The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Is Sri Lanka's garment industry under threat?
Sri Lanka's ready-made garment industry is the largest export and exchange earner. It is by far the most important industrial sub-sector. It contributed 50 per cent of the country's foreign exchange earnings in 2003. It accounts for about 40 per cent of factory industrial output and about two-thirds of industrial export value.

Any setback to the industry at this time when other industries in the country are still insignificant would be a serious setback to the economy as a whole. Does the lapse of the Multi-Fibre Agreement (MFA) in 2005 pose such a threat?

The Central Bank Annual Report of 2002 addressed this question. It came up with the conclusion that the structure and performance of the garment industry ensured that the apparel industry was robust enough to face the removal of the MFA. However the recent book Readymade Garment Industry in Sri Lanka: Facing the Global Challenge, edited by Dr. Saman Kelegama and published by the Institute of Policy Studies presents another facet of the debate as well, that is not as optimistic as the Central Bank expectation.

The Central Bank has argued that the structure and performance of the garment industry is such that it would be able to face the removal of the MFA without serious consequences. The industry is highly concentrated with about 72 per cent of production being in the hands of 12 industries. These industries, it is argued, are well managed and organised to face the competition. Though other small enterprises would find it difficult to survive and some may have to close down, many of them could be subcontracted to produce to the threatenedfirms.

This is postulated in a scenario where readymade garments would continue to expand in world trade. The other strong argument for expecting the industry to thrive is that the country has many internationally reputed and strongly linked garment manufacturers that produce high value-added non-quota items. It is to the growth of this segment of the industry that we must look to for continued growth of the industry. The Central Bank report pointed out that among competing countries Sri Lanka had the lowest (55 per cent) proportion of apparel exports in the quota category.

There is however another perspective of a downside scenario. This too is discussed in Kelegama's book. It is pointed out that in so far as the US market is concerned, Sri Lanka is not likely to be competitive as Chinese, Vietnamese and Bangladesh exports are cheaper. With weak forward integration and inadequate backward linkages, it is argued that our exports would not be competitive in the US market in particular. It is also suggested that recent developments in the industry may have softened this scenario.

The complex issues surrounding the future of this most important industry requires to be looked into. The most pertinent questions that require to be answered are: what is the future of Sri Lanka's garment industry with the impending change? Can the apparel industry retain its competitiveness in the global market without the protection afforded to quota items? How competitive is our quota sector of the industry in the face of the impending competition? To what extent has the garment industry diversified into non-quota items to ensure that the removal of quotas will not be of much consequence? What are the prospects for up-market garments that are also higher value-added export items? What are the forward and backward linkages of the industry?

The publication of the Institute of Policy Studies book makes that task easier as it addresses many of the pertinent issues of the industry in depth. It is rather urgent that corrective actions and new policies are developed on the basis of a careful study of the industry within the country and the global developments in ready- made garment trade. The Central Bank Annual Report of last year stated that the industry had made changes that could cope with the change in the global market. Nevertheless we cannot leave the industry alone to make the needed adaptations to the imminent change in just a few more months. There should be some support especially to assist cost reduction of manufacture.

Back to Columns