This LKI Explainer examines recent developments that could affect Sri Lanka’s apparel export industry, which accounts for over 40% of Sri Lanka’s total exports. As the EU and US are the largest markets for Sri Lanka’s apparel, we highlight the potential effects of Brexit, the regaining of GSP+, and the recent US Presidential election. We also summarize relevant proposals of the Sri Lanka Budget 2017, including those relating to the development of wearable technology, a global market that has been projected to increase threefold to USD 100 bn by 2023.
Although the UK remains the single largest export destination for Sri Lankan apparel in the EU, the share of apparel exports to the UK has steadily declined since 2002. In particular, the share of apparel exports to the UK during 2000-2010 and 2011-2015 declined by 12% and 10%, respectively. Similarly, the annual growth of Sri Lanka’s apparel exports to the UK is significantly lower than it is to other EU countries. Average annual growth rates from 2010-2014 for the UK, in comparison to other EU countries, were 0.8% and 11.5%, respectively. Other EU countries, as opposed to the UK, therefore appear better markets for Sri Lankan apparel in the future. (Verite Research, 2016)
2. Regaining GSP+
The EU’s GSP+ tariff concession allowed Sri Lanka to sell over 7,000 products to the EU countries tax-free, and the apparel industry was the single largest beneficiary of GSP+. However, in February 2010, the EU cited the Sri Lankan government’s alleged human rights violations as cause for the suspension of the GSP+ tariff concession. As a result, Sri Lanka lost more than LKR 800 million annually through apparel exports, and some garment factories were forced to close as a result, resulting in over 10,000 apparel employees losing their jobs.
Prime Minister Ranil Wickremesinghe travelled to Brussels, Belgium on 16 October 2016 for high-level discussions with EU officials on renegotiating the GSP+ benefits. He met the President of the European Commission, Mr. Jean-Claude Juncker, who acknowledged that the national Government formed by the two main political parties in Sri Lanka had steered the island nation onto the right path.
A 4-member delegation of the European Parliament recently visited Sri Lanka, to study the progress of national reconciliation and other human rights issues. They stressed that “it is still early days butthe trend is good.” It is expected that a formal recommendation on Sri Lanka’s application will be made to the European parliament by January 2017, and the final decision will be made in May 2017.
The United States is the largest export destination of Sri Lanka and accounts for approximately 25% of Sri Lanka’s exports. Moreover, over 70% of Sri Lanka’s total exports to the US is in apparel, accounting for 43% of Sri Lanka’s total apparel exports. Sri Lanka’s apparel exports to the US account for a relatively high 2.8% of the country’s GDP (Figure 01).
Figure 1: Apparel exports to U.S. and the World – Selected Countries
Source: Created by Ravindra Deyshappriya, based on data from World Integrated Trade Solution, 2015.
Given China is the largest source of FDI and 2nd largest source of tourists in Sri Lanka, and Singapore is one of the top 5 sources of FDI (see Figure 02), the vulnerability of the Chinese and Singaporean economies to US policy/markets has the potential to adversely impact the Sri Lankan economy as a whole.
Figure 2: Top Sources of FDI to Sri Lanka
Source: Created by Ravindra Deyshappriya, based on Board of Investment Annual Reports, 2011-2014 *Data not available for China in 2011
A signature aspect of Trump’s campaign platform was his promise to eliminate the Trans-Pacific Partnership (TPP), which has been pronounced dead since the US presidential election. In response, China has shown signs of seeking to negotiate a trade deal to replace the TPP. If this proceeds, Sri Lanka may wish to negotiate to enter the deal.
The 2017 Budget proposals have the following expected positives.i
Expected positives for the apparel industry:
The government will permit apparel companies in Sri Lanka to invest up to 5% of their average export turnover (of the preceding 3 years in any given year) in overseas apparel-related entities. Profits and income of such enterprises established overseas would need to be received by the investing company in Sri Lanka. (Page 37.)
Fashion Design will be a new subject in the Ordinary and Advanced Level curricula. (Page 20.)
15 export villages will be created on a Public Private Partnership (PPP) basis, some of which will focus on the apparel sector. (Page 40.)
