Sri Lanka is facing dark days.
Manufacturers in the South Asian nation, many of which say they haven’t seen an energy crisis this bad in decades, are also dealing with a simultaneous fuel shortage crippling the generators they installed to circumvent electricity cuts.
Russia’s war on Ukraine has further roiled energy markets and compounded the crisis in Sri Lanka, whose foreign exchange reserves have plummeted to dangerous levels over the past year. This dampens the hope of importing extra fuel, and further debilitates smaller manufacturers. Sri Lanka garment exports reached approximately $5.4 billion in 2021, targeting $8 billion by 2025.
Some industry insiders believe this was a crisis waiting to happen given the lack of mega power plants and the vested interests blocking investments in renewable energy sources. President Gotabya Rajapaksa’s green target is still an immeasurable distance away—to have renewable energy at 70 percent of the total energy mix by 2030.
Many manufacturers, however, have been caught unprepared.
“No one saw this coming. If we knew we would have taken better steps,” Rantha Tissera, treasurer for the Sri Lanka Chamber of Garment Exporters, told Sourcing Journal. “Power cuts may be normal to expect in small and occasional measure, but not at this large scale. The shortage of fuel at the same time is the reason why it has become a huge problem,” he said.
While many small manufacturers are troubled by what they see as a difficult road ahead, Tissera said that efforts are underway to find a solution, with the government and manufacturers in discussions over the past week. “Now, looking at progress we have seen, we have seen a reduction in queues at the fuel station, power cuts have been reduced. There is not going to be a solution the next day, but we are working towards it,” he said.
A surge in orders—in many cases for the next two seasons—has manufacturers looking for urgent solutions. After a troubled two-year period fighting Covid-19, garment exports have been growing, reaching a five-year high of $452 million in January —8 percent above the pre-pandemic levels of January 2019, and expected to keep rising. “The industry’s 2030 vision is to transform Sri Lanka into a global apparel hub,” said Yohan Lawrence, secretary general, Joint Apparel Association Forum (JAAF), the apex body of the Sri Lankan apparel industry.
Lawrence said that while prudent measures were urgently required to address day-to-day issues, the industry has been able to keep operations on schedule, despite interruptions in power. “At this point in time, the industry is managing as best it can to fulfill orders under the circumstances,” he said, adding that orders were being processed, with some companies having to resort to costly air freight to meet committed deliveries.
With the massive increase of oil prices, and Sri Lanka dependent on imports, the continuing foreign exchange crisis makes the domestic energy situation all the worse.
Hasib Omar, director at Brandix Lanka Ltd, one of Sri Lanka’s leading manufacturers with 27 factories, said, “the situation has been magnified in Sri Lanka… because the top three foreign exchange earning industries—tourism, apparel exports and worker remittances—were badly affected. Tourism came down to zero because of Covid, worker remittances reduced significantly, and apparel exports reduced by 25 percent from pre-Covid levels.”
However, he added that “some of the steps being taken look promising and hopefully can head in the correct direction. The industry has picked up, orders are being placed and although there are challenges in execution there is light at the end of the tunnel.”
“One of the things promised was that they will try to minimize the power interruptions in the manufacturing and free trade zones and that has sort of happened. The other is that the industry has been given priority for fuel access with stickers for buses that are used to pick up workers, which they are able to get from depots for government buses, so workers can be picked up and brought to work.”
Manufacturers observed that this has been working in certain areas, as has the access to power but in the more isolated areas the impact has been much greater. However, most agreed that there was a definite move to help handle the situation, including talks with the International Monetary Fund, as well as a push to ramp up alternate energy sources, although these typically require high investments and take time.
“Most of our plants have solar panels on the roofs and they contribute to the grid so that already has happened, and now the government is trying to implement those projects faster. I think some of the measures like floating of the exchange rate is another measure—with this, foreign remittances appear to have gone up in the weekly figures,” Omar said.
Last week, the central bank devalued the Sri Lankan rupee by an approximately 15 percent. Economists noted that this would help debt restructuring as well as boost currency reserves.
While Omar acknowledged that that the fuel crisis has not yet been fully solved, he appears to reflect the underlying faith that has kept the sector buoyant in Sri Lanka.
“The industry has weathered through the turmoil of the previous years, and the country is confident that we will be able to come through this, too,” he said.
MAS Holdings, one of Southeast Asia’s largest apparel exporters, also has a large presence in Sri Lanka, but was unavailable to comment on the situation.
Industry analysts said that the government had to find both short-term and long term-solutions—combining measures, including the import of fuel on credit, exhorting vehicle owners to save fuel by reducing usage and looking to owners of generators to work with the national grid.
“They are trying to come up with solutions but there are limited answers they can give us at this time,” said Mahika Weerakoon, CEO Trendywear Private Limited. “We were given the assurance that things will be brought under control but what’s going to happen after that is a little unclear. We are focusing on electricity and fuel, sitting in different meetings, points of data collection by the government, different forums wanting to figure things out. It is taking away on what we should be focusing on for sure,” she said.
Manufacturers are also looking out for each other, with the small and medium manufacturers needing more help, sometimes from the bigger players. Many factory owners are also looking over their shoulder at competitive sourcing from other countries like Vietnam and Bangladesh.
“But it’s not all gloom and doom,” Weerakoon said. “Yes, we do have a problem—the small guys are struggling, even the bigger guys are struggling, but we shall overcome. During the pandemic we supported the buyers. We didn’t really shut down except for the first lockdown, a closure for about a month, but we met our commitment to the buyers. If they do pull out, our economic crisis is only going to get worse.”
Lawrence stated that unless resolved soon, the extended power cuts, coupled with shortages of diesel, will have an impact on the industry’s performance this year.
“The need of the hour is for a long-term sustainable solution to the issues being faced in order to secure buyer confidence and maintain our reputation for delivering orders on time,” he said, while keeping an eye on the geo-political situation. Although Sri Lanka apparel does not export significant volumes to Russia or Ukraine directly, any escalation involving the EU region is expected to have major ramifications on global trade.