Brooding over GSP+?

Dr MATHU H LIYANAGE

It is heartening news to learn that the government is prepared to renegotiate with the European Commission on the issue of GSP+ and the question of significant shortcomings in relation to the implementation of three human rights conventions relevant for benefits under the scheme. But it is equally determined not to allow any foreign countries or institutions to interfere in the internal affairs of the country under the disguise of any conditions attached to assistance programs. Rightly so as such undue interference undermine the dignity and sovereignty of an independent state

EU’s Generalised System of Preferences (GSP) is a trade arrangement by which EU provides preferential access to the EU market covering 120 countries in the Union to 176 developing countries in the form of reduced tariff for three years at a time, encompassing (1) the standard GSP on over 6,200 tariff lines, (2) the special incentive arrangement for sustainable development and good governance and (3) The Everything But Arms (EBA) by which it provides duty free, quota free access to all products for the 39 Least Developed Countries (LDCs).

Good governance

Sri Lanka is one of those countries, which receives additional incentives (GSP+) with other 14 developing countries. Except Mongolia, Sri Lanka is the second Asian country to be provided with GSP+ concessions.

The primary objective of the GSP is to be able to reduce poverty and promote sustainable good governance and the preferential tariffs to promote international trade to gain additional export revenue with a view to developing industries and job opportunities in their countries.

EU countries

If a country exceeds or falls below a set threshold or does not comply with any requirement, preferential tariffs are either suspended or stopped following the findings of a Commission.

Where Sri Lanka is concerned, GSP+ was stopped from August 15, 2010, for non-compliance of its request to the government to investigate the alleged human rights abuses.

Sri Lanka can still export clothing, garments and ceramics and other key products to EU countries at standard preferential tariffs, which is overly beneficial.

The government emphasizes that, when the conditions were drawn up in 2005, there were no human rights or fundamental rights issues attached to the original criteria to offer concessions but the present requirements drawn up by the Commission are considered to be an interference in the legitimate internal affairs of the country. Now this has become a bone of contention between the two parties with no anticipated solution in the immediate future.

However, it has to be admitted that the withdrawal of GSP+ would certainly affect the foreign exchange earnings and loss of jobs in the clothing, garment and ceramics industries.

EU imports from Sri Lanka under GSP+ amounted to EUR 1.24 billion (US$1.55 billion) in 2008.

Garment industry

The EU and the US are the two major importers of garments from Sri Lanka. During the period 2009 to 2010, the US market fell from 2.4 percent to 1.9 percent but this loss was compensated to some extent by an increase in exports to the EU from 1.6 percent to 1.9 percent during the period 2004 to 2008.

The garment industry is a US$ 3.2 billion export business and accounts for 45 percent of the country’s export revenue.

Sri Lanka has nearly 300 garment factories including major suppliers such as Brandix, Hirdaramani and MAS Lanka.

To counteract the repercussions of the withdrawal of GSP+, it is suggested in some quarters that the devaluation of the rupee might improve the situation. Devaluation means that the exports become more competitive and cheaper to foreigners. It will increase the demand for exports.

On the other hand, imports will become more expensive and will reduce the demand for imports invariably resulting in inflation. With the implementation of a large number of development programs especially in the North and the East, devaluation may not be a viable proposition at this stage as it is bound to increase the cost of machinery and other equipment needed for such programs and even for the expansion of textile and garment making factories in the country.

Foreign exchange reserves

The Government has already taken steps to use its foreign exchange reserves to prevent the rupee strengthening and eroding the competitiveness of exports. It is said to be in a position to adjust the dollar by 10 to 12 percent.

The interest rate was about 19 percent at the time the crisis began but today it is down to 11 to 12 percent and the inflation is kept low.

Setting up of more textile and apparel making factories is yet another significant factor to handle the problems created by the GSP+ withdrawal.

The Board of Investment (BOI) has given approval to investors to set up garment factories in the country.

The Hong Kong based company Interfashion Ltd will invest Rs 35 million to manufacture high value ladies formal wear for Marks & Spencer and Tesco. It will be located in Nuwara Eliya and will provide work for 250 workers initially and up to 1,200 when it goes into full production. The production capacity of the plant is estimated to be 6,000 pieces per month.

Trade concession

Trendywear Adhikarigama is to invest Rs 315 million to export high fashion ladies garments employing about 1,000 to 1,500 workers.

The plant is expected to produce about 120,000 pieces a month. It also has four other garment manufacturing units providing work for about 3,000 workers.

Sri Lanka should also explore the possibilities of expanding their trade in countries like Hong Kong, South Korea and Taiwan and strengthen their ties with the US now that the recession is almost over in that country.

Hong Kong, South Korea and Taiwan are wealthy countries and are the world’s largest exporters of garments but they do not have sewing factories. It is this factor Sri Lanka should explore, as its textiles are of high quality and cheaper.

On an overall estimation, it may be possible for the government to whisk away the problems of foreign export earnings and loss of employment in the textile industry in keeping with the mandate given to the President at the Presidential elections not to barter the sovereignty of Sri Lanka for the EU’s seven percent trade concession (GSP+).