Although the apparel and textile industry is a major foreign exchange earner at almost USD 4,800 million, Sri Lanka imported fabrics of almost USD 2,296 million in 2015. To support the necessary backward integration, the government has proposed the formation of a textile cluster, which will include sizing, dyeing and finishing units. It will provide relief to businesses that invest in the textile cluster, plus the required space. This aims to save at least USD 2,000 million per annum. (Page 40.)
To create additional avenues for garment exports, permission will be granted to import manufactured branded products for reworking, under the commercial hub regulations. Such reworked garments would be exported to countries where there is no preferential treatment. (Page 40.)
Expected positives for the development of wearable technology:
The government will allocate LKR 1.3 billion to facilitate science, technology and innovation, an increase from LKR 826 million in 2016. (Page 43-44).
LKR 100 million each will be set aside for the Innovation Accelerator Fund introduced last year, the establishment of a Biotechnology Innovation Park, on a PPP basis, and to the Center forAdvanced Electronic Design at the University of Moratuwa to support start-ups in niche electronic LKR 250 million will be allocated to the Sri Lanka Institute of Nanotechnology (SLINTEC) and LKR 50 million to the Centre of Excellence in Robotics Applications. (Page 44.)
LKR 500 million will be allocated to entrepreneurs in Product Design Engineering. (Page 45.)
To build relevant skills, Digital Technology will be a new subject in the Ordinary Level and Advanced Level curricula (Page 20-21.) LKR 100 million will be allocated to encourage students to pursue a Bachelor of Education in Science, Technology and other subjects to increase the number of teachers in these fields. (Page 25.)
Expected positives for all export industries:
The Customs Department will publish the average processing time of import and exportdocumentation and average release time of goods. It will ensure that (i) export documents and containers will be processed for shipment within 2 hours from time of submission, and (ii) import documentation will be processed in 3 hours, and containers released within 24 hours. (Page 92.)
Initial steps will be taken for traders to electronically submit required documents or data to the relevant authority, for the import, export or transit of goods through a single entry point. (Page 92.)
Exporters with an increase of 15% or more in foreign currency earnings for the year of assessment 2016/17 in comparison to 2015/16 will be granted a rebate equal to 75% of the tax attributable to the increased earnings. (Page 133.)
To attract high impact investments, any domestic or foreign company investing USD 5-100 million (excluding the value of land) in Sri Lanka will be provided a grant of 5% of the investment at the end of its 2nd year of operation, if it engages in a venture with more than 40% value addition that could generate employment for 500 employees. If this is maintained for 5 years, the government will top up by a further 5%. It will also grant a 100% capital allowance on such businesses.
For “Landmark Investments” of USD 100-500 million and over USD 500 million, the government will design special incentive packages with specific tax concessions. A 5-year multi-entry visa to these investors and their skilled expatriate labour has been proposed. (Page 36.)
Among the tax incentives to spur investment in the Northern, Uva and Eastern provinces, the government has proposed a 200% capital allowance for businesses that invest in the Northern Province. For businesses investing over USD 3 million (excluding the value of land) and generating 250 employment opportunities in the Uva and Eastern provinces, the capital allowance would be 100%. A three or five year tax holiday could also be granted for businesses that create 500 or 800 new employment opportunities, respectively. (Page 36.)
The government will commence operations of an EXIM Bank in 2017. It will have an initial capital of LKR 25,000 million, with an initial government contribution of LKR 10,000 million. (Page 39.)
Small-scale and medium-scale entrepreneurs, including from the apparel sector, will be provided concessionary loan schemes based on turnover and employment generation capacity. The proposed allocation is LKR 750 million, including a 50% interest subsidy for SMEs with a turnover of LKR 25-250 million and an employment cadre of 10-50. Those with a turnover between LKR 250-750 million and employment cadre of 50-300 will be given an interest subsidy of 25%. (Page. 33-34.)
The 2017 Budget proposals have the following potential negatives.
Tax on profits/income of export sector businesses will be revised from 10/12% to 14%. (Page 134.)
Verite Research. (2016). Impact of Brexit on Sri Lanka.
Notes
i All page numbers are references to the 2017 Budget Proposals here.
*Ravindra Deyshappriya is the Director of Research at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI). Anishka De Zylva is a Research Associate at LKI. The opinions expressed in this article are the authors’ own. They are not the institutional views of the LKI and do not necessarily represent or reflect the position of any other institution or individual with which the author is affiliated.
