EFFECTS OF ECONOMIC CRISIS ON LESOTHO'S GARMENT AND TEXTILE

UNCLAS SECTION 01 OF 02 MASERU 000360 SIPDIS FOR AF/S, AF/EPS, AND EEB E.O. 12958: N/A TAGS: ECON ETRD EIND LT SUBJECT: EFFECTS OF ECONOMIC CRISIS ON LESOTHO'S GARMENT AND TEXTILE INDUSTRY MASERU 00000360 001.2 OF 002 -------------- Summary -------------- ¶1. According to the Central Bank, GDP growth for 2009 is estimated to be 1.1 percent. Because of the declining world prices, inflation remains under control. The exchange rate also has remained fairly stable during the past six months. However, the slowdown in the global markets, the potential loss of AGOA trade benefits, and limited public investment paint a bleak economic picture for 2010. The garments and textile industry, the key sector for Lesotho from the perspective of sustainable development, has been negatively affected by the economic crisis. Two firms shut down operations in September, leaving at least 1,250 people jobless, and industry recovery is uncertain. -------------- Economic outlook for Lesotho -------------- ¶2. According to the Central Bank, GDP growth for 2009 is estimated to be 1.1 percent; the slowdown is mainly due to the slowdown in the global economy, especially in the U.S. The US slowdown affects Lesotho because its economic growth is mainly driven by diamonds and textile and garments exports destined for the U.S. Because of declining world prices, inflation remains under control. The exchange rate also has remained fairly stable during the past six months, with the South African, which the Lesotho loti is pegged to, floating around 7.5 against the U.S. dollar. However, there are concerns that the strength of the rand erodes the competitiveness of local exports and threatens any expectations of recovery in the economy. -------------- -------------- -------------- Effects of the economic crisis on Lesotho's economy -------------- -------------- -------------- ¶3. Lesotho has been significantly affected as its main exports, diamonds and garments, face a double hit, with slowing world demand and lower prices. The garments and textile industry, being one of the key sectors from the perspective of sustainable development for Lesotho, has made a negative contribution to GDP (-0.5%) in 2008. The industry operates under difficult conditions at the moment and there is a lot of uncertainty about the future of the industry as long as the economy of the U.S. is in crisis, because almost 80% of the products from this industry are destined for the U.S. market. The potential loss of AGOA benefits further threatens the livelihood of some 36,000 people currently employed in the industry (the employment figures in the industry were around 45,000 in September 2009). ¶4. Due to this unfavorable economic environment, Raytex Garments textile firm, a subsidiary of Raytex Limited based in China, shut down in early September, leaving at least 750 people jobless. The firm had already started laying off most of its workers in 2008. A second firm, Lesotho Hinebo Textile (Pty) Ltd, also shut down at the end of September. At the time of closing down, Lesotho Hinebo left 500 people jobless. The main reason cited for the closure of these two factories was the unfavorable economic climate, specifically the low demand from the U.S. for the textile products. -------------- -------------- -------------- Government intervention in trying to rescue the industry -------------- -------------- -------------- ¶5. In order to mitigate the impact of the crisis the GOL budgeted a `Stimulus Fund' of USD 80 million, which is to be spent over two years and is aimed at supporting specific investments that will stimulate economic growth in the face of a global economic downturn. Manufacturing is one of the targeted sectors under this stimulus package. MASERU 00000360 002.2 OF 002 ¶6. The government of Lesotho also presented a proposal for amendment of AGOA legislation to Congressman Charles Rangel, through their Embassy in Washington, in early September. The proposal would allow US garment buyers who continue to source from Africa to be rewarded with the opportunity to import equal volumes of garments from the Asian LDCs duty free. This proposal is fashioned after the "Earned Import Allowance Programs" and the HOPE Act for Haiti. It would allow US apparel imports to earn the right to import an equivalent square meter of eligible garments duty-free from non-African LDCs for every importation of garments from Africa made with Third Country Fabric. This proposal was drafted with assistance from Lesotho's textile industry. -------------- Comment -------------- ¶7. Although it has a negative growth rate currently, Lesotho's textile and garment industry contributes significantly to social stability and is of high political importance in Lesotho. The wages that the workers in the industry earn feed thousands of people in this poor country, and Lesotho's relatively high share in AGOA textile imports to the U.S. are a point of pride for the GOL. Their proposal to amend AGOA show the government's commitment to retaining this industry, currently the only major industry of any kind in Lesotho, as a viable driver of Lesotho's economy. While struggling in the current financial climate, industry representatives have indicated that they hope for a market recovery that will allow them to return to full operations by around June 2010. POWER