Financial Times

Apparel trade welcomes budget, warns margins getting squeezed
The Joint Apparel Association Forum (JAAF), has welcomed incentives given to the industry in the budget but warned that margins were getting squeezed owing to growing competition from cheaper producers with the end of textile quotas.

Although the impact of the end of quotas had not been as bad as feared, Sri Lanka’s apparel industry has managed to increase exports by only 8-9 percent up to September 2005 compared with much higher growth rates from other Asian producers like China and India, JAAF secretary-general Tuly Cooray said.

“Our margins are getting thinner and thinner and thinner,” he told a news conference. “So we’re trying to reduce domestic costs which we believe will help the industry stay competitive.”

Sri Lanka still had a window of opportunity to make the industry more competitive as competitors like China have textile quotas into major markets which end only in 2008.

Turney Mohamed, chairman, Sri Lanka Garment Buying Offices Association, said exporters had been forced to drop prices by about 20 percent on FOB (free on board) values. Cooray said “100 percent” of JAAF proposals had been included in the budget for 2006 and that the industry was lobbying for further concessions for entry into European markets, having won duty free access under the European Union’s ‘GSP Plus’ system of preferential tariffs.

The GSP Plus is meant to give developing countries access to developed country markets and products are eligible to enter EU markets duty free since July 2005 compared with import duty rates of 7.5 - 33 percent previously.
Cooray said the industry wants the rules of origin criteria lowered to 35 percent from an average of 50 percent now and to be allowed to source inputs from East Asian countries apart from SAARC member nations.
Products entering the EU under GSL Plus have to meet certain requirements under rules of origin for being considered as originating in the exporting country.

While products wholly obtained in the exporting country are considered as originating there, products manufactured with inputs from other countries are considered so only if they have undergone sufficient working or processing.
Cooray said JAAF proposals to improve industry backward integration by setting up fabric mills in the Thulhiriya complex to increase procurement from the local market had been accepted by the government.

The apparel industry imports textiles to the value of $1.5 billion annually and if at least part of these imports can be made locally, this will help conformity with the rules of origin criteria.

The government had also accepted the proposal to liberalise apparel sales in the domestic market from January 2006 to allow local consumers to benefit by buying export-standard clothes for which Sri Lanka has earned a good reputation.

VAT has also been effectively removed on foreign exchange earnings of local producers of accessories required by apparel exporters as well as small garments manufacturers acting as sub-contractors for bigger exporters. This will help consolidation in the industry.

The budget has also removed VAT on import of capital goods required by the industry to modernise export factories.

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