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Tuesday May 30th, 2023

South Asia’s Garment export sector needs regional outlook, new markets

BANGLADESH – Denim factory in Dhaka

ECONOMYNEXT – COVID -19 or not, South Asia’s readymade garment sector needs to strengthen its regional ties and explore new markets if it is to grow further and remain leaders in the export sector industry experts told a webinar last week.

But, for that to happen, there must be a strong political will, sans the big brother-small brother mentality, and a critical review of Free Trade Agreements, according to two leading apparel sector executives in Bangladesh and Sri Lanka.

The two, the General Manager of Ha-Meem Group, A F M Nurur Rahman of Bangladesh and Group Director, Omega Line Ltd. Felix Fernando were sharing their views on an online discussion on the Restart Asian Economies series on ‘Ideas and Action for the Textile and Readymade Garment Industry,’ organised by the Friedrich Naumann Foundation for Freedom, South Asian Regional office, on Monday, October 5th. The discussion was moderated by the Foundation’s Country Representative in Bangladesh, Dr Najmul Hossain.

According to Rahman, Bangladesh had started to feel the heat, months before the pandemic hit that country. Even as there were delays in receiving raw material, their buyers, mostly located in the G20 countries and facing a recession owing to the virus, were not talking about future orders. Most were placing ‘on-call orders,’ he elaborated.

For the billion-dollar industry, which employs 4.4 million, mostly women, cancellation or orders put on-hold, means looking at an 18pct negative growth in 2021. Bangladesh imports a good portion of the raw materials, and exports 85pct of the finished product to the USA, EU and Canada.

The Bangladesh Garment Manufacturing and Exporters Association (BGMEA), posts that the loss owing to COVID-19 is USD3.18bn worth of orders. Says Rahman, in comparison with March to June of 2019, the value of orders lost the same period this year is about USD4.9bn.

It is not much different in Sri Lanka, where the industry which had enjoyed a steady growth of 5-7% these past few years, has suffered a 25pct decline between January and August this year when compared with the same period of 2019. Sri Lanka, says Fernando, depends on two major markets for its garments- the USA and the EU, to which 90pct of the products are exported. Though attempts are being made to get back to normal, he pointed out that with the EU and the USA heading into the winter months, and a second wave of the virus expected to raise its head during that season, the situation is in the balance.

Indeed, since the online discussion on Monday, Sri Lanka’s garment industry, which was on a slow recovery mode, has faced a further set-back with over a thousand workers attached to a garment factory testing positive for COVID-19. Most areas where patients have been identified are currently under police curfew, and several garment factories have been closed. Nearly 15pct, of the country’s more than 8 million strong workforces, is employed in the apparel sector. As in Bangladesh, a majority garment sector employees are women.

Fernando explained that while there are small, medium, large and a few extra-large companies in the garment trade, 75pct of the workforce is employed by the larger groups, and also account for 75pct of the export figures, which is around USD5.6bn. With the country under lockdown in the early months of the year, some companies switched to producing Personal Protective Equipment (PPE). However, here too, though there were many inquiries and good demand, by the time local companies had acquired the relevant certifications, the orders had gone elsewhere. Despite that, he added that the industry had undertaken about a half a billion dollars’ worth of PPE orders.

As cost-saving measures, both countries stopped over-time work. Identifying the importance of skilled workers Bangladesh had opted not to retrench any production line staff but to lay off and reduce various other facilities for those in the management and higher income category. In the case of Sri Lanka, though factories were closed till mid-April, employees had received full pay in March and April. The government allowed companies to pay their staff 50pct of the wages in May and June and helped with a subsidy. Companies had also been permitted to pay either 50pct of the salary or LKR14,500 whichever was higher to those staying at home, with the proviso that when they do come into work, they must be also paid in full for those days. While this scheme was in effect until end September, given that orders are still not up to expected numbers some companies have appealed for an extension until December.

As well staff had been brought in on a one week on, one week off basis, while those companies with several plants, shut down a few, to adhere to social distancing and cope with reduced orders. Fernando added that a voluntary retirement scheme, with the compensation calculated according to the number of years served, and work years left had been offered and that a majority who took this package were those in management. All plans were put in place in consultation with the government, labour department and trade unions.

Amongst the few factories that closed, were those that had been struggling even before COVID-19, he added.

But these are temporary measures to deal with an emergency situation, the focus they point out, must be on growing regionally.

Both speakers were of the opinion that for the industry to be more price competitive and be quick on the turn around, better and consistent policies are required.

Rahman sees bottlenecks at the Port etc. affecting lead times. As the Christmas season nears, buyers will make short-order requests based on consumer behaviour, and the industry must be ready for that. If not, their biggest competitor, Vietnam could grab the orders. While COVID-19 ‘taught us to work with low costs and high efficiency,’ he stressed that uninterrupted energy supply and better access to health care facilities, which was identified when dealing with the pandemic, must be sorted out.

Even though the country has several fabric mills, he says, the country is still dependent mainly on China, which is not eligible for GSP plus for its raw materials. That affects the price negotiations with buyers.

Bangladesh also lacks support in the area of Research and Development to keep up with changing trends in the industry.

Though considered a supplier of high quality and value-added goods it is time to ‘Get out of the basic garment mentality’ says Fernando, adding that pre-COVID, the country had been advocating a Hub Concept. Political instability resulted in the country being placed in the middle-income category, thereby earning the GSP plus from the EU, ‘but should we remain in that income level, simply to be awarded the GSP?” Nor will the planned fabric mill zone ensure self-sufficiency in raw materials, he adds.

Even while it is clear why import controls have been introduced to deal with foreign debt, Sri Lanka needs to consider how feasible local production of fabric will be; the requirement for water and wastewater disposal must be considered. Fernando believes more expert advice in this regard is necessary to identify what is “cheaper to import and what is cheaper to produce locally.’ While a few fabric mills have been set up, he is not convinced that even with the establishment of the proposed zone, even 25pct of the requirement will be met.

‘What is necessary is policy consistency’, he says, adding that Sri Lanka must revisit and renegotiate its Free Trade Agreements (FTAs). Some provisions may not have been beneficial to the country, but there were some good points; The volume of exports to India and China, for instance, is much less than what Sri Lanka imports from them; ‘the trade balance is not in our favour, ’he said, adding that where a $ billion dollars’ worth of fabric is imported from India, Sri Lanka’s exports to India is around USD50mn. While India too qualifies for GSP plus and offers a good price on its fabrics, they need to improve on their delivery and after-sales service, he explained. Vietnam, he points out has FTA’s with many countries, including the EU, and that is why they are where they are today, compared to ten years ago.

As well, it is time to explore new markets, such as Japan.

Fernando also claims that for the industry to be more efficient, labour and customs regulations need to be updated to allow for better lead times; ‘we need the flexibility to work 45 hours within three to five days, when necessary.’

Given the current circumstances, Bangladesh is wary of seeing a level of recovery that it enjoyed even at the end of 2019, while, it is uncertain whether Sri Lanka would reach its USD8bn target by 2023, with usual buyers of both countries still reeling under the pandemic.

Perhaps it’s time governments of both countries work towards strengthening regional growth of the industry. (Colombo, October 10, 2020)

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Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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