Brexit and Sri Lanka – Remarks at the British High Commission

Here are some fast facts about Sri Lanka’s trade relationship with the UK as it stands today:
  • Sri Lanka’s exports to UK have been stagnating for about a decade now – at around the US$ 1.1 billion level.
  • UK is one-tenth of our total exports – but lower than when we had under GSP Plus (was closer to 14%)
  • Even after GSP Plus was suspended for SL (so roughly the last 5 years), exports to EU grew at about 4%, while exports to UK was just 0.2%.
  • Exports to US and exports to ROW grew at over 10%
  • 80% of our exports to UK are apparels (to the rest of the EU its around 60%)
Given that it is 80% of our exports to UK, its worth talking a bit on prospects for apparels:
Immediate
  • Pressure is coming from the depreciation in the Sterling. According to economic historians, GBP to Dollar is now at its lowest level since 1792.
  • Immediate term – orders up to December are pretty much set. So no immediate fallout from the substantial depreciation of the currency (roughly 13% depreciation since Brexit)
  • But the pressure is now building – buyers are repricing their orders, and this will squeeze margins for Sri Lankan suppliers – its already happening in the new orders
  • At the moment, the order books are holding. Some softness is seen, as UK consumers are uncertain and consumer spending was down over the last couple of months. But its not too bad yet
Level-playing field
  • There is a lot of optimism that once Article 50 is triggered and everything is gone through with, post-Brexit the level playing field will be a significant advantage for Sri Lanka
  • Let me explain for anyone not familiar – Bangladesh, a key competitor to Sri Lanka (apparels mainly, but also ceramics, travel goods, etc), currently has an EU scheme that is more generous than GSP Plus – called Everything But Arms – EBA. Its a duty free quota free scheme offered to LDCs
  • Once UK leaves, B’desh loses EBA access to the UK. This can level the playing field for Sri Lankan suppliers.
  • Those I have spoken with argue that the business climate in Sri Lanka, dealing with Sri Lankan companies, the design and delivery competencies of our firms, the quality, environmental and labour standards all of these tip the scales in our favour.
  • But the key will be whether Britain extends a generous trade package to B’desh post-Brexit.
  • Which is why Sri Lanka needs to use this new goodwill and do a deal with the UK soon, to get ahead.
  • If we get GSP Plus again, we have about another year or two of preferential access to the UK, before Brexit happens – so lets use this breathing space.
The broader point on apparel exports to the UK is this:
  • Regardless of Brexit, here are some other factors with regard to exports to UK
  • ‘Fast fashion’ brands are fast gaining ground in the UK (like Uni Qlo), and this will likely grow if UK consumer sentiment remains down. But not much supply linkages to these brands from Sri Lanka
  • But the good news is that categories like ‘Ath-leisure’ – like Beyonce’s IvyPark collection with TopShop – are really growing fast. And the good news is Sri Lankan leading manufacturers are linked into those brands and supply chains
  • Ultimately it all depends on which partnerships Sri Lankan firms have – good brands that are on the right trends, and we are fine.
So here are somethings that any Sri Lankan business trading with UK would need to look at:
  • What is the deal that the UK manages to strike with the EU? Access to the single market without agreeing to movement of people, seems untenable.
  • Cost of trade with the UK – UK has to figure out what to do with 13,000 EU regulations – adopt, amend, or give up? Remember that a big war cry in the referendum was burden of EU regulation
  • What will be the impact on UK economic growth and consumption from 1) a continued weakness on the GBP; 2) shifting out from the UK of manufacturing and services to other parts of Europe.
  • On the growth and consumption side – consumer confidence indicators were sharply down in July, but were down a bit less in August. Manufacturing PMI has also shown recovery up in positive territory of 53.3 in August, from 48.3 in July, same with services PMI.
  • On the shifting of businesses. Some banks like JP Morgan and HSBC have said they are considering it strongly – going to Dublin, Frankfurt, Paris. But this can’t happen quickly – because of a practical reason a banker told me the other day – there is literally no office space in these cities to accommodate 5,000, 10,000 new financial industry workers and offices
  • But its a real concern, because a key reason that the UK is such a hub of activity is because of free movement of people. This is a key consideration for firms. Figures from the Financial Regulatory Authority show that 5,500 UK registered companies rely on EU passports to do business in Europe from the UK.
  • Of course there is a risk – extreme end – that UK goes through a ‘Hard Brexit’ – complete departure from the EU, no single market, no movement of people, no customs union, etc etc. But I think rationality will prevail and this scenario is unlikely.
Final comments – thinking beyond Brexit
  • Ultimately, it all comes down to industry competitiveness. There is much to be gained from having a preferential trade deal with the UK, but if we dont have competitiveness and innovation in our products, then we will lose out.
  • Apparels is a classic example – yes, it is 80% of exports but it may also be the one that can weather the storm. And this is because of innovation and competitiveness. The brands in the UK would continue to want to work with SL because of the competencies they find here and the partnerships they have forged. Look at Brandix, MAS, Hirdaramani, and Hela Clothing.
  • Also, we should focus on the suite of other FTAs – for instance with China. The apparel industry has much to gain from the Chinese FTA – many suppliers to China are having to produce in China. But if we have preferential market access via an FTA, several of them have already indicated they are keen to shift those lines to Sri Lanka. many of them already source from us, so they prefer to produce the European and American market orders as well as the Chinese orders in one place. Their factories are seeing substantial wage increases (15-20%).
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