By Skandha Gunasekara
While economists forecast a downward trend in economic growth for the next few years, the damage to the export sector as a result of the most recent outbreak of Covid-19 in Sri Lanka is yet to be assessed, with exporters expecting a definite negative impact.
Akin to kicking a man when he’s down, Sri Lanka’s struggling export sector has been thrown into chaos following the eruption of another cluster at a prominent apparel factory.
Senior economist and former Central Bank Deputy Governor Dr. W.A. Wijewardena pointed out that the export sector, which was showing an upward trend in the last few months, would now face further setbacks.
“The export sector was actually picking up and we were coming to experience a V-shaped recovery by the end of July, but by August, we saw it was again moving downwards. With this new outbreak, I expect it will fall to an even lower level within the next few months, which means we will be experiencing a typical W-shaped recovery path rather than a V-shaped recovery. This means it will take Sri Lanka a longer time period to get adjusted to the new situation,” Dr. Wijewardena said.
He noted that Sri Lanka’s economy had been struggling even before the global Covid-19 pandemic and that a negative economic growth had been predicted for the country in the coming years.
“Even before Covid-19, Sri Lanka’s economy was ailing – it was a sick economy. What Covid-19 has done is exacerbated and aggravated this situation. So, we need immediate measures to come out of the present economic downturn and then medium-to-long-term measures to move it upward so that we’ll be able to move back to the target growth of 6.5% by this Government. Right now, it is in the negative region. All analysts have come out with an estimate that Sri Lanka will experience a negative economic growth of about 6% in 2020. Some people had expressed openly that it would be a positive economic growth of about 1%; that is highly unlikely. This will continue over to 2021, 2022, and 2023. Most probably, we might recover into the positive range only after we arrive at, perhaps, 2024.”
He said that immediate steps must be taken to mitigate the damage and force an economic turnaround.
“That is why we need immediate measures to kick-start the economy. Everything will depend on what kind of policy measures we are going to introduce. Immediately, since we have lost the export market, we have to basically depend on the domestic market and our problem is the domestic market is very small, so it cannot generate a very high economic growth, but it can help us overcome the current economic downturn. That is what is necessary. So, the domestic market can be used to overcome the present economic downturn but after we have come to that level, we have to move towards the medium-to-long-term policies which involve revamping Sri Lanka’s production for the export market.”
With regard to Sri Lanka’s agreement to borrow $ 500 million, Dr. Wijewardena asserted that it was a much-needed relief measure in terms of foreign reserves.
With regard to the apparel sector, Dr. Wijewardena pointed out that even before Covid-19 Sri Lanka’s apparel industry was facing issues due to technological advancements and stiff competition among Asian countries with cheaper labour.
“Even before Covid-19, Sri Lanka’s apparel sector was facing huge problems – one of which was the competition from Bangladesh, Myanmar, and Cambodia. The second issue is that the buyers in North America and Europe were setting up factories in their own countries or in countries close to them which they call ‘onshoring’ and ‘nearshoring’. When apparel is produced in Sri Lanka, it is called ‘offshoring’.”
He elaborated on the advantages of onshoring and nearshoring and its expected impact on the global apparel trade.
“Even before Covid-19, say around 2015, these countries had started setting up factories on their own land – the US, the UK, and Europe. This is called onshoring because they were benefitting from the automation of the apparel industry. Then comes nearshoring – this is the practice of setting up factories in countries near them, close to the market, so that the product can be delivered to the buyer within three days. For example, Europe was supplied by countries like Turkey, Yugoslavia, and Serbia while the US was supplied by countries like Mexico, Honduras, and Guatemala.
“So, we were facing a problem because when we produce a product it takes about 30 to 40 days for it to reach the final consumer. But if you have a factory in your own land or a country close to you, it can reach in three days. That is the disadvantage that we all are facing. The estimate was that by 2025, about 65% of the requirement of the global apparel market would be met by onshoring and nearshoring countries. This is because of automation. There is 3D manufacturing applicable to the garment industry now and you don’t need human beings to do things. Therefore, the cheap labour in developing countries is no more an obstacle to start their businesses in their own countries.”
Meanwhile, the Export Development Board (EDB) confirmed that it was too early to ascertain the impact of the new Covid-19 cluster on the export industry.
“It’s difficult to tell at this point because it depends on how fast we can get this situation under control, how fast the businesses can be fully operational, and also the severity of the situation,” EDB Chairman Prabhash Subasinghe told The Sunday Morning.
He said the containment and management of the new outbreak would greatly determine the level of impact on the apparel sector.
“Even with the apparel sector, we can’t make an assessment right now. We are too early in this issue. There are two issues when we talk about how this is going to impact industries. One is how serious the virus is and how many people it is impacting and whether it is escalating. The second is how long it will take for us to manage the situation. I think the Government is very strong in managing the situation but we don’t have enough information to make any more remarks on the matter.”
He said the Government is taking all steps to manage the outbreak while also ensuring smooth operations of economic activities by taking measures like local lockdowns and curfews instead of imposing it islandwide.
“With this new cluster, we have to wait for at least two weeks to one month to know what the ground situation is. Is it only in the Gampaha District? Is it controlled in the Gampaha District? We cannot forecast anything right now. The issue is not the company itself but the matter of it affecting a key industry, and now it appears to be affecting multiple industries. There will be an impact. We just don’t know what level of impact it will be. We are trying to minimise the impact by having business continuity and having only local lockdowns and local quarantine areas instead of locking down the entire country.”
