Sri Lanka’s apparel industry, once hailed as a pillar of the nation’s export economy, is facing one of its most challenging periods in recent history. The recent closure of the NEXT factory in Katunayake, operated by the UK-based retail giant, has sent shockwaves through the sector, leaving over 1,400 workers without jobs and raising alarm about the viability of operations under rising cost pressures. NEXT has cited unsustainable operational costs as the reason for its exit, a move that underscores broader structural issues affecting the country’s industrial zones.
Simultaneously, Sri Lankan apparel exporters are grappling with a steep 44 percent tariff imposed by the United States, the industry’s largest single export market. This policy shift threatens to erode Sri Lanka’s competitive edge just as it attempts to recover from the dual blows of a pandemic and economic collapse. Amid these developments, the industry’s resilience, policy response, and prospects for reform have come under sharp scrutiny.
In an interview with the Sunday Observer this week, Yohan Lawrence, Secretary General of the Joint Apparel Association Forum (JAAF), offers an unflinching assessment of the challenges and opportunities ahead. From rising labour and utility costs to trade policy setbacks and the need for sweeping regulatory reform, Lawrence outlines what it will take for Sri Lanka’s apparel sector not just to survive but to thrive in a shifting global landscape.
Q: Could you provide an overview of the performance of Sri Lanka’s apparel industry so far this year?
A: The industry has performed well in the first four months of the year, with export earnings reaching approximately USD 1.7 billion by the end of April, compared to USD 1.4 billion during the same period last year. This marks a year-on-year increase of around 12 percent to 15 percent. Factories are busy and operating at capacity, which is a positive development, especially given the prevailing global uncertainties. We are currently about 10 percent ahead of last year, and there is strong interest in Sri Lankan apparel.
Q: There has been some controversy regarding the closure of the NEXT factory. The company said they closed down due to the high costs of operating in Katunayake, despite it being a free trade zone?
A: Katunayake has traditionally been an expensive location for manufacturing, primarily due to high labour costs. While utility costs such as electricity and water are similar to other areas, labour expenses have increased significantly over time. Many manufacturers have relocated out of Katunayake as a result. Today, most of the apparel companies there focus on product development or data services, rather than manufacturing. NEXT, for instance, cited high operational costs as a key reason for their decision to relocate. Entry-level workers at NEXT earned a basic salary of Rs. 45,000 per month, which is notably above the zone average of Rs. 30,000–32,000. This was partly driven by collective bargaining agreements, making such wage levels unsustainable.
The issue is not solely due to collective agreements or location within the Western Province but is exacerbated by labour shortages in Katunayake. Typically, zones have higher labour costs due to increased competition for workers. However, capital-intensive operations such as fabric mills benefit from centralised utilities and require less labour, so zones make sense for those segments. In contrast, recent industry growth has shifted outside the main zones, particularly to the Northern and Eastern, areas such as Kilinochchi, Mullaitivu, and Batticaloa, where labour is more affordable and locally sourced, thereby reducing accommodation costs.
Q: With Sri Lanka’s ageing population and a shrinking labour force, how can the apparel industry and other labour-intensive sectors address this challenge?
A: Sri Lanka does face a structural issue with an ageing population. Within our industry, approximately 70–75 percent of employees are women, yet the national female labour force participation rate is only around 30 percent, compared to roughly 50 percent in Vietnam. Increasing women’s participation in the workforce would not only help address unemployment and industry staffing needs but also drive national development.
A key barrier is outdated labour regulations, originally intended to protect women but now limiting their employment opportunities, such as restrictions on night work. Reforming these laws to be more inclusive would benefit not just apparel, but sectors such as BPOs, KPOs, and hospitality as well. Other social issues, such as child care and maternity care, must also be addressed, but updating labour laws is a relatively straightforward step that could have a significant impact.
More flexibility, including enabling part-time work, is also essential. Current laws make part-time employment costly and difficult. By modernising labour legislation, we can bring more people, especially women, into the workforce. We do not support importing foreign labour; the potential workforce is here, particularly among women, and unlocking it would benefit the entire sector.
Q: What role can automation and artificial intelligence play in addressing workforce challenges?
A: Automation and AI can enhance productivity, but they do not eliminate the need for human workers in our sector. Automation is mostly applied in areas such as design and fabric cutting. Garment manufacturing remains inherently labour-intensive, although advances in machinery have automated some manual tasks over the past 30 to 40 years. These changes make operations more efficient, allowing employees to focus on higher-value work.
Labour remains a significant cost, but so does energy. JAAF has consistently advocated competitive utility rates. For example, a sharp increase in electricity prices in 2023 led to higher water rates, as water provision is energy intensive. However, when electricity rates fell, water rates did not decrease, contributing to cost volatility. An 18 percent rise in electricity prices is expected on 1 June, which will negatively impact our competitiveness.
We require stable and predictable tariffs. Similarly, the current exchange rate, below 300, hurts exporters, as we believe it is artificially high due to suppressed import demand and the suspension of debt payments. The realistic rate should be around 310 – 315. Stability in exchange rates and utility costs is vital for planning and competitiveness.
