South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Garment Industry in 2005
Published: The Kathmandu Post, 10 March 2006
By: Navin Dahal

The application of the quota system under the Multi Fibre Agreement (MFA) was the main reason for the growth of Nepal's garment industry. In the early 80s, Indian exporters constrained by the lack of quotas turned to Nepal and there was a sharp increase in the export-orientated garment manufacturers. The number of establishments rose sharply between 1986/87 and 1991/92 from 86 to 234. The number of establishments, however, started decreasing after 1991/92 and reached 115 in 2001/02.

In addition, in recent time, the phasing out of the quota system has changed the rules of the game of international apparel trade and as anticipated Nepal's exports have declined sharply in 2005. Conse-quently, many garment industries have closed down. At present, only 90 industries have renewed their Garment Association Nepal membership, of which only around 25 are in operation. The garment industry has played an important role in the Nepali economy. During its peak in 1991/92, more than 18,000 workers were employed. One popular opinion regarding the garment sector is that it employs mostly foreign nationals, mainly Indians.

However, when we look at the numbers, it says that it is untrue. In 1991/92, a third of the people employed by this industry were not the Nepali citizens. Ten years later, less than one out of every 12 people employed by the industry was not a Nepali citizen. Notable in the employment figures is the percentage of females employed - more than a quarter of the total employees are women. This industry has also been the main foreign currency earner for more than a decade accounting for a quarter of total export earnings. Nepal's garment export grew dramatically from Rs 8 million in 1980 to Rs 13,942 million in 2000. However, export has declined after 2000. Export in 2004 was only 57 percent of the export in 2000. The expiry of the quota system beginning 1 January 2005 brought to an end decades of managed international trade in the textiles and garments sector.

As anticipated the garment export has continued to decline after January 2005. At US$ 75,532,543, the total export of garments in the first 11 months of 2005 was 30 percent less than that in the same period in 2004. Between 2004 and 2005, the average per-unit export price of garments decreased from US$ 3.24 to US$ 2.97, a decrease of 8.4 percent. It is, however, encouraging that after a decreasing trend in the first eight months of 2005, the export volume has increased in Sept-Oct and Oct-Nov of 2005 compared to the same periods in 2004. The increase in total export value has been lower than the increase in volume and has actually been negative in Oct-Nov compared to that during the same period in 2004. Nepal's garment export to the United States in the first 11 months of 2005 was 40 percent lower than that in the same period in 2004. In spite of duty-free market access, Nepali exporters were not able to significantly increase exports to non-US markets in the first 11 months of 2005.

In spite of the gradual decline in Nepal's garment exports in the past few years and the sharp decline following the phase out of the quota system beginning January 2005, the government has not taken any serious measure to address this issue. The decline in the major foreign currency earning sector, which has also been providing employment to thousands of Nepalis, including a high number of women, cannot be brushed aside. The private sector has also not been able to take measures to take advantage of the quota-free textile regime. The government and the private sector must take immediate measures to revive the garment industry. The markets for Nepali garments in a quota-free trade are mainly of two types: Those with preferential and non-preferential market access opportunities. With two different types of markets, it is necessary to have two separate strategies to ensure growth in exports in both the markets. The strategy for the US market should be an intensified lobbying for the duty-free market access to offset the high price through a duty advantage as Nepali exports face high average tariff in the United States.

For the European and Canadian markets, which offer duty-free access to Nepali garments, the strategy should be to lobby for a continuation of the favour-able rules of origin.

Though preferential market access will give breathing space to the garment industry, Nepal will also have to address the supply side issues to remain competitive. As Nepal will not be the only country receiving such access, competitiveness is what Nepal will have to develop to remain a preferred country of sourcing. This is also important given the fact that garment prices in major markets have fallen after 1 January 2005.

The government and the private sector need to work together to increase the competitiveness of the Nepali garment industry. Estab-lishment of a Garment Processing Zone near the Inland Container Depot in Birgunj, establishment of Technology Upgradation Fund to provide subsidized loan to the private sector to upgrade technology, procedural simplification to reduce cost and time are measures that need to be started immediately.'

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