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Importance of GSP for apparel sector

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An apparel worker

 

By Jeevith Senaratne

Sri Lanka’s apparel industry – which accounts for 47 per cent of the nation’s exports and 15 per cent of industrial employment – is critical to our national economic health and well-being. Therefore, ensuring that the industry remains strong and resilient should be very high on our list of national priorities.

Given this backdrop, managing Sri Lanka’s relationships with key trading partners becomes highly significant, especially the few that we have preferential trading relationships with. A case in point is the European Union (EU).

The Generalised System of Preferences (GSP) or GSP, a preferential tariff system of the EU, one of our main export markets, plays a key role in Sri Lanka’s export competitiveness – and in the apparel industry’s success story. We cannot afford to lose access to our second largest export market, but the risk of that happening is real.

Here’s a situational summary: the European Parliament asked the European Commission (EC) to consider suspending Sri Lanka’s GSP+ status (explained a few paragraphs below), which it had restored in 2017 after first revoking it in 2010. The EC’s decision-making processes are however, grounded in economic rationale, and different from the calculus of the European Parliament, whose considerations are primarily political.

The timing is significant; the current GSP regulations will expire on 31st December 2023, and the renewal of the scheme is under review at present. This matters for another important reason: two other markets that the Sri Lankan apparel industry hopes to enter – Japan and Australia – also have GSP schemes, modelled on the EU. The EC’s actions could – potentially – affect those plans.

There are other reasons GSP+ access needs to be protected; look at the economic benefits that the apparel industry has contributed, the jobs it has created, its impact on economic development across the country, the reduction between rural and urban incomes that it has enabled and how it has empowered women by dramatically increasing their participation in the workforce.

Apparel accounted for 59 per cent of our country’s merchandise exports in 2020: $4.4 billion out of $7.7 billion, and just a shade under 5.5 per cent of GDP. It employs 350,000 people directly, and roughly twice that number indirectly. Women are 78 per cent of the industry’s employees, compared to the national average of 34 per cent for female participation in the workforce.

A 2018 study by the data analytics and insights company Kantar found that employees in the apparel industry were proud of being part of it; women felt empowered and glad to have economic independence. Additionally, earnings of people moving from rural to urban apparel industry jobs, boosts incomes in rural Sri Lanka, reducing rural poverty substantially.

A brief explanation of what GSP is, and how it works will help understand why retaining it is important. In essence, GSP+ is a special incentive arrangement aimed at sustainable development and good governance in vulnerable, low and lower-middle income countries. Vulnerability is assessed based on a country’s imports and economic diversification.

GSP+ countries – there are 7 others apart from Sri Lanka – have to implement 27 core international conventions on human rights, labour rights, protection of the environment and good governance. The EU reduces customs duties for the products under the general GSP arrangement to 0 per cent for GSP+ countries. GSP+ benefited roughly $1.9 billion of Sri Lanka’s exports to EU countries in 2019.

In its 2019 annual report, the EU said apparel accounted for 48 per cent of the 184 billion Euro under GSP+. This number highlights how vital being eligible for GSP+ is to remain competitive in accessing the European market.

Since we import a little over half the raw materials used in the apparel industry, we cannot, under current EU rules, get zero duty benefits on the full value of apparel exports to the EU, which were $1.2 billion in 2019. Zero duties were allowed on $586 million, or roughly 42 per cent.

That’s because we use a large part of imported content in our apparel. GSP+ has conditions called ‘country of origin’ rules, whereby you can only benefit from zero duty if the product was made from fabric that originated from a SAARC country.

The upcoming fabric processing park at Eravur gains additional importance in light of this. This fabric park is a project that has been under consideration for a long time; and when completed, it will add to our raw material processing capacity and enable import substitution. The decision by the GoSL to expedite this park will be a major boost to the Sri Lankan apparel manufacturer as it will allow for a greater utilization of GSP+. The zone will have a central wastewater treatment facility which is of significant value to investors in a fabric park.

In layman terms, at least in apparel, the loss of GSP+ would on average make Sri Lankan exports to the EU 9.5% more expensive than it is in the status quo. This “surcharge” would come on the back of Sri Lankan apparel already being more “expensive” than that of our competitors.

Rather than being cost-competitive like some competitor nations, our apparel industry focuses on value addition, estimated at close to $2.4 billion on $5.3 billion of apparel exports in 2019 (after deducting costs of raw material imports), or 52 per cent. With strategic initiatives like the fabric park in Ervaur, we can aim towards 65% value addition within Sri Lanka in the not-too-distant future. However, the viability of ventures such as the fabric park hinge on investors being able to reap the full reward presented through the existence of preferential trade agreements.



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Reform or perish, it’s not too late

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Sri Lankan economy in historic crisis

By K.D.D.B Vimanga and Naqiya Shiraz

The Sri Lankan economy faces a historical crisis. The root causes are the twin deficits. First, the persistent fiscal deficit – the gap between government expenditure and income. Second, the external current account deficit – the gap between total exports and imports. The problems have been festering for too long. Without urgent reforms, the crisis could easily morph into a full-blown debt crisis.

