"We're definitely going to face serious issues next year. It will probably be one of the worst years we have had in a long time."
Exports were already slowing down in key markets and top buyers were under pressure and could possibly reduce orders, Dias told the 'Apparel South Asia Conference 2008'.
The conference has drawn South Asian apparel manufacturers from India, Pakistan, Bangladesh and Sri Lanka, a powerful manufacturing bloc for global apparel needs that faces problems like low productivity and lack of modern technology.
Dias said the 3.2 billion apparel export industry is the largest contributor to Sri Lanka's economy, accounting for 10 percent of gross domestic products and employing 270,000 people.
"We're growing somewhat slowly now," he said Wednesday.
Exports to the US, the biggest market till recently, were down 11 percent in the first six months of this year while shipments to the European Union markets were up 12.6 percent.
"Last month, the share of exports to the US fell to 48 percent," said Dias. "For the first time we're exporting more to the EU than the US. This is significant because we're losing our market share."
Dias said the GSP + trade deal, under which Sri Lankan exports go duty free to the EU, was the main reason for the EU market growth."It seems at the moment we may very well lose this facility towards the middle of next year," Dias said.
This was because of differences between the Sri Lankan government and the EU over the latter's concerns about alleged human rights abuses by the Sri Lankan government.
The government has rejected the allegations and refused to allow an EU probe.
The GSP+ deal comes up for renewal by the end of this year and the government has promised support for the industry to help exporters cope with the loss of the trade benefit which would make their products more expensive that those of competitors.
Under the scheme, the government will give about 100 million dollars to exporters, Dias said.
Dias said that according to the GSP + regulations, even if it is not renewed, the scheme will continue until May 2009, and very probably for six months after that.
"So there'll be no serious effect on exports for the first six months of 2009."
However, Dias said the loss of the duty free access to Europe would mean some contraction in the number of exporters, because of rising costs and falling orders.
"There is top line pressures on retailers (in overseas markets)," he said. "Several of our buyers are downsizing and now, after the financial crisis, the situation has got worse. We're definitely going to face serious issues next year."
For instance, he said, buyers of garments from the UK had already indicated a downturn in the numbers of orders.
Dias said 105 apparel factories account for 87 percent of the island's clothing exports and 150 factories the balance.
"By the end of 2009, this total could fall to 200. A lot of consolidation is taking place and the small and medium industry is struggling because of problems in the industry and country today.
"Larger players will get larger, there'll be mergers," he said. "Smaller factories would probably end up tying up in one way or the other in manufacturing and be bought up by larger players."