Inflation and high wages hit Sri Lanka's textile industry

Colombo: Inflation and wage pressure are cutting earnings in Sri Lanka's trademark industry - garments - to the point where fast-growing remittances could take over its top export earner status for the first time in two decades.

A possible loss of a lucrative EU concession, plus the fact that Sri Lankan garment workers earn more than those in competitor countries, has also dimmed the industry's outlook this year, officials and analysts said.

Export earnings from the garment industry rose 8.5 per cent to $3.34 billion in 2007, accounting for 43 per cent of total export revenue. In the first half of 2008, earnings have grown by a mere 1.5 per cent to $1.6 billion.

Garments last year were the country's top source of foreign exchange followed by remittances of $2.5 billion and tea export earnings, which brought in $1 billion.

"The remittances can surpass the garment sector," Vajira Premawardhena, head of research at Lanka Orix Securities said.

Earnings from remittances have jumped 22.4 per cent to $1.46 billion in the first half of 2008 period and are still growing, according to Sri Lanka's Bureau of Foreign Employment.

"When inflation is running at 26 per cent, the wages you earn domestically are not sufficient for people to survive. So a lot of people are giving up their local jobs and moving overseas. So there is a good prosperity for remittances."

Sri Lanka's inflation is one of the highest in the Asian region, and had hit an 18-year peak in late 2007 mostly due to high government expenditure on a war with Tamil Tiger separatists and state salaries and pensions.

The rise of global fuel and food prices propelled inflation upward since December to a high of 28.2 per cent in June, before falling to 26.6 per cent last month on a new index that reset the baseline year to 2002.

That has pushed Sri Lanka's working class to look for work elsewhere - primarily as domestic workers in the Middle East where salaries are much higher - and in turn eroded the traditional employee base for garment manufacturers.

Industry officials said Sri Lanka's competitiveness is suffering as much as anyone else from higher production costs because of high world food and fuel prices, but more so because of its more mature industry wage scale.

"Costs have been fairly high, higher than most of our competitors, particularly Bangladesh, Cambodia and Vietnam," T.G. Ariyaratne, the secretary general of the Joint Apparel Association Forum, said in a telephone interview.

Industry players said the average monthly employee wage in Cambodia and Bangladesh - around $25 - is similar to Sri Lanka's wage level 10 years ago. Sri Lanka's garment industry pays $45-$60 a month per employee.

"Their wages are fairly low. So that's why their prices are low. So we will probably end up somewhere similar to last year on the basis of the present situation."

Concession

An EU trade concession has helped the industry boost export revenue since mid-2005, but the European body has warned it may not renew it after its expiry in December because of continuing human rights violations stemming from the civil war.

"Forty-seven per cent of the export from the garment industry goes to EU. Assuming that GSP+ is not available from next year, then we will find it real hard to operate. The cost will obviously go up," Ariy-aratne said.

The GSP+ scheme helped Sri Lanka net a record $2.9 billion from EU markets last year, 37.5 per cent of total export income.