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Garment industry hopes for win-win
situation
...in negotiations between govt. and EC over GSP Plus
Sri Lanka’s largest export industry—the apparels and ready-made garments industry—is hoping the government and the European Commission would come up with a win-win situation with regards to an extension of the GSP Plus facility for duty concessions of exports to Europe, as a loss of the trade facility would be a big blow as European retailers constantly demand for lower prices, says Chairman of the Apparel Exporters Association Kumar Mirchandani.
"The price competition we are facing with (EU) retailers demanding lower prices and plenty of low-cost competitor countries is bad enough to lose the seven percent duty concession to the EU would make a big impact in the apparel industry," Mirchandani said speaking to the Island Financial Review.
"We cannot afford to lose the seven percent concession as we already have no margins. We are hopeful the government and the European Commission would engage each other and come up with a win-win scenario because Sri Lanka needs GSP Plus," he said.
European retailers were already asking Sri Lanka’s apparel manufacturers how they would respond to a possible withdrawal of the trade facility, clearly not intending to pay the extra seven percent duty which means that Sri Lankan exporters would have to absorb the cost themselves.
Mirchandani said it would make Sri Lankan exports less attractive and buyers would look elsewhere given the cheap competition from countries such as Bangladesh and Vietnam.
"Buyers have been constantly demanding for reductions in prices and for the past five years, we have experienced a price deflation of our exports to the EU. Retailers in Europe, or the US for that matter, are getting used to cheaper clothing.
"Over the past few years, the most successful have been the retail chains that offer cheaper clothing as against the high-end stores and this has put pressure on prices all around. For example a Ralph Loren designer shirt which cost US$ 110 a few years ago is now priced at US$ 40," Mirchandani said.
He could not quantify the extent of the loss but Mirchandani said the industry would have no choice but adapt itself if the GSP Plus facility is discontinued.
Currency pressure...
The Central Bank late October said the recent depreciation of the rupee against the Euro provided ample space for exporters to make returns without GSP Plus.
In January 2009, a Euro 10 export price brought in Rs. 1,469.3 at a Euro/Rupee exchange rate of 146.93.
If GSP Plus is withdrawn, the export price would decline by 7 percent (because the buyer would still want to pay Euro 10) and exporters would therefore earn Euro 9.34.
The Euro has appreciated by 18.5 percent since last January and the Euro/Rupee exchange rate is now 172.09. So when converted to rupees, an exporter would earn Rs. 1,607.31 (9.34 x 172.09) which is higher than what he would have received in January despite losing GSP Plus.
"In effect therefore, because of the depreciation of the rupee against the Euro, there is no loss in rupee terms to the exporter if we were to lose GSP Plus today," Central Bank Governor Ajith Nivard Cabraal said, presenting the Central Bank’s case.
Even if the rupee was to appreciate against the euro at a future time, Cabraal said there is ample space to deal with it.
Exporters to the EU say their margins are under constant pressure and maintain pricing was difficult, therefore the gains made by the recent depreciation of the rupee against the euro would not be sustainable when buyers bid down prices.
"I was in the private sector of thirty years and proper margins are never disclosed, I never did. We should not get carried away (by the complaints that margins are under pressure," Cabraal said.
Dollars not Euros...
Mirchandani said the Central Bank’s argument would hold true that the recent depreciation of the rupee against the euro would benefit apparel exporters, but most if not all contracts are priced in dollars, not euros.
"Most, if not all, contracts to the European Union are in dollars so we are losing because the rupee has been appreciating against the dollar," Mirchandani said.
Dealers said the rupee could appreciate further to about Rs. 113 against the dollar by the end of the year, with the Central Bank effectively managing the exchange rate.
Non-reciprocal...
Central Bank Governor Ajith Nivard Cabraal says the European GSP Plus trade concessions carried significant risks to Sri Lanka by virtue of it being non-reciprocal; creating uncertainty, dependency and eroding incentives to improve productivity.
"There is uncertainty that is created by being subject to non-reciprocal trade concessions is that it creates fear among the industries, banks, media and all stakeholders in a country’s economy. The uncertainty about the continuance of GSP Plus facilities has sapped the economic energy of our country," Cabraal said last afternoon.
Support facility on the balance...
Cabraal said the proposed US$ 150 million support facility for exporters in the event GSP Plus facilities are withdrawn is not being considered by the government, although the offer still stands.
Earlier this year the government said it would allocate US$ 150 million to support exporters to the European Union in the event the GSP Plus trade concessions were withdrawn based on the island’s human rights record, the government vehemently opposing any investigations by the European Union considering it an affront to the country’s sovereignty.
Cabraal said the government was no longer considering the US$ 150 million support facility because under present conditions exporters were making better returns as a result of the depreciation of the rupee against the euro (but Mirchandani says otherwise with most exporters to the EU pricing their products in dollars).
"The proposed US$ 150 million concession is no longer needed but the offer still stands," Cabraal said.
A better deal
Trade unions say Sri Lanka needs GSP Plus concessions especially now, with country emerging from a thirty-decade long war but say authorities ought to strengthen labour inspection capabilities in order to monitor the implementation of labour standards, laws and regulations.
General Secretary of the Free Trade Zone Workers Union, Anton Marcus, recently told the Island Financial Review that GSP Plus was necessary for Sri Lanka and its withdrawal could be disastrous to workers.
"The problem is if we lose GSP Plus, employers are bound to use it as an excuse to withdraw certain benefits to workers. Before the scheme was first given to Sri Lanka in 2003 and up until now, we have said that the benefits of GSP Plus have not trickled down to the workers," Markus said.
