Sri Lanka Garment Sector Revises Revenue

UNCLAS SECTION 01 OF 02 COLOMBO 000533

SIPDIS

STATE SA/INS, EB/TPP; MCC FOR D NASSIRY AND E BURKE
DEPT PASS USTR

SENSITIVE, SIPDIS

E.O 12958: N/A
TAGS: ECON EAID KTEX ETRD CE
SUBJECT: Sri Lanka Garment Sector Revises Revenue
Projections Downward


1. (SBU) Summary: Sluggish growth in apparel exports has
prompted Sri Lanka to re-design its textile and garment
industry strategy. While new growth targets have not been
set, the new strategy will focus on promoting two broad
categories of apparel and enhancing productivity. In
addition, a key industry advocacy group has recommended
increased Government involvement in the sector, new
marketing strategies, increased supply-chain integration
and more regional accumulation of inputs. While the
industry is pushing for more Government involvement, it
would do well to reflect on the success of the private
sector in building the garment industry. Nonetheless,
industry advocacy does reflect a key US assistance goal of
promoting economic sector-led industry development. End
Summary.


2. (SBU) The value of Sri Lankas garment exports rose 3.1
percent in 2005 to $2.9 billion, significantly lower than
the 12 percent annual growth rate forecast in the 2002 5-
year apparel industry strategy. The strategy projected
that exports would reach USD 4.7 billion by 2007. While
data on volumes are not yet available, it is widely
suspected that volume has increased significantly, but that
export value is victim to a free-fall in prices due to the
expiration of the Multi-Fiber Agreement (MFA) quota system.
Mr. T. Cooray, Secretary General of the Joint Apparel
Association Forum (JAAF),told EconFSN that the industry is
totally out of step with its previous growth targets,
which prompted them to revisit the strategy. According to
Cooray, smaller factories which operated on very thin
margins are having severe difficulties. Meanwhile, bigger
players are reducing margins and expanding production. Sri
Lanka's top end producers, who contribute about 70 percent
of exports, have gone high-tech, consolidated their supply
chains, cut costs and lead times, and have formed close
ties with garment buyers.


3. (SBU) JAAF, an industry advocacy group established to
address post-MFA challenges, has recently conducted a
strategic planning session to revisit the five-year apparel
industry strategy adopted in 2002. According to Cooray,
while the final report is not yet ready, a main
recommendation will be to focus on the development of two
key product categories, casual wear and intimate garments.
These categories have recorded very high growth rates in
the past year. The original strategy identified four broad
d
product categories to be developed in the post quota era
casual-, intimate-, sports- and childrens-wear. JAAF has
proposed dropping sportswear and childrens-wear as they
have not performed particularly well in the post-MFA era.


4. (SBU) Another key recommendation is the need for a new
strategy to compete in the US market as the prospects for
preferential market access are slim (Note: Sri Lankas
garment sector has been pushing for a Free Trade Agreement
between the US and Sri Lanka and has also been a strong
lobby for duty free access for Sri Lankan goods as a
tsunami relief measure. End Note). JAAF has also proposed

SIPDIS
establishment of a separate cabinet ministry for the
garment sector (Note: new cabinet ministries are often
viewed as the solution to any problem in Sri Lanka there
are currently 35 cabinet ministries and 25 non-cabinet
ministries. End Note). Further, the organization has
suggested enhancing information technology capabilities and
and
productivity, using social compliance as a key marketing
tool and consolidating ties with regional countries to
enhance the supply chain and comply with rules-of-origin
requirements that allow for regional accumulation of
inputs.


5. (SBU) While garment exports, being the main success
story of the Sri Lankan economy, contribute to nearly 50%
of export earnings and the industry is lobbying for a new
ministry, the industrys phenomenal success has been
primarily due to private initiatives. Successful
initiatives of local and foreign investors, as well as
skills of high caliber professionals managing the industry,
helped Sri Lanka to make maximum use of the quota regimes

COLOMBO 00000533 002 OF 002


under the MFA and produce for international apparel brands.
In light of the MFA phase-out, these companies banded
together through the JAAF to restructure the industry and
promote investment in modern equipment, advanced
technological processes and to provide improved facilities
for their workforce.



6. (SBU) The governments role was largely to manage the
quota regime and offer tax holidays for foreign investors,
build export processing zones and canvas for trade
liberalization such as the EU GSP-plus program, the Indo-
Lanka Free Trade agreement and a US-Sri Lanka Free Trade
Agreement. The industry also deals with various government
agencies, such as ports and customs, on a daily basis for
business purposes. The request for a separate ministry
looks in part to be a move to attract greater government
attention to the industry and to lobby for increased
business facilitation from various government agencies
(including canvassing for low cost power plants and fewer
holidays - two key problems faced by the industry).


7. (SBU) A leading industrialist who built 30 factories
under former-President Premadasas 200 garment factory
program told Econoff that he did not see a need for a
separate ministry as less government involvement was better
er
for business. He was especially glad that the MFA was
phased-out as the quota distribution in Sri Lanka was
subject to corruption and political patronage. According
to this industrialist, the absence of quotas has made it
possible for companies to grow through their own
initiatives and marketing and not by becoming dependent on
artificial market forces. Since the MFA phase-out his
company has re-opened 10 factories that were closed and is
negotiating to open an exclusive infant line with a UK
buyer.


8. (SBU) Comment: We will report on the labor impacts of
the MFA expiration septel. The industry is in a period of
consolidation and faces a period of uncertainty. We
believe JAAF has shown itself to be an incredibly positive
force in preparing Sri Lanka for the post-quota world, and
also believe that its current effort to rationalize its
projections will provide good input and guidance to the
industry as it moves forward. Perhaps more importantly,
the garment sector has provided Sri Lanka with a much
needed example of industry banding together and leading
itself (something the USG is promoting through our USAID
Economic Growth initiative The Competitiveness Program).
End Comment

Lunstead