VZCZCXRO2887
RR RUEHLMC
DE RUEHLM #1594/01 2711038
ZNR UUUUU ZZH
R 281038Z SEP 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4358
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9988
RUEHKA/AMEMBASSY DHAKA 9448
RUEHIL/AMEMBASSY ISLAMABAD 6348
RUEHKT/AMEMBASSY KATHMANDU 4393
RUEHCG/AMCONSUL CHENNAI 6905
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001594 
 
SIPDIS 
 
STATE FOR EB/TPP/ABT THOMAS LERSTEN AND SCA/INS 
 
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA 
 
USTR FOR ABIOLA HEYLIGER 
 
MCC FOR D NASSIRY AND E BURKE 
 
SIPDIS 
 
E.O 12958: N/A 
TAGS: ECON ETRD KTEX ELAB CE
SUBJECT: TEXTILES AND APPAREL SECTOR: UPDATED STATISTICS AND 
PROJECTIONS OF FUTURE COMPETITIVENSS - SRI LANKA 
 
Ref:  (A) State 138090  (B) Colombo 537  (C) Colombo 533 
 
      (D) 05 Colombo 1644 
 
¶1.  Summary:  Textile and apparel export growth has slowed following 
the expiration of the Multifiber Agreement (MFA).  The decelerating 
growth suggests that the apparel industry will no longer be the main 
driver of Sri Lanka's economic development.  Large scale operators 
who have invested in new technology and backward integration 
continue to perform well.  Contrary to earlier expectations of 
massive job losses due to the expiry of the MFA, the industry is 
reporting a serious shortage of labor.  End Summary. 
 
¶2.  The following are the statistics requested in Ref A regarding 
Sri Lanka's textiles and apparel sector.  Source is the Central Bank 
of Sri Lanka except as noted: 
 
     2005  2006 
               Jan-June 
Total industrial production: 
      (Millions of USD) 7,784  NA 
Total textile/apparel/leather production: 
      (Millions of USD) 3,071  NA 
 
Textile/apparel exports: 
      (Millions of USD) 2,895  1380 
Textile/apparel share of total exports: 
      (Percent)   45.6   43.6 
 
Textile and apparel share of total imports: 
      (Percent)   17.2   14.7 
 
Textile and apparel exports to the US:(a) 
      (Millions of USD) 1,679  845 
 
Total manufacturing employment: 
      (Thousands)  1,385  NA 
 
Total textile and apparel employment NA   NA 
 
(a) based on USITC data 
 
¶3.  Recent growth:  Textile and apparel export growth has slowed 
following the expiry of the MFA.  Textile and apparel exports 
increased by about 3 percent in CY 2005 and 4 percent in the first 
half of 2006, compared to 9 percent growth in 2004 and 6 percent in 
¶2003.  While Sri Lanka's Treasury Secretary recently told a meeting 
of Sri Lanka Garment Buying Offices Association that the "apparel 
industry is the future of Sri Lanka," the decelerating growth 
suggests that the apparel industry will not be in a position to 
provide the main impetus for Sri Lanka's future economic 
development.  While there is no detailed information on the 
financial stability of the sector, news of cash flow problems faced 
by small and medium sized operators is emerging in private 
discussions.  Large scale operators who have invested in new 
technology and backward integration continue to perform well. 
 
¶3.  Prices:  The key problem faced by apparel manufacturers is the 
acute pressure on prices, which have fallen sharply.  However, some 
export categories, such as lingerie, have received higher prices and 
continue to enjoy substantial margins. 
 
¶4.  Impact of the US and EU restrictions on China: Sri Lanka has 
benefited from US restrictions on China.  Sri Lanka's exports to US 
of the restricted categories have risen sharply while exports of 
unrestricted categories have recorded substantial declines.  The 
industry fears that the period beyond 2007 will pose several risks 
to the industry due to the entry of Vietnam to the WTO and the 
expiry of China trade restrictions in 2008. 
 
