ECONOMIC SITUATIONAL ANALYSIS

Industry Enterprise Profile

Lesotho Has One of Sub-SaharanAfricas Largest Textile & Clothing Industries

• Lesotho garment firms specialise in the production of denim garments (mainly jeans, but some chinos/corduroys), and garments made from cotton knit fabrics (t-shirts, polo shirts, tracksuits & fleece). It is estimated that Lesothos 41 apparel firms each year make 90 million knitted garments, 26 million jeans, and a growing range of other woven top and bottom garments.

• Supporting Lesothos garment industry is an independent commission garment screen printer, two commission embroidery firms, and a commission laundry. Some garment firms also have in-house capacities to undertake laundry, embroidery, screen-printing, and heat transfer processes. The Formosa denim mill (investment of over US$100million) uses African cotton to make a minimum of 6 300 tons of denim fabric a year, and about 10 800 tons of cotton (and cotton blend) yarns which is suitable to make knit fabrics.

A basic industry profile is as follows :

Industry Employment

Lesothos Textiles & GarmentIndustry Provides Significant Employment to Large

Numbers of Mainly Women Workers

• The industry remains Lesothos largest formal sector employer - even though employment has dipped below its 2004 peak. About 85% of industry employees are women.

• The contribution of the industry to Lesothos economy goes beyond the sector itself there are important employment and economic multipliers. A range of formal / informal sector activities occur that feed into/off the industry, e.g. a packaging industry; road freight transport; courier services; clearing & forwarding agents; security; passenger transport; traders that sell food to workers; residential accommodation; water, electrical & telecommunication utilities; etc.

The direct employment provided by the industry is vital. In Mar.2007 the Government of Lesotho (GoL) employed 39 048 civil servants (Mar. 2004:35 609); in Mar. 2007 the numbers of migrant Basotho employed in RSA mines stoodat 53 877 (in Mar. 2004: 61 525). In July 2007 it was estimated that Lesothos footwear industry employed 2076 workers. Employment in other Lesotho NationalDevelopment Corporation (LNDC) assisted manufacturing enterprises amounted to abouta further 2 000 workers (Mar. 2007). There are no other sizeable formal sectorindustries.

Wages & Working Conditions

Wages Earned By Workers in Lesothos Textiles & Garment Industry Play An

Important Role in Poverty Alleviation

• The wages earned by employees engaged in Lesothos textiles & garment industry is of vital importance to Lesothos economy. ComMark currently estimates that Lesothos textile and apparel workers earn about M500[1] million a year.

• With effect from Oct. 2007 skilled garment workers are guaranteed a monthly minimum wage of M770, and unskilled workers M725. Lesothos labour laws enshrine all aspects of the ILOs core conventions (no child / forced labour; non-discrimination; freedom of association), regulate maximum working hours (45 normal & 11 hours overtime per week); and minimum leave.

• While the application of Lesothos labour laws is regulated by the inspectorate of the Lesotho Ministry of Labour, many Brands that source garments from Lesotho also monitor factory conditions. The GAP and Levis Strauss (in particular), but also Walmart, Jones Apparel, Sears, etc. regularly inspect the working conditions of workers employed by their Lesotho vendors.

Exports

Lesotho Continues To Remain The Largest Sub-Saharan Exporter Of Garments To The Usa. It Is A Concern That It Exports Virtually Nothing To The European Union In Fact They Are Derisory

• It is estimated that about 85% of Lesothos textile & garment exports go to the USA. Lesotho continues to remain the largest Sub-Saharan African exporter of garments to the USA (in 2006 30% of total SSA garment exports by value, and 29% by volume).

• In the period Jan-Sept. 2007 Lesotho exported 75.48million square meter equivalents (SME) to the USA up 3.75% over the same period in 2006 (and about 4% up on the same period for 2005).

• Lesothos next biggest purchaser of garments is South Africa; its third biggest is Canada. Small volumes also go to member states of the European Union, Dubai, Qatar, Chile, Japan and Taiwan. Lesothos denim mill also exports denim fabric to Nicaragua, Botswana, Kenya, Egypt, Madagascar and Mauritius; while it sells large amounts of ring spun yarn to RSA textile mills.