Q: Beyond labour and utility costs, what are the other significant challenges currently facing the industry?
A: The main concern at present is the issue of reciprocal tariffs, especially with the US. We appreciate the swift response and ongoing negotiations by the Government. What matters most is that our tariffs remain in line with those of key competitors such as India, Bangladesh, Vietnam, and Cambodia. The absolute tariff rate is less important than ensuring parity. If India enjoys a lower tariff, business may shift there. Remaining competitive is critical for Sri Lanka.
Q: Can the industry manage if a 10 percent tariff is imposed?
A: The impact of a 10 percent tariff depends on what tariffs are applied to our competitors. If Bangladesh faces a 5 percent tariff and Sri Lanka faces 10 percent we will be at a disadvantage. If Vietnam faces a 15 percent tariff, then 10 percent is more manageable. Higher tariffs tend to reduce demand in the US, which could lead to lower order volumes. Ideally, tariffs should be as low as possible, but the key issue is the relative difference with our regional competitors.
Q: Over the past two decades, many manufacturers have relocated to Bangladesh and Africa. Is this trend continuing?
A: Relocation is largely influenced by market access. Companies have established operations in Africa to benefit from duty-free access to the US, and in Bangladesh for duty-free access to the EU and UK. As long as Sri Lanka has a market access disadvantage, business will shift to other countries. Brands source globally and will always choose the most competitive supplier.
At present, Sri Lanka offers few investment incentives, partly due to the ongoing IMF program. There are no preferential tax rates or specific incentives to attract investment. Investors will choose locations that maximise returns. While Sri Lanka is known for strong labour conditions and ethical standards, these are now baseline expectations for brands, rather than factors that drive higher orders or prices. Other countries have also improved their standards, and ethical practices mainly help retain, rather than grow, market share.
Temporary instability, whether in Sri Lanka, Bangladesh, or elsewhere, can cause short-term order shifts, but volumes typically return to normal once stability is restored. Only two brands, including NEXT, have invested directly in manufacturing in Sri Lanka, most production is handled by contract manufacturers, who can easily move operations if necessary. Unless we remain competitive on costs, investment, and exchange rates, business will continue to move elsewhere.
Q: What is the current status of the EU’s GSP Plus scheme for Sri Lanka?
A: The GSP Plus scheme is in place until 2027. The recent monitoring mission was part of routine reviews of Government compliance with commitments, such as repealing the PTA and implementing the Online Safety Bill. Continued eligibility will require the Government to deliver on these commitments, as GSP Plus is Sri Lanka’s most significant trade tool, accounting for 30 percent of industry exports.
Other countries are moving quickly: India has secured a free trade agreement with the UK, Vietnam has one with the EU, and Bangladesh has extended its LDC trade benefits until 2028 or 2029. Sri Lanka must also move quickly to secure and expand market access to remain competitive. The Government recognises these needs, but action is required.
Q: Given that 40 percent of exports go to the US and 30 percent to the EU, are there opportunities for meaningful diversification into other markets?
A: Opportunities for diversification are limited, as the US, EU, and UK together account for 85 percent of our exports. Growth prospects exist in markets such as Japan, Australia, New Zealand, and South Korea, but these are often restricted by market access terms. Competitors, such as Bangladesh, have FTAs with countries such as Australia, while Vietnam has favourable arrangements with Canada.
India represents significant potential, but under the current ISFTA, Sri Lanka can only export eight million pieces annually, a cap that has not changed in 20 years. Once this quota is filled, usually by July, no further exports are allowed until the following year. We are seeking a level playing field rather than a special advantage, as all our competitors benefit from preferential access in various markets.
Q: Would a Free Trade Agreement with China be beneficial for the industry?
A: A Free Trade Agreement with China would be highly advantageous. China is a vast, brand-conscious market, and such an agreement would open new opportunities for Sri Lankan manufacturers and could also attract Chinese investment. While it is uncertain if and when this will materialise, expanding access to China is something we support.
Q: Does India also present a significant growth opportunity for Sri Lankan apparel exports?
A: Absolutely. India has immense potential due to its large population and increasing consumer spending power. However, Bangladesh currently exports USD 800–900 million worth of apparel to India, while Sri Lanka is limited to about USD 40 million under the ISFTA quota, which is typically exhausted by mid-year. Unless this quota is expanded, we cannot fully realise the market’s potential.
We are not seeking preferential treatment, just equal opportunities. All our competitors benefit from some form of preferential access, and as Sri Lanka is not the lowest-cost producer, achieving parity in market access is crucial for future growth.
Q: Looking ahead to 2030 or 2035, what is your vision for the Sri Lankan apparel industry?
A: By 2030, we aim to grow the industry to USD 8 billion in export value, up from the current USD 5 billion. Achieving this target will require unlocking several constraints, including labour law reforms to increase women’s participation, improved market access, investmenpt in fabric mills, and strengthening the raw material base. Without significant reforms, growth will be incremental and limited by existing constraints such as land and labour availability.
