Let the rupee fluctuate naturally: Yohan Lawrence

April 9, 2024

Apparel export operations rely heavily on long-term planning, where stability is crucial due to the significant gap between quoting a price and receiving payment. Fluctuations in currency exchange rates, therefore, pose challenges, said Joint Apparel Association Forum Sri Lanka (JAAFSL) Secretary General Yohan Lawrence in an interview with The Sunday Morning Business, pointing out the challenges faced by the apparel exports sector in Sri Lanka due to rupee fluctuations.

“Our request is simple: let the rupee fluctuate naturally. Whether it strengthens or weakens, we are prepared to adapt. However, we urge for the removal of restrictions imposed on it,” he said.

Following are excerpts of the interview:

What are the factors contributing to the decline in apparel exports?

When you mention ‘decline,’ over the past 14-15 months, there has been some level of variation, but it has consistently operated at around the same level. There hasn’t been a continuous decline; rather, there has been a drop in the level of operation.

From January 2023 onwards, the figures have remained relatively stable. However, there is a noticeable decline compared to 2022. In 2022, the average monthly figure was $ 466 million, whereas in 2023, it averaged $ 378 million. This indicates a decline since 2022, but it hasn’t been continuous.

The factors that contributed to this decline in 2023 are still prevalent, being primarily a reduction in global demand for apparel and potentially a shift in the competitiveness of small businesses in response to local circumstances.

How have recent local and global economic trends and trade dynamics affected Sri Lanka’s apparel exports and market competitiveness?

As the country begins its economic recovery there is an increase in confidence, but this doesn’t necessarily translate into increased volumes in apparel exports. Ultimately, competitiveness and demand are still crucial factors.

Externally, observers may not have perceived much difference as we continued to export throughout the crisis, even during periods of fuel shortages affecting industries. This was possible due to close collaboration with the Government to ensure uninterrupted operations. Thus, from the customer’s perspective, there is no visible change because they still receive the same level of service, despite perceptions they may have based on media reports.

Are you looking at new export markets? How challenging is it to explore new markets at this point?

We primarily collaborate with international brands as we have limited participation from local brands in export activities. Therefore, when seeking new markets, we are essentially exploring opportunities with new brands operating in diverse markets.

Currently, our brands operate predominantly in the EU and the UK. However, for Sri Lanka to compete effectively, it must compete at the same level as with competitor countries. Looking at potential markets, particularly in the Asian region such as Japan, South Korea, and India, as well as Australia, presents challenges. It’s not simply a matter of expanding sales to these countries; we must ensure competitiveness.

Sri Lanka isn’t the most cost-effective location for manufacturing. Therefore, competing on price alone isn’t feasible. Countries like Bangladesh, with significant economies of scale, can operate at a lower cost base and thus compete more effectively. Achieving competitiveness is a complex endeavour.

In addition, we have planned a roadshow called the ‘Sourced Sri Lanka – Textile and Apparel Roadshow’ scheduled for June in London. The reason for the roadshow is that the UK is one of our biggest markets. However, the majority of our shipments to the UK are directed towards larger, well-established brands. Especially in the post-pandemic landscape, we’ve witnessed the emergence of numerous other brands operating within these markets.

The objective of the roadshow isn’t to showcase our offerings to existing customers, since they are already well aware of the capabilities within the country. Instead, it aims to reach out to smaller and newer brands that may not have existing connections with Sri Lanka.

In the UK, many of our exports are to companies that have been sourcing from Sri Lanka for 20-30 years. These companies are familiar with Sri Lanka’s skill set and capabilities. The roadshow seeks to introduce brands that are not currently sourcing from Sri Lanka to the opportunities available here. This is why we chose the UK for the roadshow.

Ideally, we would also like to explore opportunities in Germany, but we are assessing the practicality of this endeavour. In essence, the roadshow is designed to target brands that are not currently engaged in purchasing from Sri Lanka.

What strategies and steps has the JAAFSL taken to penetrate potential existing and new global markets?

The aim is essentially to pursue additional free trade agreements with countries from which we can derive benefits, and vice versa. Therefore, our focus lies on accessing new markets such as India, China, Japan, South Korea, and Australia, all of which hold significant potential. Hence, our priority is to negotiate comprehensive agreements with these countries, allowing us to compete more effectively with our counterparts on a level playing field.

How has the electricity tariff rate affected the cost of local apparel manufacturing?