Sovereign debt workouts are extremely painful for citizens. A mangled debt restructuring can perpetuate the sense of crisis for years or even decades. A return to normal economic activity may be delayed, credit market access frozen, trade finance unavailable.

With the global pandemic, these are unusual and difficult times. The next five years are going to be crucial for the country. The problems can no longer be avoided and should be faced squarely. The journey ahead is going to be painful but the longer these are delayed the worse the problem becomes and the magnitude of the damage compounds.

State of the Economy

The new government inherited a fragile economy, battered by the Easter attacks of 2019, the constitutional crisis of October 2018 and the worst drought in 40 years in 2017. With the pandemic in 2020 Sri Lanka’s economy shrank by 3.6% with all sectors of the economy contracting.

Yet, the pandemic is not the sole cause – it only accelerated the decline of Sri Lanka’s economy that was weak to begin with. The country has long been plagued by structural weaknesses, with growth rates in the last few years even below the average growth rate during the war. Mismanaged government expenditure coupled with a long term decline in revenue have characterised Sri Lanka’s fiscal policy. As of 2020 total tax as a percentage of GDP fell to just 8%, while recurrent expenditure increased.

Borrowing to finance the persistent budget deficits is proving to be unsustainable. Total government debt rose to 101% of GDP in 2020 and has grown since. Sovereign downgrades have shut the country from international debt markets. The foreign reserves declined from US$ 7.6 bn in 2019 to US$ 5.7bn at the end of 2020 and to US$ 2.8 bn by July 2021. This level of reserves is equivalent to less than two months of imports. With future debt obligations also in need of financing, the situation is dire.

The import restrictions placed to combat this foreign exchange crisis have failed to achieve their purpose and are doing more harm than good. imports rose 30% in the first half of 2021 compared to 2020 despite stringent restrictions.

The problem lies not in the trade policy but in loose fiscal and monetary policy that has increased demand pressures within the economy, drawing in imports and leading to the balance of payments crisis and consequently the depreciation of the currency.

Measures by the Central Bank to address this by exchange rate controls and moral suasion have caused a shortage of foreign currency leading to a logjam in imports.

Fundamental and long-running macroeconomic problems were intensified by the pandemic.Import restrictions, price and exchange controls do not address the real causes.

Treating symptoms instead of the underlying causes is a recipe for disaster.

The continuation of such policies will lead to the deterioration of the economy, elevate scarcities, disadvantage the poor who are more vulnerable and in the long run lead to even higher prices and lower output due to lack of investment.

Sri Lanka’s GDP growth over the last decade has been alternating between short periods of high growth and prolonged periods of low growth. This is a result of the state-led, inward looking policies of the last decade.

A comprehensive reform agenda must be built around five fundamental pillars:

i) fiscal consolidation – The need to manage government spending within available resources and to reduce debt are paramount. Revenue mobilization must improve but the control of expenditure cannot be ignored. Budgetary institutions must be strengthened and there must be reviews not only of the scale of spending but also the scope of Government.

ii) Much of government expenditure is rigid – the bulk comprises salaries, pensions and interest so reducing these is a long term process. Reforming State Enterprises, especially in the energy sector and Sri Lankan Airlines is less difficult and could yield substantial savings. Continued operation of inefficient and loss-making SOE’s is untenable under such tight fiscal conditions. Financing SOE’s from state bank borrowings and transfers from government reduces the funds available for vital and underfunded sectors such as healthcare and education. Excessive SOE debt also weakens the financial sector and increases the contingent liabilities of the state. Therefore SOE reforms commencing with improving governance, transparency, establishing cost reflective pricing and privatisation are necessary. This can take a significant weight off the public finances and by fostering competition contribute to improvements in overall economic productivity.

iii) Tighten monetary policy and maintain exchange rate flexibility. Immediate structural reforms include, Inflation targeting, ensuring the independence of the central bank by way of legislation and enabling the functioning of a flexible exchange rate regime. Further significant attention has to be placed on the financial sector stability with a cohesive financial sector consolidation plan, with special emphasis on restructuring of SOE debt.

iv) Supporting trade and investment. Sri Lanka cannot achieve economic growth without international trade which means linking to global production sharing networks. Special focus has to be given to reducing Sri Lanka’s high rates of protection which creates a domestic market bias in the economy along with measures to improve trade facilitation and attract new export oriented FDI.

Attempts to build local champions supported by high levels of protection have

(a) diverted resources away from competitive businesses,

(b) created a hostile environment for foreign investment,

(c) been detrimental to consumer welfare,

(d) dragged down growth

v) Structural reforms to increase productivity and attract FDI – Productivity levels in Sri Lanka have not matched pace with the rest of the growing economies. The reforms mentioned above are extensively discussed in Advocata’s latest publication “Framework for Economic Recovery”.

Sri Lanka stumbled into the coronavirus crisis in bad shape,with weak finances; high debt and widening fiscal deficits. It no longer has the luxury to delay painful reforms. Failure to do so will not only jeopardize the economy; it could even spawn social and humanitarian crises.

