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Thursday December 8th, 2022

As Coronavirus tears Sri Lanka’s apparel sector apart, an insider calls for help

ECONOMYNEXT – Chamila Samarakkodi has been in fashion and apparel manufacturing industry for over 30 years. His firm Design Studio has plants in Anuradhapura and Kurunegala employing over 2500 rural persons. The group exports to UK retailers including Primark, ASDA, Topshop, Sainsbury’s, ASOS, River Island, Oasis and Urban Outfitters, high-end ladies soft and tailored garments.

In this analysis he explains the economic shock to the apparel sector the fallout on workers and the need for support. No event in modern history has caused implications as severe as that of the Covid-19 outbreak, which is in danger of tearing the very seams of the fashion trade, he says.

Tearing the very seams of the fashion trade

The clothing industry has consistently faced instability over the past few years after its slow recovery from the last global financial crisis. Economic headwinds have eroded even the mightiest industry participants globally.

The UK’s most recent shockwave, Brexit, thrust both retailers and suppliers into new and uncharted territory – decreasing the buying power of clients and creating a ‘price-war’ situation for manufacturers in Sri Lanka.

But no event in modern history has caused implications as severe as that of the Covid-19 outbreak, which is in danger of tearing the very seams of the fashion trade. For the first time in memory, we have witnessed the effective cancellation of an entire fashion season:Spring/Summer 2020 is no more. As a result, there are unavoidable financial blows to every supplier involved. Finished garments have been cancelled, gathering dust in warehouses and retiring as dead stock.

Hard losses

Our clients are all closing down stores and cancelling all orders indefinitely, including those that are already a work in progress in our factories, as the UK goes into a lockdown state. Cessation of all trading operations until the health crisis situation is resolved – including the cancellation of all future contracts as our clients attempt to safeguard their business continuity, sustainability and resilience – puts all of us manufacturers in a period of great uncertainty over the next 6 months.

And there is no mercy from the desperate buyers either – a recent article off Drapers, the fashion retail sector’s premier magazine, evidenced the plight the local industry faces as follows:

“Industry-wide, suppliers are forced to absorb direct losses and accrued liabilities. Even the most trusted retailers are simply unable and unwilling to foot any part of the bill. … The devastating effects of these cancellations are being further amplified by forced extended payment terms – non-negotiable, of course. There is little concern for the suppliers that have been – and post-pandemic will continue to be – the mechanics of billion-pound retail businesses.”

Nation-wide impact

In an internal survey I set up, that was carried out among the members of the Sri Lanka Apparel Exporters Association (SLAEA) representing the island’s premier apparel manufacturers and exporters, it was made evident that there is already a struggle to service salaries and other statutory payments over the next 6 months at minimum – or even longer, depending on how the current unprecedented situation plays out – due to the non-availability of funds.

For a group of key players that have persevered through numerous challenges when apparels first kicked off in the country, there is an overarching sense of uncertainty around if there is even a future for the industry post-Covid-19 if adequate buffers aren’t put in place and support provided – and these leaders are certain ramping back up to merely the same scale and health their organisations used to be at will be a slow and tedious process, even after normalcy is restored.

For context, the apparel industry accounts for about half of our country’s total exportsand employs over 15% of the local workforce. In fact, this is the only case in Sri Lanka of a single industry providing mass employment to its citizens (990,000+ skilled workers), in addition to being the country’s second largest FOREX earner for over 8 years with a 2025 target of $8 bn that is at risk – this is what’s at stake and why the government should be worried.

In speaking to many of my colleagues and peers in the industry, I have understood that the gravity of Covid-19’s implications to our organisations are far severe to what we make it out to be in our communications to the authorities, including the Sri Lanka Apparel Exporters Association (SLAEA) and Joint Apparel Association Forum (JAAF-SL) leadership.

Numerous manufacturers – majority being BOI-approved ventures – have already written to the Department of Labour, banks, creditors and so on but believes the urgency and severity of the situation has not been fully appreciated yet. This is an exceptional situation where the government must intervene to safeguard the continuity of one of its largest revenue and employment generators who are already at the point of bankruptcy.

