add to inflation. So in a few months’ time they will want another salary increase because the salaries will not be enough again. We already have the most expensive machine operators in the whole of Asia,” he said.
The JAAF says the only solution is to control the rate of inflation and the cost of living. “This rate of inflation must be brought down to a bearable level,” said Dias. The Colombo Consumer Price Index (CCPI) in September, showed a 1.1 percent increase against August.

This is an increase of Rs. 122.59 in the expenditure value of the CCPI ‘Market Basket’ compared to August. The Department of Census and Statistics said the highest price increase was in food items because some agricultural items went ‘off-season’ in September. However, many food items that were not officially ‘off season’ and other essentials like clothing and a list of ‘miscellaneous’ items, also saw price increases.

The CCPI in September showed a 17.3% point to point increase, compared to September 2006. The annual inflation rate (12 months moving average) registered was 17.5% - an increase of 6.3% compared to the same period last year.

Exchange rate stability

The garment trade says the rapid rupee depreciation is also adding to industry costs.

“The rupee depreciation is not helping the industry. As much as 60% of the value of a garment is raw materials. Around 50% is imported and the balance 10% is bought locally, but paid for in dollars. So when the rupee depreciates the cost is high,” explained Dias. Garment exporters say they need a stable, predictable exchange rate to be able to plan their profits and production. “We need a stable exchange rate because these changes won’t allow companies to plan ahead. Companies can’t plan their operations because on one side the costs are going up and on the other side the exchange rate is changing. The exchange rate must be kept steady,” he added.

Productive increases

The garment trade says any salary increases of workers must be linked to productivity, as factories cannot increase salaries at the rate of inflation.

“No one is saying our workers should not have salary increases. But this is about the ability of most of the companies, to pay. Most of the companies are small and mediums and they cannot afford to pay this. Already the basic minimum wage is Rs 6,000. But even starting salaries are higher than this because no one is willing to work for Rs 6,000. Garment factories also provide meals, attendance bonus and other production incentives that are not provided in other industries. The take home wage is around Rs 10,000 now anyway, on average,” said Dias.