The Sri Lankan apparel industry is facing a crisis due to the struggling global economy and the loss of market share to Bangladesh according to various reports. Sri Lanka’s clothing industry contributed nearly half of the country’s export earnings last year after enduring both the Covid pandemic and the crippling economic crisis. However, changes in the global economy have caused a drop in demand, forcing manufacturers to fire hundreds of workers.
Analysts also believe that some of Sri Lanka’s market dominance in apparel manufacturing is moving to Bangladesh, partly due to trade agreements. From 2021 to 2022, Sri Lanka’s export revenue rose by 10 percent, while that of Bangladesh grew by 28 percent. The industry's first-quarter performance in 2023 has struggled with textiles and garment exports dropping 13.8 percent to US$1.3 billion. Shocks in the international market have led to a plunge in demand, prompting factories to lay off hundreds of employees. Small and medium companies could see difficulties as the sector adapts to deal with a slowdown in orders. Trade agreements are at the core of this dynamic, since Bangladesh as a least developed country (LCD) holds more preferential trade terms, and could export apparel free of duty to the EU and the UK under the “Everything but Arms (EBA)” trade agreements.
Sri Lanka, however, trades under the Generalised System of Preferences, which comes with conditions based on the rules of origin. This means to qualify for duty-free entry into the EU or Britain, it has to be made from fabric from Sri Lanka or a country in the South Asian Association for Regional Cooperation. But most Sri Lankan apparel is made with fabric from places including mainland China, Taiwan, and Thailand, and this raises duties by 10 percent when the EU and the UK import from Sri Lanka.
As a result, apparel made in Sri Lanka is less price-competitive than that of Bangladesh. Trouble at larger manufacturing facilities means the smaller factories which operated mainly as subcontractors during better times and took over some of the excess orders, would now get the short end of the stick.
The garment industry in 2022 directly employed some 350,000 workers, who are now facing uncertainty amid the turmoil.