When considering electricity tariffs, our stance is that they should be stable, competitive regionally, and predictable. One of our major concerns with tariffs, especially over the past two years, has been the significant fluctuations and sudden, unplanned changes. For instance, there were instances where tariffs were revised twice a year, then three times, resulting in unnecessary increases followed by decreases.

This unpredictability poses challenges for us as we operate on a long-term basis. When we quote prices to customers today for garments that we will produce in 3-4 months and receive payment for in possibly a year, we require certainty. Therefore, Sri Lanka’s electricity tariffs must be competitive within the region and provide the predictability necessary for businesses like ours.

Currently, even with the reduction that has been implemented, the electricity tax should still be positioned towards the higher end. Our request is not to increase or decrease it but rather to ensure that it remains cost-effective.

We advocate for transparency in the cost structure and efforts to manage costs, while also transitioning towards a more renewable energy mix. This approach aims to not only reduce costs but also ensure sustainability. Therefore, the discussion extends beyond just the rate itself; it encompasses broader considerations.

What negative impacts does the apparel sector face regarding exports due to rupee appreciation?

When the rupee appreciates, exports become less competitive. However, this issue boils down to two key arguments.

Firstly, our operations rely heavily on long-term planning, where stability is crucial due to the significant gap between quoting a price and receiving payment. Fluctuations in currency exchange rates, therefore, pose challenges.

Secondly, there are regulatory constraints that exporters currently face, such as mandatory conversion requirements for excess dollars and limited flexibility in choosing conversion banks. These regulations limit exporters’ ability to optimise currency exchange opportunities and timing, resulting in inconsistency and potential inefficiencies.

When this situation occurs, it restricts the exporter’s ability to operate flexibly. Meanwhile, the importer gains an advantage; they can book forward, choose when to pay their bills, and adjust the timing of bill retirements according to their needs. The exporter, however, lacks such flexibility. Our argument regarding exchange rates acknowledges this reality. However, the current scenario worsens the issue by forcing exporters to inject dollars into the market when it is unnecessary.

Our request is simple: let the rupee fluctuate naturally. Whether it strengthens or weakens, we are prepared to adapt. However, we urge for the removal of the restrictions imposed on us.

Currently, we are constrained and unable to secure the best deals due to these limitations. This situation is a market anomaly that needs addressing. The regulations were implemented two years ago when the country faced a different foreign exchange landscape. Today, the situation has reversed. Commercial and industry banks are overwhelmed with dollars due to decreased imports, resulting in minimal demand. Consequently, the mandatory conversion requirement for exporters worsened the situation.

One aspect worth mentioning is that when the rupee depreciates, exporters may indeed benefit financially. However, it’s important to recognise that exporters also face significant expenses, particularly in terms of labour compensation and ensuring employees can meet their living expenses. Unfortunately, when the rupee strengthens, these expenses do not decrease accordingly.

To what extent is the Sri Lankan apparel sector affected by brain drain in both labour and executive levels or managerial employment aspects?

Labour-level shortages have never been a significant issue for us. At the executive and managerial levels, we often observe those who work overseas. It’s worth noting that many Sri Lankans already work in countries like Bangladesh and other manufacturing nations. Therefore, labour mobility has always been a factor we must address. This is why we closely collaborate with educational institutions to ensure a steady stream of individuals entering the apparel sector. Despite these challenges, brain drain is not a major concern for us.

What policy changes do you anticipate to prioritise export-led growth of the apparel sector, ensure the inflow of vital export earnings, and encourage investments in the future?

I believe there are several factors to be considered. Firstly, when it comes to trade agreements, they must be established with countries that we can effectively trade with. Additionally, if we are advocating for the country to increase its exports in general, we need a system that incentivises individuals to enter the export market. Currently, there is a lack of incentivisation for individuals to engage in exports, and this needs to change.

There must be policy adjustments that attract investment into the export sector. Many competing countries offer attractive packages to exporters, whether through lower tax rates or other incentives. Without such incentives, domestic manufacturers may be hesitant to enter the export market due to its inherent risks. Therefore, our request is for a policy framework that actively encourages investment in exports.

We also need to ensure that we have an enabling business environment. While there isn’t a specific Ease of Doing Business index, the concept of e-governance and facilitating smooth trade by minimising bureaucratic hurdles is crucial. The Government needs to focus on creating an environment where businesses can set up quickly and easily.

Currently, various restrictions such as the negative list for imports hinder competitiveness in Sri Lanka. To foster growth, we must build a platform that encourages investment in exports by offering attractive incentives. Sri Lanka may not at present offer the most appealing package for businesses. If we want to expand our apparel exports, we must take necessary action to attract investors.