By Felix Fernando
Much has been said of the potential economic costs to Sri Lanka, of losing the Generalised Scheme of Preferences (GSP) Plus trade concessions to the European Union (EU). While these costs will be high, the social and human costs are likely to be even greater.
Considering official statistics for 2021, available up to end November, the EU was Sri Lanka’s single largest export market for 2021, accounting for nearly a quarter (24.1%) of our total merchandise exports of US$ 11.1 billion.
Given the EU’s importance to Sri Lanka, the loss of preferential tariffs for Sri Lanka’s exports to the EU through GSP+ previously, in 2010, had a substantial adverse impact on our economy. This likely led to an increase in poverty and income inequality as per academic studies (for example, Bandara and Naranpanawa, 2014). At present, given the ramifications of the pandemic, the consequences of the loss of GSP+ could be far more dire, leading to increase in unemployment, poverty, vulnerability and inequality, as well as loss of improvements achieved in female empowerment.
According to the World Bank’s estimates, Sri Lanka’s poverty rate rose from 9.2% in 2019 to 11.7% in 2020, putting more than 500,000 additional people in poverty. The country’s poorest were disproportionately negatively affected. Adding to the woes stemming from the loss of income and livelihoods – especially by informal workers who account for around 70% of Sri Lanka’s labour force – the cost of living has soared in recent times. Inflation was at a 12-year high in December 2021, with food prices surging to levels that have led to fears regarding increase in malnutrition and hunger.
In such a scenario, the loss of GSP+ would be highly damaging. EU is a key market for some of Sri Lanka’s largest export industries including apparel, food exports and plastic and rubber exports. These sectors employ a substantial portion of our workforce and are also characterised by the heavy presence of small and medium enterprises (SMEs). In addition, the EU has been a significant contributor to the growth of some of these exports industries – for instance rubber-based exports and seafood.
For Sri Lanka’s biggest export industry, apparel, the EU is particularly critical, being the single largest market. The EU accounted for $2.2 billion or nearly half (43.6%) of the sector’s total export earnings for 2021. The apparel industry employs 350,000 workers in the country, of which nearly 80% are rural women. Female representation in the industry is more than double the national average, considering the share of women in Sri Lanka’s labour force. Therefore, if GSP+ is lost, vast improvements made in female economic empowerment and overall human capital could also be in jeopardy.
SMEs and family-owned businesses are also likely to be more severely affected if GSP+ is unavailable. Many apparel SMEs tend to depend on subcontracts from larger players, which will dry up if excess orders are not available due to loss of preferential access to key export markets. Earlier, when GSP+ concessions were removed in 2010, there were reports of several SME apparel factories being closed down, which also led to unemployment. Currently, SMEs account for approximately 45% or nearly half of Sri Lanka apparel manufacturing facilities and provide employment to around 50,000 employees.
Many apparel manufacturing facilities in the country are located outside urban areas and industrial zones and are crucial in generating rural employment. SMEs are particularly vital in this regard since due to their relatively smaller scale, which requires less workers, a high percentage of these factories are located in less-populated and lagging regions.
Many other sectors in the country rely on the apparel industry, given its heavy presence across the island. These include logistics and transport providers, raw material suppliers as well as small-scale businesses providing food and refreshments. In addition, several cottage industries, such as producers of carpets and pillow covers, depend on apparel factories in their neighbourhoods for raw material (in the form of waste fabric). If the industry is to suffer a downturn due to loss of GSP+, this entire economic ecosystem too will suffer adverse trickle-down effects.
In addition, the pandemic has led to global re-orientation of supply chains which Sri Lanka’s apparel sector is well-positioned to capitalise on. However, this requires easy access to exports markets, through trade arrangements such as GSP+. Export earnings, which generate foreign exchange, are also vital for Sri Lanka’s economic stability, as well as to meet our foreign debt obligations.
Hence, given these challenges and opportunity costs, Sri Lanka needs GSP+ now, perhaps more than ever before.
In discussions with the Government, the apparel industry and other export sectors have impressed upon the authorities the importance of retaining GSP+. These concerns have been met favourably by the authorities and the industry is hopeful of a positive outcome.
In addition to retaining GSP+ in the immediate future, it is important that Sri Lanka engages with the EU to enjoy the benefits of the new GSP+ facility, which will commence in 2024, replacing the existing scheme. Sri Lanka needs to be prepared to align itself with the 33 conventions of the new scheme, compared with the 26 conventions of the current GSP+ regime. It is critical that the policymakers and the authorities commence these preparations now.
In addition to GSP+, the apparel sector has also emphasised on the authorities the importance of low-tariff or tariff-free access to other key export destinations – such as USA, China, India (to which a quota applies for apparel exports from Sri Lanka), Japan and South Korea. The Government has responded favourably to these concerns and the industry is hopeful of a positive outcome. New Free Trade Agreements (FTAs) can provide a significant boost to expanding and diversifying Sri Lanka’s and the apparel industry’s export markets.
While these are critical at present, it is important to recognise that the apparel industry does not expect GSP+ concessions to remain indefinitely. We are mindful of the fact that the country will lose its trade concessions in the future, as we gradually transition to an upper middle-income nation.
With the assistance of other stakeholders, including the Sri Lankan Government, the apparel sector has commenced a series of concerted initiatives to prepare the industry for the potential loss of trade concessions in the future. These efforts are also aimed at transforming Sri Lanka into a global apparel hub, increase the sector’s competitiveness and diversify its export markets.
The foundation has already been laid in this regard. For instance, Sri Lanka has positioned itself as a leader in sustainable apparel manufacturing. Sri Lankan apparel producers have invested significantly in manufacturing facilities that incorporate the latest environmentally-friendly features – minimising wastage, energy, and emissions.
The apparel sector has also made progress in further strengthening human resource practices. Through the ‘Garments without Guilt’ initiative, many Sri Lankan factories voluntarily submitted themselves to independent audits of working conditions. In December 2021, the apparel industry also signed a historic agreement with trade unions, paving the way for greater transparency in employee control over dispute resolution and grievance handling.
In the long run, these initiatives can strengthen Sri Lanka’s apparel industry significantly and, by extension, the country’s export sector, reducing the need for trade concessions. However, if these concessions are removed now, the social and human costs are likely to be dire. Given the pandemic’s unprecedented impact, GSP+ to the EU is critical for Sri Lanka and its export sectors at present.
(Felix A. Fernando is the CEO of Alpha Apparels Ltd. and Sirio Ltd., and a Group Director of Omega Line, which ranks among Sri Lanka’s five largest apparel exporters. He holds a MBA from the Post Graduate Institute of Management (USJ), in addition to being a Fellow member of the Chartered Institute of Management Accountants, U.K. He has received extensive Executive Education at Harvard, The Wharton School, National University of Singapore and AOTS, Japan. Fernando is also the Deputy Chairman of the Joint Apparel Association Forum Sri Lanka and a Past Chairman of the Sri Lanka Apparel Exporters’ Association.)