GSP+ vital boost for apparel exports

NDB Securities on GSP Plus:

NDB Securities (Pvt) Ltd (NDBS) released a report on the Generalised Scheme of Preferences (GSP) special incentive arrangement (GSP+) and its anticipated impact on the apparel sector of Sri Lanka.

The report makes some interesting revelations about the expected time horizon for which Sri Lanka may be eligible for this scheme, while also analysing two listed companies in the textiles and apparels sector.

Sri Lanka first received GSP+ in 2005, the same year the European Union (EU) introduced the scheme to assist developing countries become more competitive in exports to the EU market. In 2010, the country lost GSP+.

The topic of GSP plus regained prominence after the elections in 2015 at which point the new regime lobbied its case among EU member states for GSP+ readmission for Sri Lanka.

Head of Research, NDBS, Sidath Kalyanaratne said, "As the global economic drive shift towards developing countries, trade and competition among nations becomes two very important aspects of inclusive global economic growth.

This may empower developing nations through transfer of sophisticated technical knowledge, flow of capital and access to larger markets. For Sri Lanka, one way of harnessing those benefits from trade and competition and the resultant economic development is through access to global value chains."

He said, "Sri Lanka's total exports to GDP dropped from around 30% in 2000 to around 13% in 2014. However, during the same period, other competing countries in the region strengthened their exposure to the global market. For example, Vietnam (that competes with Sri Lanka on certain apparel and textile product lines) increased total exports to GDP from around 55% in 2000 to around 86% by 2014."

"This is expected to improve further due to Vietnam's entry into a Free Trade Agreement with the EU (in 2015) and the recent inclusion in the Trans Pacific Partnership (TPP) which has induced some of the region's leading textile and garment players such as Texhong Textile Group Ltd., Shenzhou International Group Holdings Ltd. and Pacific Textiles Holdings Ltd. to increase their operational exposure to Vietnam," Kalyanaratne said.

Sector analyst of NDBS, Upul Atapattu said, "The EU will remain a very important trading partner for Sri Lanka, especially in the apparel and textiles segment.

Sri Lanka's apparel and textiles exports account for around 45% of the total exports to all destinations. Apparel exports contribute to around 60% of total exports to the EU. Hence, the GSP special incentive arrangement, if awarded to Sri Lanka, will benefit the country more through the apparel and textiles sector compared to any other sector covered under the scheme." "The GSP in particular is non-reciprocal in nature.

Therefore, the GSP arrangements with premier export destinations will provide tariff preferences for exporters which is expected to have a considerable impact on the competitiveness of the export basket. Currently, Sri Lanka enjoys GSP for destinations such as the EU, US, Turkey, Japan, Canada, Switzerland, New Zealand and Norway," he said.

"Except for the textile and garments sector which remained resilient due to its focus on value addition, overall export competitiveness of Sri Lanka to the EU reduced by the withdrawal of GSP+. Going forward, the trade development of peer countries with the EU could present a considerable risk to the textile and garment sector as the peer countries are becoming more competitive through the preferential and free trade agreements," Atapattu said.