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Sri Lanka import controls, Covid-19 cargo logjam hit apparel exporters

TRADE DISRUPTION: Sri Lanka’s export industries which saw supply chains hit by Coronavirus are now facing weaker demand in Europe.

ECONOMYNEXT – Sri Lanka’s apparel exporters are facing difficulties in obtaining essential items for manufacturing due to import controls and a logjam of un-cleared cargo at the port, an industry official said just as the sector is trying to emerge from the Coronavirus crisis.

Raw materials to make the exports are shipped in as FCL (full container load for a large consignment or LCL (less-than-container-load) in cases where several small consignments imported for several clients are consolidated into one box.

The cost could vary from 200 to 300 dollars to 5000 dollars or more per shipment. LCL cargo has to be ‘de-stuffed’ and each consignment allocated to different owners.

“If you can’t clear the raw materials, let’s say you have got everything to make a shirt but the buttons are stuck at the port due to delayed de-stuffing, then the whole product is not going to be shipped,” Sri Lanka Apparel Exporters Association President Rehan Lakhany said.

“The apparel industry operates on time, if we do not have the goods on time, the customers cancel the order.”

Cargo ordered earlier in 2020 for extra shopping, usually seen during the April New Year season and Ramadan, is still stuck at the port with curfews only recently being lifted, industry officials say.

Import Controls

Sri Lanka also slapped severe import controls after the central bank printed large volumes of money, de-stabilizing a soft-dollar peg with the US dollar, driving the rupee close to 200 to the US dollar at one point, creating even more problems for exporters.

The rupee has since strengthened to around 186 to the US dollar amid weak private credit.

Under import controls announced after the currency troubles, Sri Lankans cannot import items on ‘open terms’ except on a 90-day credit term.

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To make payments 90 days from the clearance date it should be stated in the first invoice sent to the buyers before delivering the goods.

Many items such as clips and pins, which have small values, are needed to make a garment.

“…[W]hen we import materials like clips and pins, we usually do on an open term because we have that relationship with the supplier,” Lakhany said.

“So, what happens is with the new restrictions, we cannot import anything on open terms meaning banks are not accepting goods on open terms, and the Customs aren’t clearing these consignments.

“There is a large label supplier called Avery Dennison, which supplies all the top brands and the value of the labels is insignificant. But the label supplier can’t get the raw materials even from their sister companies due to the 90 day payment term.

“We don’t want to be bogged with sorting out these little issues because we have to concentrate our full effort into marketing, sales, and production,” he said.

Apparel manufacturers are in discussion with the authorities and are hoping to get these issues sorted soon.

Sri Lanka has also restricted the import of clothing, slips, jackets, pantyhose, scarves, ties, shoes, hats, etc.

“…[I]n the restricted list also there are things such as hangers and hanger clips which are required for the apparel industry,” Lakhany said.

Sri Lanka’s apparel exporters are beginning to get orders but trade restrictions from monetary instability and port bottlenecks are keeping them at bay.

“At the moment, coming out of the crisis we are trying to stand on our feet again, but these are the difficulties we are facing.”

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Though Sri Lanka is not the only country to go through a Coronavirus crisis, this country has placed severe import controls due to monetary instability.

Monetary Instability

Competitors like Vietnam and Cambodia, where central banks have been reformed do not have foreign exchange problems.

The lack of a credible anchor for policy triggers foreign exchange shortages in Sri Lanka whether or not there is a crisis leading to Nixon shock style import controls. In 2012 and 2015/2016 the rupee collapsed due to pro-cyclical policy amid economic booms and in 2018 in a small recovery.

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Sri Lanka has strongly resisted a credible external anchor through a ‘flexible’ exchange rate and also sidestepped a credible domestic anchor through ‘flexible’ inflation targeting giving a high degree of discretion for errors and pro-cyclical policy, critics have said.

Instead, there are multiple mandates including targeting the real effective exchange rate and a perceived output gap as well as a partial external anchor through the ‘flexible’ exchange rate and forex reserve target.

Analysts have called for central bank reform to help the country progress, and also avoid sovereign default of dollar debt.

Competitors like Vietnam no longer face such problems because the State Bank of Vietnam was reformed in the late 1980s after severe currency collapses led to a severe economic contraction.

Vietnam’s gross domestic product collapsed from 42 billion US dollars in 1987, a year after it was re-opened to 6.5 billion US dollars in 1999, as the Dong collapsed from 20 to the US dollar from 11,000 by 1991.

Cambodia’s central bank collapsed the currency from 424 in 1990 to 4000 by 2000 and people shifted to US dollars.

As a result, the National Bank of Cambodia cannot now print money to control interest rates (loosen monetary policy) in a dual currency regime and destroy the external sector.

Because of that safety factor, the partially used Cambodia Rief had been stable at around 4,000 for nearly 20 years and it is drawing foreign investments and becoming an export powerhouse including in apparel. (Colombo/June05/2020-sb)

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