Priorities

Traditionally, many organisations are in the habit of painting a strong and stable image of themselves – particularly true in our culture – but there’s nothing traditional about the challenges we are all collectively faced with today. Now’s the time for transparency and to be upfront on this evolving situation.

For my companies, right now our priorities are the well-being of our 2500+ people – our greatest asset – many of whom are the sole breadwinners of their family; and to keep our business alive until BAU can be resumed. We provide extensive vocational training and upskilling, employee benefits and other forms of social responsibility to our people, their families and the localities ourfactories operate in – including annual sponsorship of school stationary and other needs for the children of our staff, medical insurance and employee counselling, provision of visual and hearing aids, a death donation fund, free meals and transport, and many direct/indirect emoluments to the local citizenry.

This is not possible without a few sacrifices up front though, for which we need the support and approval of the government and its institutions. For instance, we really want to protect all of our employees and have them with us once business resumes – but we can’t do that unless we are allowed temporary lay-offs and other short-term measures.

My organisation alone works withsix other outsourced manufacturing partners with a cumulative workforce of an additional 3500 employees – a demonstration of just how many lives could be changed forever, if we don’t take action.

Government bailout

It’s been almost a month since the more serious implications of Covid-19 kicked in, and after having really put in both individual and concerted efforts to try remediate the pitfall we are headed towards – if not already are in –it’s become apparent that the businesses can’t do this alone. While appreciating all the prompt, hard work the government is putting in to control the spread of the virus – an inspiration to the rest of the world – the post-Covid situation too deserves equal attention. Industries need to be safeguarded via a plan of action, or the country will collapse post-Covid despite having been saved from the virus.

By bringing together all the conversations I’ve partaken in recently, I have laid out the following straightforward requestsand proposed solutions which my colleagues and I hope will ensure the industry has a future in the aftermath of the coronavirus crisis:

1. Salaries

1.1. All manufacturers have paid salaries for the month of March, due on 10th April 2020, by way of collecting all available cash-in-hand at their disposal. Even this required certain pay-cuts to have been made.

1.2. Manufacturers have no means to provide for the remaining timeframe of 6 months at minimum until trading resumes and we are all back in business.

1.3. As such, we request the Government to join hands with us and make arrangements to provide some form of allowance for our employees during this period.

1.4. We require permission to initially work on a pro-rata basis for less than the full work week, once we are back in business and are still ramping up to full capacity. This is because securing adequate work from clients will take time.

2. Statutory Payments

2.1. As we face difficulty paying core salaries alone, we request abolishing statutory payments – i.e. EPF and ETF – for the next 6 to 9 months.

2.2. Rescheduling ongoing non-payments of EPF to be paid back in 24 months, with at least a 6 to 9-month grace period and no penalties enforced. This is due to no trading taking place over the next 6 months, and an unclear landscape of how the business and the situation will progress during and after this period.

3. Employment Contracts

3.1. We request laying off a fraction of our staff for the next 6 to 9 months unpaid, i.e. on furlough.

A small price to pay

If you are wondering if these concessions that are sought after will be a tough call for the authorities to make, to me, it’s a no-brainer.Real jobs of real people who need them the most, are at stake here – and we cannot look after them and protect their employment if we aren’t allowed to make some drastic changes in the interim to cushion the shock waves we are facing today. We need to be cautious of this fact.

There are a number of best practices mypartners abroad and their governments have taken up, as well as plenty of examples of incentives similar to what I am proposing being implemented in other countries where the apparel industry is dominant, as illustrated.

Sri Lanka is already knee-deep in increasingly fierce competition with suppliers in Vietnam, Cambodia and Indonesia. This is no time to experiment, test your confidence and pride, or do nothing.

To end on a (potentially)positive note, however, I am sure the industry as a whole would be sincerely grateful if the above propositions are actioned. We are confident that, with the support of the right parties and if we work together to take the right approach, we will survive through this period and come out as preferred suppliers of choice once global trading resumes – and more importantly, enable all of our employees to resume working with us with minimal disruption to their livelihoods.

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)

 

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2023 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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