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New lifelines for Sri Lanka’s economy

European Union concessions to Sri Lanka which came into effect last month may rescue the island’s garment industry which has been struggling to recover since US textile quotas were scrapped, opening the door to competitors, including China.

Lower shipping insurance premiums and the revaluation of the Chinese yuan are also expected to help Sri Lankan garment makers retain customers after the abolition this year of global export quotas allowed lower-cost Chinese producers to raise their exports by 21 percent already this year, Bloomberg said.

In June, insurers took Sri Lanka off the war-risk list, significantly cutting premiums and costs for exporters, Bloomberg reported.

''It’s a fantastic opportunity for large scale foreign investors to produce goods in Sri Lanka for sale in EU''

And the EU concession which came into effect on July 1 removing tax from nearly 200 items, representing nearly 90 percent of the imports into EU countries from Sri Lanka, the Daily Telegraph reported last week.

This potentially means a saving of 12.5 percent for textiles and garments and 15 percent for all other goods, the British broadsheet said.

But there still hurdles, particularly rules concerning the origins of components of Sri Lankan products to overcome Lanka Business Online (LBO) reported

Sri Lanka’s biggest export to the EU is clothing, accounting for over 60%.

Indeed, garments and textiles account for a quarter of Sri Lanka’s $20 billion economy, Bloomberg reported this month.

The EU’s duty free concessions, offered as aid through trade following the devastation of the tsunami, were seen as a virtual lifeline to the garment industry in which scores of small factories have closed or are struggling to survive.

The industry had been fighting to recover since US textile quotas were scrapped in 2004 opening the door to countries like China which could compete with cheaper prices.

Sri Lankan industrialist Mahesh Amalean told the Daily Telegraph these concessions will help Sri Lanka recover from an anticipated bad year. “It will increase exports and hopefully enable us to pull back orders for the EU from India and China.”

In 2003 the UK absorbed around 13pc of Sri Lanka’s exports, but the good news for UK companies is that the components of much of this trade originates in Britain.

The lifting of duty on Sri Lankan goods is thus also an incentive for greater investment in the island.

“It’s a fantastic opportunity for some of the large scale investors in Britain to look at Sri Lanka as a possible manufacturing base where they can produce and bring goods into the EU,” Jay Perera, chairman of the UK Sri Lankan Business Council said.

''Sri Lanka is not that dangerous at the moment for marine underwriters'' - Lloyd’s

Although the EU changed its GSP scheme to make it more developing country friendly, its rules of origin could still pose a problem, as the majority of Sri Lanka’s clothing exports can’t meet these rules, LBO reported.

“The current rules of origin are considered very rigid. For Sri Lanka the double transformation criteria, for instance, is very difficult to achieve,” Sonali Wijeratne, at a Ceylon Chamber of Commerce seminar said.

The double transformation rule requires that the conversion from yarn to fabric and fabric to garment, happen locally. Local exporters say this is impossible as Sri Lanka imports most of its fabric and yarn.

However, rules of origin “will most likely be revised in early 2006,” says Roshan Lyman, economic and trade advisor to the European Commission in Sri Lanka.

The Sri Lankan government wants the EU to reduce its 50 percent domestic value addition to 35 percent and to relax double transformation to a single transformation.

The EU is promising a comprehensive set of changes to advantage developing countries like Sri Lanka.

“What is being discussed is an across the board value addition criteria in place of the other rules, but this may change with time,” says Lyman.

And although the Norwegian peace process remains stalled, Sri Lanka’s industries are reaping the benefits three years of ceasefire.

Insurance premiums for vessels calling at Colombo are beginning to fall following the June decision by Lloyd’s Market Association in London to drop the nation from its list of areas at “war risk,” said John Keells Holdings.

Ships carrying cargo from the island had to pay as much as $100,000 extra insurance for the added risk.

“Our customers were paying for that war-risk surcharge,” said the MAS managing director, Dian Gomes. “Now that they don’t have to pay, it makes us more attractive in this competitive market where China is the dominant player.”

“Sri Lanka is not that dangerous at the moment for marine underwriters,” said Neil Roberts, a technical specialist at Lloyd’s Market Association in London. War-risk insurance premiums cost as much as 0.4 percent of the value of a ship.

''Trade volumes through the island’s ports will most certainly rise as the perception of Sri Lanka is getting better''

Deletion from the Lloyd’s war-risk list may help Colombo develop as a South Asian cargo center, said Romesh David, director for transportation at John Keells, which gets half its earnings from freight services and runs a container terminal in Colombo.

“It adds to the viability of Colombo port as a transshipment hub,” David told Bloomberg. “Trade volumes going through the ports will most certainly rise as the perception of Sri Lanka is getting better.”

Sri Lanka’s main port in Colombo handled 2.2 million containers last year, up 16 percent from 2003. The number of containers handled during the first three months of this year rose 20 percent from a year earlier, the government said in May.

Sri Lanka’s export earnings rose 11.4 percent in the first five months from a year earlier, the central bank said July 13. Textile manufacturers plan to double overseas shipments to $4.5 billion by 2007, according to the Joint Apparel Association Forum, an industry group.

“The important thing is the recognition of the improving security situation in the port of Colombo,” said N.K. Warusavitharana, secretary general of the Ceylon Association of Ship’s Agents, which represents about 130 shipping agents that operate in Sri Lanka.

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