• In spite of EU trade preferences (Cotonou) Lesothos EU garment exports are negligible. In 2006 Lesothos EU garment exports was only .3% of total country garment exports to the USA. EU preferential trade rules of origin prohibit the use of 3^rd country fabrics (AGOA allows this).

• Purchasers of Lesothos garments include well known Brands such as: the Walmart, JC Penny, GAP, Reebok, Jones Apparel, Edun, Levis Strauss, K-Mart, Footlocker, Target, Sears, Gloria Vanderbilt, Ralph Lauren, Disney, etc. It is thought that much of its garment exports to the EU are specialist items (chefs jackets), and product for GAP stores. In recent times there has been growing interest in Lesothos garment industry from retailers such as H&M and Nike, and from regional Southern African retailers such as Woolworths, Pep, Edgars and Mr. Price.

Crisis & Challenges

The Downturn of Lesothos Textiles & Garment Industry Can Be Attributed To The

Strength of the Rsa Currency & the Expiry of the Mfa

• In early 2005 7 factories (all of which made knit garments most on a CMT basis) closed their doors; while many other factories retrenched portions of their workforces, or put workers on short-time. The main reasons behind the closures / downsizing were:

o        Currency Strength: since 2002 the Loti (which is tied to the RSA currency (the Rand)) at par has significantly strengthened in value. At the end of Jan. 2002 US$1 would buy M11.44, in Jan. 2003 M8.65, in Jan. 2004 M6.85 (at one point in Dec. 2004 the US$ plummeted to M5.58), and in Jan. 2005 M5.93. Currently (26^th July 2007) US$1 = M7.00. The strong currency meant that Lesothos garments became too expensive for USA buyers.

o        Agreement on Textiles & Clothing: the expiry of the WTOs Agreement on Textiles & Clothing (also known as the MFA) in Dec. 2004 also had an impact. In terms of the MFA rich states (like the USA, EU members and Canada) were no longer able (after 2004) to impose quantitative restrictions on the imports of clothing exports from countries such as China and India. Upon the MFAs expiry Chinese garment exports, especially in those categories of products that Lesotho firms specialise in producing, flooded into the USA. Some Brands took advantage of cheaper Chinese goods and ceased / radically reduced orders which normally would have gone to Lesotho. The fact that the USA has now imposed quotas on certain Chinese exports has benefited Lesotho (to the extent that some orders did return to Lesotho). However some Brands that left Lesotho have now developed alternative global procurement programmes that do not involve Lesotho.

• Going forward, in the medium to long term, Lesotho will face 6 serious challenges :

o        AGOA Changes: in Dec. 2006 the USA extended the 3^rd country fabric provision until Sept. 2012 (AGOA expires 2015). This was a major victory for Lesotho it saved thousands of local jobs. It is a concern that the USA legislators introduced the concept of commercial availability in the extension; and have automatically assumed that denim fabrics are in abundant supply. This provision means that African denim apparel producers will have to use 30million m² of African-made denim fabric each year. The effect of this may lead to the downsizing/closure of some Lesotho denim garment firms (current employment 15 700) as the Brands that give them orders want the freedom to choose the fabrics that want to use. Levis have already suspended their African sourcing programmes.

o        Export Incentives: the Southern African Customs Unions (SACU) Duty Credit Certificate Scheme (DCCS) rewards textile & apparel exporters with financial incentives. The DCCS was supposed to have expired in Mar. 2007 but it was given a reprieve until a new scheme is put in place. A replacement scheme must be developed.

o        Buyer Requirements: some buyers of Lesotho garments are pressurising firms to improve their capabilities to manufacture more complex garments. In this context some buyers want Lesotho firms to be able to undertake more sophisticated wet & dry washing / finishing processes on denim / knit garments (i.e. to add value to basic commodity garments). Lesotho firms are unable to respond to the challenge of garment finishing mainly because they do not have partnerships with globally operative garment finishing companies (training is not an issue skills transfer at a senior level is); and because hazardous waste water cleaning facilities are required to support laundering and garment dyeing operations.

