VZCZCXRO2436
RR RUEHLMC
DE RUEHLM #0533/01 0950329
ZNR UUUUU ZZH
R 050329Z APR 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3011
RUCPDOC/USDOC WASHDC
INFO RUEHNE/AMEMBASSY NEW DELHI 9440
RUEHKA/AMEMBASSY DHAKA 9063
RUEHIL/AMEMBASSY ISLAMABAD 5952
RUEHKT/AMEMBASSY KATHMANDU 3986
RUEHKP/AMCONSUL KARACHI 1995
RUEHCG/AMCONSUL CHENNAI 6496
RUEHGV/USMISSION GENEVA 1104
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 000533 
 
SIPDIS 
 
STATE SA/INS, EB/TPP; MCC FOR D NASSIRY AND E BURKE 
DEPT PASS USTR 
 
SENSITIVE, SIPDIS 
 
E.O 12958: N/A 
TAGS: ECON EAID KTEX ETRD CE
SUBJECT: Sri Lanka Garment Sector Revises Revenue 
Projections Downward 
 
¶1.  (SBU) Summary:  Sluggish growth in apparel exports has 
prompted Sri Lanka to re-design its textile and garment 
industry strategy.  While new growth targets have not been 
set, the new strategy will focus on promoting two broad 
categories of apparel and enhancing productivity.  In 
addition, a key industry advocacy group has recommended 
increased Government involvement in the sector, new 
marketing strategies, increased supply-chain integration 
and more regional accumulation of inputs.  While the 
industry is pushing for more Government involvement, it 
would do well to reflect on the success of the private 
sector in building the garment industry.  Nonetheless, 
industry advocacy does reflect a key US assistance goal of 
promoting economic sector-led industry development.   End 
Summary. 
 
¶2.  (SBU) The value of Sri Lankas garment exports rose 3.1 
percent in 2005 to $2.9 billion, significantly lower than 
the 12 percent annual growth rate forecast in the 2002 5- 
year apparel industry strategy.  The strategy projected 
that exports would reach USD 4.7 billion by 2007.  While 
data on volumes are not yet available, it is widely 
suspected that volume has increased significantly, but that 
export value is victim to a free-fall in prices due to the 
expiration of the Multi-Fiber Agreement (MFA) quota system. 
Mr. T. Cooray, Secretary General of the Joint Apparel 
Association Forum (JAAF), told EconFSN that the industry is 
totally out of step with its previous growth targets, 
which prompted them to revisit the strategy.  According to 
Cooray, smaller factories which operated on very thin 
margins are having severe difficulties.  Meanwhile, bigger 
players are reducing margins and expanding production.  Sri 
Lanka's top end producers, who contribute about 70 percent 
of exports, have gone high-tech, consolidated their supply 
chains, cut costs and lead times, and have formed close 
ties with garment buyers. 
 
¶3.  (SBU) JAAF, an industry advocacy group established to 
address post-MFA challenges, has recently conducted a 
strategic planning session to revisit the five-year apparel 
industry strategy adopted in 2002.  According to Cooray, 
while the final report is not yet ready, a main 
recommendation will be to focus on the development of two 
key product categories, casual wear and intimate garments. 
These categories have recorded very high growth rates in 
the past year.  The original strategy identified four broad 
d 
product categories to be developed in the post quota era 
casual-, intimate-, sports- and childrens-wear.  JAAF has 
proposed dropping sportswear and childrens-wear as they 
have not performed particularly well in the post-MFA era. 
 
¶4.  (SBU) Another key recommendation is the need for a new 
strategy to compete in the US market as the prospects for 
preferential market access are slim (Note: Sri Lankas 
garment sector has been pushing for a Free Trade Agreement 
between the US and Sri Lanka and has also been a strong 
lobby for duty free access for Sri Lankan goods as a 
tsunami relief measure. End Note).  JAAF has also proposed 
 
SIPDIS 
establishment of a separate cabinet ministry for the 
garment sector (Note: new cabinet ministries are often 
viewed as the solution to any problem in Sri Lanka  there 
are currently 35 cabinet ministries and 25 non-cabinet 
ministries. End Note).  Further, the organization has 
suggested enhancing information technology capabilities and 
and 
productivity, using social compliance as a key marketing 
tool and consolidating ties with regional countries to 
enhance the supply chain and comply with rules-of-origin 
requirements that allow for regional accumulation of 
inputs. 
 
¶5.  (SBU) While garment exports, being the main success 
story of the Sri Lankan economy, contribute to nearly 50% 
of export earnings and the industry is lobbying for a new 
ministry, the industrys phenomenal success has been 
primarily due to private initiatives.  Successful 
initiatives of local and foreign investors, as well as 
skills of high caliber professionals managing the industry, 
helped Sri Lanka to make maximum use of the quota regimes 
 
COLOMBO 00000533  002 OF 002 
 
 
under the MFA and produce for international apparel brands. 
In light of the MFA phase-out, these companies banded 
together through the JAAF to restructure the industry and 
promote investment in modern equipment, advanced 
technological processes and to provide improved facilities 
for their workforce. 
 
 
¶6.  (SBU) The governments role was largely to manage the 
quota regime and offer tax holidays for foreign investors, 
build export processing zones and canvas for trade 
liberalization such as the EU GSP-plus program, the Indo- 
Lanka Free Trade agreement and a US-Sri Lanka Free Trade 
Agreement.  The industry also deals with various government 
agencies, such as ports and customs, on a daily basis for 
business purposes.  The request for a separate ministry 
looks in part to be a move to attract greater government 
attention to the industry and to lobby for increased 
business facilitation from various government agencies 
(including canvassing for low cost power plants and fewer 
holidays - two key problems faced by the industry). 
 
¶7.  (SBU) A leading industrialist who built 30 factories 
under former-President Premadasas 200 garment factory 
program told Econoff that he did not see a need for a 
separate ministry as less government involvement was better 
er 
for business.  He was especially glad that the MFA was 
phased-out as the quota distribution in Sri Lanka was 
subject to corruption and political patronage.  According 
to this industrialist, the absence of quotas has made it 
possible for companies to grow through their own 
initiatives and marketing and not by becoming dependent on 
artificial market forces.  Since the MFA phase-out his 
company has re-opened 10 factories that were closed and is 
negotiating to open an exclusive infant line with a UK 
buyer. 
 
¶8.  (SBU) Comment: We will report on the labor impacts of 
the MFA expiration septel.  The industry is in a period of 
consolidation and faces a period of uncertainty.  We 
believe JAAF has shown itself to be an incredibly positive 
force in preparing Sri Lanka for the post-quota world, and 
also believe that its current effort to rationalize its 
projections will provide good input and guidance to the 
industry as it moves forward.  Perhaps more importantly, 
the garment sector has provided Sri Lanka with a much 
needed example of industry banding together and leading 
itself (something the USG is promoting through our USAID 
Economic Growth initiative  The Competitiveness Program). 
End Comment 
 
Lunstead