NDB Securities insights into Sri Lanka’s return to GSP Plus

NDB Securities Ltd. (NDBS) released a report on the Generalised Scheme of Preferences (GSP) special incentive arrangement (GSP+) and its expected 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, whilst 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 amongst EU member states for GSP+ readmission for Sri Lanka. 

“As the global economic drive shifts towards the developing countries, trade and competition amongst nations becomes two very important aspects of inclusive global economic growth. This may empower the developing nations through transfer of sophisticated technical knowledge, flow of capital and access to larger markets. For Sri Lanka, one such way of harnessing those benefits from trade and competition and the resultant economic development is through access to global value chains,” NDBS Head of Research Sidath Kalyanaratne mentioned, commenting on the latest publication. 

He added: “Sri Lanka’s total exports to GDP deteriorated 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 year 2000 to around 86% by 2014.

This is expected to improve further due to Vietnam’s entry in to a Free Trade Agreement with 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.”

NDBS Sector Analyst Upul Atapattu stated: “In this context, 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 accounts for around 45% of total exports to all destinations. Further, apparel exports contribute to around 60% of total exports to the EU. Hence, 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.” 

He added: “GSP in particular is non-reciprocal in nature. Therefore, GSP arrangements with premier export destinations will provide tariff preferences for the exporters which is expected to have a considerably impact on the competitiveness of the export basket. Currently, Sri Lanka is enjoying GSP for destinations such as EU, US, Turkey, Japan, Canada, Switzerland, New Zealand and Norway.”

Upul further commented: “Except for the textile and garments sector which remained resilient due to its focus on value additions, overall export competitiveness of Sri Lanka (SL) to EU reduced by the withdrawal of GSP+. Going forward, the trade development of peer countries with EU could present a considerable risk to textile and garment sector as the peer countries are becoming more competitive through preferential and free trade agreements. Therefore, regaining GSP+ may be beneficial for the external sector development of the country.”

NDB Securities is a fully-owned subsidiary of NDB Capital Holdings, the capital market arm of the NDB group.