This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 COLOMBO 001644 
 
SIPDIS 
 
STATE/EB/TPP/ABT EDWARD HEARTNEY 
STATE FOR SA/INS 
DEPT PASS USTR ABIOLA HEYLIGER 
COMMERCE/ITA/OTEXA MARIA D'ANDREA 
GENEVA PASS USTR 
 
E.O 12958: N/A 
TAGS: ECON KTEX ETRD EAID CE ECONOMICS
SUBJECT:  TEXTILES AND APPAREL SECTOR UPDATE: SRI 
LANKA 
 
REF: (A) STATE 146213   (B) 05 COLOMBO 1247 
     (C) 05 COLOMBO 965 (D) 04 COLOMBO 1604 
     (E) 04 COLOMBO 1271 
 
¶1.  Per ref (A), information for Sri Lanka follows: 
 
-                                     2004     2005 
-                                              thru 
-                                              June 
 
Total Industrial Prod. (USD MN)      6,889      NA 
Total text/apparel/leather prd(USD MN)2,919     NA 
Total textiles/apparel exports(USD Mn)2,809  1,326 
Textile/apparel share of total exports  49%    45% 
Total manufacturing employment (`000) 1,221(a)  NA 
Total textile/apparel employment         NA(b)  NA 
 
(a) 3rd Quarter 
(b) According to 2003 data, total manufacturing 
employment was 1.16 million in 2003, with 357,538 
employed in apparel factories. 
 
¶2.  Export Data:  Sri Lanka's apparel industry appears 
to have weathered the MFA expiration reasonably well 
judging by export data.  In the first half of 2005, 
total exports of textiles and apparel have risen by 
8.2 percent to USD 1.33 billion from USD 1.23 billion 
in the corresponding period in 2004.  The growth 
follows a 9 percent growth in CY 2004.  However, 
according to latest Central Bank data, apparel exports 
in July dropped by about 2 percent. 
According to US data, apparel exports to the US, Sri 
Lanka's largest market, increased 16 percent in the 
first half of 2005.  Exports to the EU which increased 
by 27 percent in 2004 in response to tariff concessions 
under a EU GSP scheme, have declined in the first few 
months of 2005 as the duty concessions were not 
sufficient to offset heavy Chinese competition (see 
below for most recent developments in EU GSP). 
 
¶3.  Prices:  Prices received by garment manufacturers 
generally declined in the first half of 2005 and 
steeper declines are expected in the second half of 
¶2005.  Some specialty segments (e.g. sportswear, bras, 
and briefs) have, however, seen an increase in price. 
According to industry sources, price competition from 
China has been greatest in the EU market. 
 
¶4.  Orders:  Most large producers experienced larger 
orders in 2005.  Cottons have done particularly well. 
Both the EU quotas and the US safeguards on Chinese 
products are assisting local companies.  Consequently, 
large producers expect increased orders in the next 
few months based on feedback from buyers.  Some large 
producers are expecting to enhance capacities by way 
of acquisitions to meet capacity requirements.  In 
addition, Sri Lanka qualified for the EU's new GSP 
"Plus" scheme, allowing even greater access to its 
second largest apparel market.  Under this scheme, Sri 
Lankan apparel, made of EU or Sri Lankan fabric, may 
enter the EU duty free as of July 1(ref b).  Sri 
Lankan apparel with regional fabric (from South Asia) 
also qualifies for duty free access to the EU if local 
value addition exceeds 50 percent.  According to a 
senior EU Trade Commission official in Colombo, there 
has been a renewal of Sri Lankan exports to the EU 
recently following the EU GSP "Plus" scheme. 
Previously, the EU commission reported a decline in 
Sri Lankan orders in the first half of 2005.  Small 
scale producers continue to complain of a reduction in 
orders and heightened price competition. 
 
¶5.  Special arrangements:  In addition to the EU GSP 
"Plus" scheme, Sri Lanka has signed Free Trade 
Agreements (FTAs) with India and Pakistan.  Under 
these agreements, apparel exports from Sri Lanka are 
under quota.  However, Sri Lanka has not been able to 
fully exploit the quotas due to heavy price 
competition in these markets.  Some Sri Lankan 
manufacturers are also investing in other countries to 
stay competitive in the post MFA era.  A leading 
apparel manufacturer, Brandix, will start work on a 
large apparel manufacturing unit in a special economic 
zone in Andra Pradesh in India.  Another smaller group 
has set up a factory in Africa to benefit from the 
U.S. African Growth and Opportunity Act (AGOA). 
 
¶6.  Wages:  Increased global competition has not 
resulted in a reduction in wages.  Due to increased 
over-time work to meet new orders the wage bill of 
some companies has actually risen.  Some 
manufacturers, especially smaller firms, reported a 
shortage of workers.  According to them, high 
inflation (around 13 percent) has led to increased 
cost of living in most urban areas where factories are 
located.  The government, which is contemplating a 
mandatory wage increase for private sector employees, 
may exclude the garment sector from the wage increase 
temporarily, but several manufacturers has told us 
they expect to get hit with the wage hike soon. 
 
¶7.  Factory closures:   There have been many 
consolidations and acquisitions of smaller factories 
by larger factories.  There are no reliable statistics 
on factory closures. 
 
¶8.  Actions:  Sri Lanka is continuing various programs 
to improve the apparel industry, which is the mainstay 
of the manufacturing and export sectors.  According to 
the Joint Apparel Associations Forum (JAAF), current 
rules of origin in textile trade are favoring 
countries with a strong textile base.  Sri Lanka is 
disadvantaged in this respect due to the lack of a 
textile base.  Infrastructure bottlenecks (especially 
the high cost of power and poor rural road conditions) 
are hampering the establishment of a vibrant textile 
base. 
 
¶9.  Among some of the actions being taken by the 
Government and the JAAF are: 
-- encourage the local textile industry by requiring 
all government purchases of fabric (for school 
uniforms, military uniforms and prison uniforms) to be 
made by local manufacturers 
-- imports of textiles and inputs for the apparel 
industry are exempted from the Value Added Tax (VAT). 
-- a productivity improvement program in 200 small and 
medium sized factories. 
-- an apparel branding/image building program 
-- upgrading of vocational training courses for 
apparel sector 
-- affiliation with North Carolina State University's 
textile institute 
-- a Government credit guarantee scheme for commercial 
banks that lend to apparel industries.  The scheme is 
available for factory upgrades.  However, the scheme 
has not been successful as bankers are reluctant to 
fund the apparel industry until they see more clearly 
how it will weather the transition to a post-MFA 
world. 
-- a newly created Government SME bank also has a low 
interest loan scheme for the apparel industry. 
However, few SME apparel manufacturers have taken 
advantage of this opportunity. 
 
¶10.  According to JAAF sources if the apparel industry 
stagnates, the country will need to identify other 
industries to fuel growth.  JAAF recognizing the vital 
contribution made to the economy by the apparel 
industry, asked to present the following "wish list" 
to USG to protect the apparel sector in Sri Lanka: 
--enhanced access to the US through special legislation 
for tsunami affected and low income countries 
--continuation of Chinese safeguard actions 
--technical assistance to reopen an ELVIS like system to 
avoid transshipment of Chinese goods through Sri Lanka. 
 
Lunstead