New laws to help ailing garment factories recover
The Central Bank says it will soon introduce new laws to resuscitate ailing industries that will help prop up garment factories in trouble.
Although 700 odd garment factories are expected to bring in US$ 3 billion in export earnings this year, factories are also quietly closing down unable to adjust to post-quota market changes. The worst impacted are the small manufacturers that are finding it difficult to access credit to keep going. However, the Central Bank says new laws will soon come in, that would help ailing garment factories get back on their feet.
“Billions of rupees of economic assets are locked out of the economy because of failed industries. So we are working on that,” said the Governor of the Central Bank, Ajith Nivard Cabraal, speaking at the Annual General Meeting of the Sri Lanka Apparel Exporter’s Association (SLEA) on Wednesday.
Meanwhile, the garment industry is asking for legal protection from creditors for garment factories. “Permit ailing apparel manufacturing companies to have legal protection similar to the provisions of Chapter 11 in the USA,” said the new Chairman of the SLEA, Noel Priyatilake.
Chapter 11 is a chapter of the US Bankruptcy Code which governs the process of reorganisation under the bankruptcy laws of the US. A business in trouble can file, or be forced by its creditors to file, for bankruptcy under either Chapter 7 or Chapter 11. A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations. A Chapter 11 filing, on the other hand, is an attempt to stay in business while a bankruptcy court supervises the ‘reorganisation’ of the company's contractual and debt obligations. The court can grant complete or partial relief from most of the company's debts and its contracts, so that the company can make a fresh start. The garment industry is asking for similar provisions in Sri Lanka.
The garment industry is also asking for a moratorium on all debts of all ailing apparel companies and flexibility from banks in the case of delinquent loans. Garment exporters say these protective legal measures need to be operational as soon as possible.
“These policy decisions must be taken quickly because we see two threats looming before us,” said Priyatilake. The exporters point to China as a contained threat until end 2007 and Vietnam as an emerging threat. Once quota controls on China expires by the end of 2007, the industry will be left open to the full impact of low cost Chinese production in major markets like the USA. Vietnam’s entry into the World Trade Organisation this year is also expected to eat into Sri Lanka’s tiny 1.1% global market share.
The SLEA that represents nearly 70% of total garment exports from Sri Lanka says the industry urgently requires legal protection to withstand market adjustment shocks.