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INFO RUEHNE/AMEMBASSY NEW DELHI 9447
RUEHKA/AMEMBASSY DHAKA 9068
RUEHIL/AMEMBASSY ISLAMABAD 5957
RUEHKT/AMEMBASSY KATHMANDU 3991
RUEHKP/AMCONSUL KARACHI 2000
RUEHCG/AMCONSUL CHENNAI 6501
RUEHGV/USMISSION GENEVA 1109
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 000537 
 
SIPDIS 
 
C O R R E C T E D  C O P Y  (TRUNCATED LINES CORRECTED) 
 
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:  Garment Quota Expiration  No Drastic Impact on Labor 
 
REF: Colombo 533 
 
COLOMBO 00000537  001.2 OF 002 
 
 
¶1.  (SBU) Summary:  While Sri Lankas apparel export growth 
slowed to 3% from an expected 12% (REFTEL), there has been 
no drastic impact on labor, as previously expected.  Although, 
there is evidence of about 10,000 job losses, most 
of the workers have been absorbed back into the industry 
as larger companies have consolidated and expanded their 
operations.  End Summary. 
 
¶2.  (SBU) Sri Lankas garment exports rose 3.1% in 2005 to 
$2.9 billion. According to Oxfam (Australia) officials, who are 
preparing a study on the impact of the Multi-Fiber Agreement 
(MFA) expiration in Sri Lanka, 45 factories closed in 2005 
resulting in about 9,500 job losses.  The Sri Lankan Labor 
Department reports a similar number of factory closures and 
job losses. These data contrast with earlier (pre-MFA phase 
out) forecasts of up to a 100,000 job losses. 
 
¶3.  (SBU) According to Oxfam, International Labor 
Organization (ILO), and Board of Investment (BOI) sources, 
the MFA fallout on labor has not been as severe as feared. 
While there have been closures of small and medium factories, 
some of which failed to pay mandatory severance and final 
salaries, there has been no huge unemployment problem. 
The termination unit of the Labor Ministry, which examines 
termination disputes, has received applications from only 
six companies, involving about 350 workers.  According to 
the BOI, the Governments investment promotion agency, and 
the Labor Department, most workers who lost jobs have been 
able to find new jobs in the sector as a result of acquisitions 
or consolidations.  For example, at the Katunayake Export 
Processing Zone (KEPZ), the largest export processing zone 
in Sri Lanka, several factories that were facing problems 
have been acquired by larger operators, either directly or 
through foreclosure.  In one case, a large plant with 
2,500 employees plans to close its sweater line, due to a 
lack of orders. Nevertheless, it has decided to absorb all 
800 affected workers into an expanded T-shirt line. 
According to senior managers of the KEPZ, there are around 
2,000 vacancies for sewing machine operators in the zone 
at any given time and most people who lost jobs due to 
specific factory closures have been able to find other jobs 
within the zone itself.  Some managers have suggested that it is 
difficult to find work for older operators (over 35) as they are 
perceived as less productive. 
 
¶4.  (SBU) According to a senior manager at one of the largest 
apparel manufacturing groups, the group has added over 4,000 
workers in 2005 to its 30,000 member workforce and has plans 
to add another 7,000 workers in 2006.  Post is aware of 
several other companies that are expanding operations as well. 
 
¶5.  (SBU) Several industry-wide programs are underway to 
minimize the effect of the MFA fallout.  Some of the key 
initiatives are listed below: 
 
-- The industry is redesigning its post-MFA strategy (reftel). 
 
-- Sri Lanka is included in the EU GSP-plus program which 
provides duty free status to products originating from Sri 
Lanka.  Sri Lanka is hoping the EU will relax stringent 
rules-of-origin criteria to make more garment categories 
eligible 
 
-- Oxfam is working with the Apparel Industry Labor Rights 
Movement (ALARM), an umbrella organization comprising several 
trade unions in the garment sector. Oxfam campaigns for 
increased market access and improvement in labor standards. 
 
-- The International Labor Organization (ILO) is hoping to 
launch its post-MFA program, which was delayed due to the 
tsunami.  ILO has developed a 9-prong strategy to protect 
 
SIPDIS 
workers.  ILOs strategy focuses on retrenchment policies, 
facilitating compensation and retraining. 
 
-- The Asia Foundation, with support from USAID, will initiate 
a program in Sri Lanka to enhance competitiveness through 
economic reforms. The program is aimed at fostering market 
conditions that are necessary to support the sustainability and 
development of the sector.  The Asia Foundation will work with 
local interested parties to produce an agenda for reform in 
each country and provide technical assistance to streamline 
procedures and reduce impediments to trade. The program will 
run simltaneously in two other garment exporting countries, 
Bangladesh and Cambodia. 
 
-- JAAF has partnered with USAID to provide garment-related 
vocational training at up to four vocational institutes being 
reconstructed under USAIDs tsunami reconstruction program. 
JAAF has guaranteed employment with their member companies 
for graduates. 
 
-- JAAF has also sponsored an industry-wide productivity 
enhancement program that analyzes issues both across the 
industry and provides analysis and inputs at specific plants. 
 
¶6.  (SBU) Comment: There is a lot of hand wringing throughout the 
garment sector about the post-MFA world.  In fact, Sri Lanka continues 
to do well relative to other countries, and has seen an expansion in 
those sectors where it has developed expertise and close customer 
relations. Nonetheless, growth is down because prices have fallen 
precipitously as increased production in low-cost countries 
 
COLOMBO 00000537  002.2 OF 002 
 
 
(especially China and Bangladesh) challenges Sri Lankas 
low-cost, but high-standard labor market.  While this will 
remain a key challenge for the garment sector, we suspect 
that through continued consolidation and industry-led efforts 
to boost productivity, Sri Lanka will continue to perform well 
in this sector.  End Comment. 
LUNSTEAD