The garment industry came to a head this week after the government rejected a request from the European Union (EU) to investigate whether Colombo has enforced certain human rights conventions as a precursor to another round of duty-free concessions.
The government’s tough stand follows a decision taken by the EU to launch an investigation even before an application for GSP+ concessions had been made for the new 3-year term starting January 2009, according to International Trade Minister Prof. G.L. Peiris.
According to an EU announcement, the decision to launch an investigation was taken on October 18. Sri Lanka’s application was sent days before that to its Brussels embassy and subsequently forwarded to the EU office.
GSP+ or not, the government is working out the modalities of a bailout package for the beleaguered garment industry where the fallout from this dispute is adding to many problems the industry has been having in the past 12 to 18 months. In fact small-to-middle level factories have been facing a major crisis over several months now with banks reluctant to advance credit -- with a lot of bad debts in the corporate sector.
Many of these companies have been struggling; a few have closed while some have been given on lease by owners, frustrated by the crisis. To many, the cost of production has increased sharply, year-on-year with power, fuel, interest rates and wage costs running astronomically high.
The big players like MAS Holdings and Brandix are getting ‘lean and mean’ with MAS in particular reducing on top-end, senior managers and cutting the number of overseas manufacturing units in an effort to overcome costs and a global economic crisis but have no problems about credit from banks as favoured customers while it’s the lower-end of the ladder who are taking the hit, GSP + or not.
The domestic crisis, to some extent, has been aggravated by what Wall Street calls the “financial meltdown’ where the US government is bailing out financial institutions. The situation in the US is expected to see lower consumer spending which would impact on clothes, in turn impacting on Sri Lankan garment manufacturers.
The US fallout is seeping through the industrialized world with commodity, stock and financial markets in turmoil. Europe, which accounts for 50 % of Sri Lankan garment exports, is also certain to see its buyers putting pressure on Sri Lankan suppliers with the price being the key push-pull factor. While Sri Lanka is known for its quality products, European buyers, under pressure from a possible fall in consumer spending, are most likely to pin down local suppliers to a competitive price-advantage issue.
While details are being worked out, the bailout package of $150 million is expected to provide concessionary credit facilities and possible concessions on power and other tariffs. A Supreme Court ruling this week for the Ceylon Electricity Board to abandon its currently, new tariffs and go back to an earlier, lower-cost regime would benefit the industry in terms of costs.
The EU says its probe is one of the conditions under which Sri Lanka benefits from the tariff preferences offered under the EU's special incentive arrangement for sustainable development and good governance (the GSP+).
It says the investigation will determine whether the legislation of Sri Lanka on the recognition and protection of fundamental human rights is effectively implemented. While the EU and its envoys representing different countries have publicly said the issue is unconnected to politics, most political analysts believe the west is using this as a bargaining tool to whip the government over alleged human rights abuses, a charge the Mahinda Rajapaksa administration has vociferously rejected.
The pressure continues for John Keells Holdings (JKH) and its board with the share price falling by half to around Rs 64 this week from Rs 130 in the same period a year ago.
The share price perked up a little bit on Thursday after the company assured investors that it was going ahead with its share re-purchase at Rs 90 per share, but then fell to previous low levels. This happened on increasing worries by investors that JKH’s privatization deal pertaining to the South Asia Gateway Terminal (SAGT) would be scrutinized through another fundamental rights petition, following on the LMSL privatization which was a corrupt deal, according to the Supreme Court.
On another front, JKH will come under the microscope when the slowly-moving Chamber of Commerce main committee next week takes up the issue of whether JKH has violated the chamber’s code of conduct.
Looks like JKH and is not out of the woods yet after the damning LMSL judgment in July.