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Cablegate: Textiles and Apparel Sector Update: Sri

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 COLOMBO 001644

SIPDIS

STATE/EB/TPP/ABT EDWARD HEARTNEY
STATE FOR SA/INS
DEPT PASS USTR ABIOLA HEYLIGER
COMMERCE/ITA/OTEXA MARIA D'ANDREA
GENEVA PASS USTR

E.O 12958: N/A
TAGS: ECON KTEX ETRD EAID CE ECONOMICS
SUBJECT: TEXTILES AND APPAREL SECTOR UPDATE: SRI
LANKA

REF: (A) STATE 146213 (B) 05 COLOMBO 1247
(C) 05 COLOMBO 965 (D) 04 COLOMBO 1604
(E) 04 COLOMBO 1271

1. Per ref (A), information for Sri Lanka follows:

- 2004 2005
- thru
- June

Total Industrial Prod. (USD MN) 6,889 NA
Total text/apparel/leather prd(USD MN)2,919 NA
Total textiles/apparel exports(USD Mn)2,809 1,326
Textile/apparel share of total exports 49% 45%
Total manufacturing employment (`000) 1,221(a) NA
Total textile/apparel employment NA(b) NA

(a) 3rd Quarter
(b) According to 2003 data, total manufacturing
employment was 1.16 million in 2003, with 357,538
employed in apparel factories.

2. Export Data: Sri Lanka's apparel industry appears
to have weathered the MFA expiration reasonably well
judging by export data. In the first half of 2005,
total exports of textiles and apparel have risen by
8.2 percent to USD 1.33 billion from USD 1.23 billion
in the corresponding period in 2004. The growth
follows a 9 percent growth in CY 2004. However,
according to latest Central Bank data, apparel exports
in July dropped by about 2 percent.
According to US data, apparel exports to the US, Sri
Lanka's largest market, increased 16 percent in the
first half of 2005. Exports to the EU which increased
by 27 percent in 2004 in response to tariff concessions
under a EU GSP scheme, have declined in the first few
months of 2005 as the duty concessions were not
sufficient to offset heavy Chinese competition (see
below for most recent developments in EU GSP).

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3. Prices: Prices received by garment manufacturers
generally declined in the first half of 2005 and
steeper declines are expected in the second half of
2005. Some specialty segments (e.g. sportswear, bras,
and briefs) have, however, seen an increase in price.
According to industry sources, price competition from
China has been greatest in the EU market.

4. Orders: Most large producers experienced larger
orders in 2005. Cottons have done particularly well.
Both the EU quotas and the US safeguards on Chinese
products are assisting local companies. Consequently,
large producers expect increased orders in the next
few months based on feedback from buyers. Some large
producers are expecting to enhance capacities by way
of acquisitions to meet capacity requirements. In
addition, Sri Lanka qualified for the EU's new GSP
"Plus" scheme, allowing even greater access to its
second largest apparel market. Under this scheme, Sri
Lankan apparel, made of EU or Sri Lankan fabric, may
enter the EU duty free as of July 1(ref b). Sri
Lankan apparel with regional fabric (from South Asia)
also qualifies for duty free access to the EU if local
value addition exceeds 50 percent. According to a
senior EU Trade Commission official in Colombo, there
has been a renewal of Sri Lankan exports to the EU
recently following the EU GSP "Plus" scheme.
Previously, the EU commission reported a decline in
Sri Lankan orders in the first half of 2005. Small
scale producers continue to complain of a reduction in
orders and heightened price competition.

5. Special arrangements: In addition to the EU GSP
"Plus" scheme, Sri Lanka has signed Free Trade
Agreements (FTAs) with India and Pakistan. Under
these agreements, apparel exports from Sri Lanka are
under quota. However, Sri Lanka has not been able to
fully exploit the quotas due to heavy price
competition in these markets. Some Sri Lankan
manufacturers are also investing in other countries to
stay competitive in the post MFA era. A leading
apparel manufacturer, Brandix, will start work on a
large apparel manufacturing unit in a special economic
zone in Andra Pradesh in India. Another smaller group
has set up a factory in Africa to benefit from the
U.S. African Growth and Opportunity Act (AGOA).

6. Wages: Increased global competition has not
resulted in a reduction in wages. Due to increased
over-time work to meet new orders the wage bill of
some companies has actually risen. Some
manufacturers, especially smaller firms, reported a
shortage of workers. According to them, high
inflation (around 13 percent) has led to increased
cost of living in most urban areas where factories are
located. The government, which is contemplating a
mandatory wage increase for private sector employees,
may exclude the garment sector from the wage increase
temporarily, but several manufacturers has told us
they expect to get hit with the wage hike soon.

7. Factory closures: There have been many
consolidations and acquisitions of smaller factories
by larger factories. There are no reliable statistics
on factory closures.

8. Actions: Sri Lanka is continuing various programs
to improve the apparel industry, which is the mainstay
of the manufacturing and export sectors. According to
the Joint Apparel Associations Forum (JAAF), current
rules of origin in textile trade are favoring
countries with a strong textile base. Sri Lanka is
disadvantaged in this respect due to the lack of a
textile base. Infrastructure bottlenecks (especially
the high cost of power and poor rural road conditions)
are hampering the establishment of a vibrant textile
base.

9. Among some of the actions being taken by the
Government and the JAAF are:
-- encourage the local textile industry by requiring
all government purchases of fabric (for school
uniforms, military uniforms and prison uniforms) to be
made by local manufacturers
-- imports of textiles and inputs for the apparel
industry are exempted from the Value Added Tax (VAT).
-- a productivity improvement program in 200 small and
medium sized factories.
-- an apparel branding/image building program
-- upgrading of vocational training courses for
apparel sector
-- affiliation with North Carolina State University's
textile institute
-- a Government credit guarantee scheme for commercial
banks that lend to apparel industries. The scheme is
available for factory upgrades. However, the scheme
has not been successful as bankers are reluctant to
fund the apparel industry until they see more clearly
how it will weather the transition to a post-MFA
world.
-- a newly created Government SME bank also has a low
interest loan scheme for the apparel industry.
However, few SME apparel manufacturers have taken
advantage of this opportunity.

10. According to JAAF sources if the apparel industry
stagnates, the country will need to identify other
industries to fuel growth. JAAF recognizing the vital
contribution made to the economy by the apparel
industry, asked to present the following "wish list"
to USG to protect the apparel sector in Sri Lanka:
--enhanced access to the US through special legislation
for tsunami affected and low income countries
--continuation of Chinese safeguard actions
--technical assistance to reopen an ELVIS like system to
avoid transshipment of Chinese goods through Sri Lanka.

Lunstead

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