Naqiya Shiraz is the Research Analyst at the Advocata Institute and can be contacted at naqiya@advocata.org.K.D.D.B. Vimanga is a Policy Analyst at the Advocata Institute. He can be contacted at kdvimanga@advocata.org.

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Samsung Galaxy 5G-ready devices now available at Dialog

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Dialog Axiata PLC recently announced the pre-order availability for the all new 5G-ready Samsung Galaxy Z Fold3 5G and Z Flip3 5G devices.

 The latest foldable smartphone range by Samsung is now available for pre-order via Preorder.dialog.lk until 30th September 2021. Dialog Customers will also receive anytime free Data worth 200 GB (valid for 60 days) with Fold3 purchases or 150 GB (valid for 60 days) with Flip3 purchases made on or before the 30th October 2021. Club Vision members have the added benefit of redeeming their loyalty discounts when purchasing the devices from Dialog. Customers are also provided with the convenient payment method of purchasing the latest Samsung Galaxy Z Flip3 and Fold3 on monthly instalment plans at 0% interest – up to 40 months with leading credit cards. All online purchases will also receive free doorstep delivery.

Opening the next chapter in foldable innovation, both devices are premium foldable smartphones built with the craftsmanship and flagship innovations Samsung users have come to love and expect. The third generation of these category-defining devices incorporates key improvements that Samsung foldable users have asked for—making them highly durable with more optimized foldable experiences than ever before. From iconic design to immersive entertainment, Galaxy Z Flip3 and Z Fold3 offer users unique new ways to work, watch, and play. For those who need the ultimate device for productivity and immersive entertainment, Galaxy Z Fold3 is a true multitasking powerhouse with next-level performance, an undisrupted 7.6-inch Infinity Flex Display, and the first-ever S Pen2 support on a foldable device. For those who want style that comes with function, Galaxy Z Flip3 is the ideal device with its sleek, compact, and pocketable design, enhanced camera features, and a larger Cover Screen built for quick use on the go.

 The Samsung Galaxy Z Flip3 is available in the colour Cream with an 8GB RAM + 256 GB internal storage capacity and is priced at Rs. 249,999/-. The Samsung Galaxy Z Fold3 is available in the colours of Phantom Black and Phantom Green with a 12 GB RAM + 256 GB internal storage capacity and is priced at Rs. 399,999/-.

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BoardPAC appointed Strategic Partner of Commonwealth’s Business Network – CWEIC

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BoardPAC, the Sri Lanka-based multinational Board meeting automation solutions company, has been appointed a Strategic Partner of the Commonwealth Enterprise and Investment Council (CWEIC), the organization officially mandated by the Commonwealth Heads of Government to promote trade and investment between the 54 Commonwealth member countries, a company news release said last week.

“This prestigious appointment will see CWEIC relying on BoardPAC’s award-winning solutions to conduct board and committee meetings with members and maintain relationships across the Commonwealth network at a time when the global pandemic’s complete disruption of business activity has resulted in a surge in the demand for efficient board meeting automation,” it said.

The Company said the partnership will also effectively promote the BoardPAC platform to new users and facilitate its expansion into new territories and focus markets. BoardPAC already has a global user base in excess of 50,000 and a presence in more than 40 countries.

Noting that BoardPAC’s latest partnership serves as yet another testament to the quality of its solutions, BoardPAC Co-Founder/CEO, Lakmini Wijesundera stated: “Our growth plan includes expanding our worldwide network, and our strategic alliance with CWEIC will strongly help us extend our presence into Commonwealth territories. The strategic cooperation between CWEIC and BoardPAC is especially relevant in light of the worldwide pandemic, and the emerging need for secure remote working and filling the void in virtual board meetings.”

CWEIC Chairman, Rt. Hon. Lord Jonathan Marland said: “We are looking forward to work closely with BoardPAC. The alliance will not only help CWEIC to conduct virtual board meetings securely and safely, but also align ourselves with all governance, risk and compliance as well as environmental, social, and governance frameworks.” Echoing this sentiment, CWEIC Deputy Chair, Sir Hugo Swire stated: “We are excited to partner with BoardPAC and extend modern digital governance and compliance solutions to organisations operating in the Commonwealth.”

A commercial, not-for-profit membership organisation, the Commonwealth Enterprise and Investment Council’s network includes around 100 business and government Strategic Partners (members) including Standard Chartered, Zenith Bank, Trade & Investment Queensland and the Government of the Maldives from 30 countries and territories. Every two years, CWEIC hosts the Commonwealth Business Forum in association with the host country of The Commonwealth Heads of Government Meeting (CHOGM).

BoardPAC is an award winning, multinational, paperless board meeting automation solutions provider, recognized for driving simple, secure, sustainable and experiential communications for Board and Executive members. Leading corporates such as Petronas, Deloitte, EY, Mercedes Benz, Prudential, Hong Leong Group, Stock Exchange of Malaysia, Central Bank of Sri Lanka, Bombay Stock Exchange, Bank Negara, Maybank, Power Grid Corporation of India, Colombo Stock Exchange, and Sri Lankan Airlines are just some of BoardPAC’s success stories, and the Company said the partnership with the CWEIC will pave the way to several more high-profile additions to this list.

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