Akin to kicking a man when he’s down, Sri Lanka’s struggling export sector has been thrown into chaos following the eruption of another cluster at a prominent apparel factory.
Senior economist and former Central Bank Deputy Governor Dr. W.A. Wijewardena pointed out that the export sector, which was showing an upward trend in the last few months, would now face further setbacks.
“The export sector was actually picking up and we were coming to experience a V-shaped recovery by the end of July, but by August, we saw it was again moving downwards. With this new outbreak, I expect it will fall to an even lower level within the next few months, which means we will be experiencing a typical W-shaped recovery path rather than a V-shaped recovery. This means it will take Sri Lanka a longer time period to get adjusted to the new situation,” Dr. Wijewardena said.
He noted that Sri Lanka’s economy had been struggling even before the global Covid-19 pandemic and that a negative economic growth had been predicted for the country in the coming years.
“Even before Covid-19, Sri Lanka’s economy was ailing – it was a sick economy. What Covid-19 has done is exacerbated and aggravated this situation. So, we need immediate measures to come out of the present economic downturn and then medium-to-long-term measures to move it upward so that we’ll be able to move back to the target growth of 6.5% by this Government. Right now, it is in the negative region. All analysts have come out with an estimate that Sri Lanka will experience a negative economic growth of about 6% in 2020. Some people had expressed openly that it would be a positive economic growth of about 1%; that is highly unlikely. This will continue over to 2021, 2022, and 2023. Most probably, we might recover into the positive range only after we arrive at, perhaps, 2024.”
He said that immediate steps must be taken to mitigate the damage and force an economic turnaround.
“That is why we need immediate measures to kick-start the economy. Everything will depend on what kind of policy measures we are going to introduce. Immediately, since we have lost the export market, we have to basically depend on the domestic market and our problem is the domestic market is very small, so it cannot generate a very high economic growth, but it can help us overcome the current economic downturn. That is what is necessary. So, the domestic market can be used to overcome the present economic downturn but after we have come to that level, we have to move towards the medium-to-long-term policies which involve revamping Sri Lanka’s production for the export market.”
With regard to Sri Lanka’s agreement to borrow $ 500 million, Dr. Wijewardena asserted that it was a much-needed relief measure in terms of foreign reserves.
With regard to the apparel sector, Dr. Wijewardena pointed out that even before Covid-19 Sri Lanka’s apparel industry was facing issues due to technological advancements and stiff competition among Asian countries with cheaper labour.
“Even before Covid-19, Sri Lanka’s apparel sector was facing huge problems – one of which was the competition from Bangladesh, Myanmar, and Cambodia. The second issue is that the buyers in North America and Europe were setting up factories in their own countries or in countries close to them which they call ‘onshoring’ and ‘nearshoring’. When apparel is produced in Sri Lanka, it is called ‘offshoring’.”
He elaborated on the advantages of onshoring and nearshoring and its expected impact on the global apparel trade.
“Even before Covid-19, say around 2015, these countries had started setting up factories on their own land – the US, the UK, and Europe. This is called onshoring because they were benefitting from the automation of the apparel industry. Then comes nearshoring – this is the practice of setting up factories in countries near them, close to the market, so that the product can be delivered to the buyer within three days. For example, Europe was supplied by countries like Turkey, Yugoslavia, and Serbia while the US was supplied by countries like Mexico, Honduras, and Guatemala.
“So, we were facing a problem because when we produce a product it takes about 30 to 40 days for it to reach the final consumer. But if you have a factory in your own land or a country close to you, it can reach in three days. That is the disadvantage that we all are facing. The estimate was that by 2025, about 65% of the requirement of the global apparel market would be met by onshoring and nearshoring countries. This is because of automation. There is 3D manufacturing applicable to the garment industry now and you don’t need human beings to do things. Therefore, the cheap labour in developing countries is no more an obstacle to start their businesses in their own countries.”
Meanwhile, the Export Development Board (EDB) confirmed that it was too early to ascertain the impact of the new Covid-19 cluster on the export industry.
“It’s difficult to tell at this point because it depends on how fast we can get this situation under control, how fast the businesses can be fully operational, and also the severity of the situation,” EDB Chairman Prabhash Subasinghe told The Sunday Morning.
He said the containment and management of the new outbreak would greatly determine the level of impact on the apparel sector.
“Even with the apparel sector, we can’t make an assessment right now. We are too early in this issue. There are two issues when we talk about how this is going to impact industries. One is how serious the virus is and how many people it is impacting and whether it is escalating. The second is how long it will take for us to manage the situation. I think the Government is very strong in managing the situation but we don’t have enough information to make any more remarks on the matter.”
He said the Government is taking all steps to manage the outbreak while also ensuring smooth operations of economic activities by taking measures like local lockdowns and curfews instead of imposing it islandwide.
“With this new cluster, we have to wait for at least two weeks to one month to know what the ground situation is. Is it only in the Gampaha District? Is it controlled in the Gampaha District? We cannot forecast anything right now. The issue is not the company itself but the matter of it affecting a key industry, and now it appears to be affecting multiple industries. There will be an impact. We just don’t know what level of impact it will be. We are trying to minimise the impact by having business continuity and having only local lockdowns and local quarantine areas instead of locking down the entire country.”