¶5.  Imports from China:  All textile fabric imports are free of 
import duty to support the apparel industry.  There is a 15 percent 
import duty and an additional 15 percent tax on apparel.  There are 
no specific restrictions on imports from China. 
 
¶6.  Impact on labor:  An estimated 10,000 to 30,000 employees have 
lost jobs due to closure or contraction of operations of some 
factories.  However most of these workers are believed to have been 
 
COLOMBO 00001594  002 OF 002 
 
 
absorbed back into the industry.  In fact, there are about 30,000 
vacancies in the industry as of September 2006.  According to 
industry sources, many large factories are working below capacity 
due to labor shortages.  The shortage is attributed to lack of 
accommodation and transport facilities, poor perception of factory 
workers in rural areas, migration of Sri Lankan workers to jobs 
abroad, the demanding nature of factory jobs, and the rising cost of 
living without a commensurate increase in salaries. 
 
¶7.  In 2005, the apparel industry requested a six-month deferment of 
a Government mandated wage increase to private sector employees. 
The government acceded to the request delaying the application of 
the wage increase by six months from August 1, 2005 to January 1, 
2006 for apparel workers.   The apparel industry has protested 
against a recent move by some trade unions to request a minimum wage 
of Rs 10,000 (USD 100) for private sector employees.  Garment 
producers contend that wage demands should be tempered by the 
realities facing the industry. 
 
Action to improve competitiveness 
--------------------------------- 
 
¶8.  A new apparel industry strategy - Sri Lanka's apparel industry 
has begun to review its 5 year apparel industry strategy 2003-2007 
due to the slowdown in export growth from an anticipated 12 percent 
to about 3.5 percent in 2005-2006.  The industry has not established 
new targets for export growth but has decided on a set of "strategic 
initiatives" for the next 3-year period.  The initiatives include 
image branding, improving design and development capability, 
increasing productivity, human resource development and worker 
welfare, and supply chain management to improve lead times.  The 
industry also plans to request that the government provide fiscal 
incentives (tax exemptions), assistance to build worker housing, and 
a moratorium on electricity rate hikes applicable to the industry. 
 
¶9.  Backward integration - The garment manufacturers are taking 
steps to improve backward integration.  Numerous production 
facilities for accessories, textile mills, dying, washing and 
finishing plants have been or are being set up.  Recently, a large 
apparel company began building a dedicated apparel and textile 
complex with the aim of inviting fabric and accessory manufacturers 
from around the world.  There are various efforts to improve skills 
and training, including a tie up with North Carolina State 
University.  As part of the US government's tsunami reconstruction 
program, USAID will construct and equip two model vocational 
training centers to provide training for the apparel industry. 
 
¶10.  Image building - The industry has launched an international 
image building campaign based on a new Sri Lankan brand "Sri Lanka 
Apparel: Garments without Guilt".  The campaign strives to 
differentiate Sri Lanka as an ethical sourcing destination based on 
good working conditions in factories and broad compliance with 
International Labor Organization standards, including the absence of 
child labor in the apparel industry. 
 
¶11.  Preference schemes - Sri Lanka qualified for EU GSP+ benefits 
from July 1, 2005, allowing Sri Lankan textile and apparel duty-free 
entry to the EU.  However, Sri Lanka is not able to reap full 
benefits of the program due to the requirement of local value 
addition in excess of 50 percent.  Sri Lanka is negotiating to 
reduce the required value addition to 35 percent, although certain 
segments of the apparel industry, especially those that have 
recently invested in backward integration, oppose the change. 
 
¶12.  Prospects:  Sri Lanka's apparel industry is at a cross roads. 
The industry (especially the large players) has reached a high level 
of sophistication in the production process.  However, the industry 
needs to become a full service destination, providing services from 
the design stage to production.  In this environment, large players 
that have upgraded production and technology, invested in backward 
integration, formed ties with foreign buyers and secured access to 
finance will continue to perform well.  Smaller players face 
difficulties due to lack of financing, lagging technology, high 
electricity costs, serious labor shortages, and competition from low 
cost countries. 
 
BLAKE