Much has been said of the potential economic costs to Sri Lanka, of losing the Generalised Scheme of Preferences (GSP) Plus trade concessions to the European Union (EU). While these costs will be high, the social and human costs are likely to be even greater.

Considering official statistics for 2021, available up to end November, the EU was Sri Lanka’s single largest export market for 2021, accounting for nearly a quarter (24.1%) of the latter’s total merchandise exports of US$ 11.1 billion.

Given the EU’s importance to Sri Lanka, the loss of preferential tariffs for Sri Lanka’s exports to the EU through GSP+ previously, in 2010, had a substantial adverse impact on the Sri Lankan economy. This likely led to an increase in poverty and income inequality as per academic studies (for example, Bandara and Naranpanawa, 2014). At present, given the ramifications of the pandemic, the consequences of the loss of GSP+ could be far more dire, leading to increase in unemployment, poverty, vulnerability and inequality, as well as loss of improvements achieved in female empowerment.

According to the World Bank’s estimates, Sri Lanka’s poverty rate rose from 9.2% in 2019 to 11.7% in 2020, putting more than 500,000 additional people in poverty. The country’s poorest were disproportionately negatively affected. Adding to the woes stemming from the loss of income and livelihoods - especially by informal workers who account for around 70% of Sri Lanka’s labour force – the cost of living has soared in recent times. Inflation was at a 12-year high in December 2021, with food prices surging to levels that have led to fears regarding increase in malnutrition and hunger.

In such a scenario, the loss of GSP+ would be highly damaging. EU is a key market for some of Sri Lanka’s largest export industries including apparel, food exports and plastic and rubber exports. These sectors employ a substantial portion of the country’s workforce and are also characterised by the heavy presence of small and medium enterprises (SMEs). In addition, the EU has been a significant contributor to the growth of some of these exports industries – for instance rubber-based exports and seafood.

For Sri Lanka’s biggest export industry, apparel, the EU is particularly critical, being the single largest market. The EU accounted for $2.2 billion or nearly half (43.6%) of the sector’s total export earnings for 2021. The apparel industry employs 350,000 workers in Sri Lanka, of which nearly 80% are rural women. Female representation in the industry is more than double the national average, considering the share of women in Sri Lanka’s labour force. Therefore, if GSP+ is lost, vast improvements made in female economic empowerment and overall human capital could also be in jeopardy.

SMEs and family-owned businesses are also likely to be more severely affected if GSP+ is unavailable. Many apparel SMEs tend to depend on subcontracts from larger players, which will dry up if excess orders are not available due to loss of preferential access to key export markets. Earlier, when GSP+ concessions were removed in 2010, there were reports of several SME apparel factories being closed down, which also led to unemployment. Currently, SMEs account for approximately 45% or nearly half of Sri Lanka apparel manufacturing facilities and provide employment to around 50,000 employees.

Many apparel manufacturing facilities in Sri Lanka are located outside urban areas and industrial zones and are crucial in generating rural employment. SMEs are particularly vital in this regard since due to their relatively smaller scale, which requires less workers, a high percentage of these factories are located in less populated and lagging regions.  Many other sectors in Sri Lanka rely on the apparel industry, given its heavy presence across the island. These include logistics and transport providers, raw material suppliers as well as small-scale businesses providing food and refreshments.

In addition, several cottage industries, such as producers of carpets and pillow covers, depend on apparel factories in their neighbourhoods for raw material (in the form of waste fabric). If the industry is to suffer a downturn due to loss of GSP+, this entire economic ecosystem too will suffer adverse trickle-down effects.

In addition, the pandemic has led to global re-orientation of supply chains which Sri Lanka’s apparel sector is well-positioned to capitalise on. However, this requires easy access to exports markets, through trade arrangements such as GSP+. Export earnings, which generate foreign exchange, are also vital for Sri Lanka’s economic stability as well as to meet the country’s foreign debt obligations. 

Hence, given these challenges and opportunity costs, Sri Lanka needs GSP+ now, perhaps more than ever before.

However, it is important to recognise that this does not imply that Sri Lanka nor the country’s apparel industry will require GSP+ concessions indefinitely. Both the Sri Lankan Government and exporters are mindful of the fact that the country will lose its trade concessions in the future, as it gradually transitions to an upper middle-income nation.

While these efforts have been negatively impacted by the pandemic, apparel exporters have been working in collaboration with the authorities to mitigate the potential loss of such trade concessions. These initiatives seek to transform Sri Lanka into a global apparel hub, increase the sector’s competitiveness and diversify its export markets.

For instance, Sri Lanka’s apparel sector has made significant progress in recent times in positioning the country as a leader in sustainable manufacturing and strong human resource practices. Large investments have been committed by apparel exporters in setting up some of the world’s most eco-friendly manufacturing facilities in the country. The sector has also further strengthened its human resource practices by partnering with labour unions to improve processes related to employee grievance handling and dispute resolution.  

In addition, as the pandemic recedes and sectors like tourism – a key industry for Sri Lanka – recovers, the country’s economic prospects are likely to improve, gradually reducing the need for preferential export market access in the long-run.

In the long run, these developments and initiatives can strengthen Sri Lanka’s apparel industry significantly and, by extension, the country’s export sector, reducing the need for trade concessions. However, if these concessions are removed now, the social and human costs are likely to be dire. Given the pandemic’s unprecedented impact, GSP+ to the EU is critical for Sri Lanka and its export sectors at present.

Felix Fernando

Felix A. Fernando is the CEO of Alpha Apparels Ltd. and Sirio Ltd., and a Group Director of Omega Line, which ranks among Sri Lanka’s five largest apparel exporters. He holds a MBA from the Post Graduate Institute of Management (USJ), in addition to being a Fellow Member of the Chartered Institute of Management Accountants, U.K. Fernando is also the Deputy Chairman of the Joint Apparel Association Forum Sri Lanka and a Past Chairman of the Sri Lanka Apparel Exporters’ Association.)

https://srilanka-apparel.com/