o        Expiry of USA China Safeguards: soon after the expiry of the MFA Chinese apparel products surged into the USA. In response the USA (and the EU) imposed quantitative restrictions upon selected Chinese apparel products. The USA safeguards are set to expire in 2008 (those of the EU in 2007). When they do, Lesotho-made products will once again face stiff competition from China, and its firms may loose market share as a consequence. It is important to note that the RSA also imposed quota safeguards on certain Chinese clothing and textiles with effect from Jan. 2007. This has resulted in Lesotho doing more business into the RSA market place. When these expire in Dec. 2008 it is thought that many of these orders could remain in Lesotho because the RSA safeguards have made regional retailers more aware of the sourcing possibilities that Lesotho offers.

o        Preference Erosion: there are 2 issues. 1. arising from the WTOs Doha Ministerial it was agreed to further reduce industrial tariffs (Non-Agricultural Market Access (NAMA)) on a worldwide basis. If the industrial most-favoured-nation (MFN) tariffs of the rich states (which have extended tariff preferences to Lesotho) reduce it will undermine the preferences that Lesotho enjoys when its apparel products enter their economies. Currently Lesothos exports enjoy significant tariff preferences as a consequence of AGOA. If the USA were to drop their MFN tariffs on clothing it would mean that the value of the 0% duty preference enjoyed by Lesotho would diminish. 2. The WTO (Hong Kong 2005) decision which compels rich states to grant duty & quota free (DFQF) access to all products from LDC states by 2008 will ensure that Lesotho made goods face very stiff competition from Bangladesh and Cambodia.

o        Infrastructure: Lesotho has managed to market itself so successfully that there is a growing queue of value chain investors that want to establish themselves in Lesotho (and some of the existing investors want to expand. Unfortunately they are unable to house these investors as there is no physical infrastructure that can locate them (factory shells; waste water recycling facilities; etc). Lesotho needs to find resources to build more physical infrastructure.

Addressing Problems Proactively

Lesotho Stakeholders Have Worked Hard To Proactively Address Problems Facedby Its Textiles & Garment Industry

• The GoL and a range of other stakeholders have attempted to improve circumstances for the industry, to this end they have done the following :

o    Inter-Ministerial Textile & Apparel Industry Task Team (IMTT): in June 2004, on the basis of concerns raised by the private sector, the Lesotho Prime Minister directed that an IMTT should be established to work on industry concerns. The IMTT (comprising the GoL, the private sector, organised labour) finalised its deliberations in Sept. 2004. Its report covered a range of issues, including: tax collection, industrial incentives, speeding-up import and export transactions, the issuance of work & residence permits, improving security in industrial area, and a range of infrastructural issues. The IMTT has had considerable success in achieving positive outcomes. The IMTT (led by the Lesotho trade minister) now meets about every 2 weeks to monitor progress in implementation, and to address new issues. This has been / will be a key structure for driving changes to the industry.

o    Improving Firm Competitiveness : continual firm level performance improvement is vital if Lesotho garment firms are to remain in the global garment trade. It is encouraging to note that Lesotho firms have now started to invest in the training of their staff some trainings have had spectacular results (one ComMark co-financed programme has resulted in a firm improving output by about 35%).

o    Investment Promotion : the LNDC has initiated plans to attract further sector investments to Lesotho. These investment promotion trips have been spectacularly successful. There has been a regional (SADC) explosion of interest in Lesotho as a destination where one can locate textile and garment production units. In addition in order to ensure that Lesothos USA garment exports remain strong, a multi-stakeholder delegation (led by the Minister of Trade) has visited the USA twice in order to cement relationships with the USA Brands that purchase (and do not purchase) Lesotho garments.

o    Tax Concessions : the GoL, cognizant of the problems being faced by the existing industry, and in an effort to give the LNDC a significant tool to attract more industry, announced (Feb. 2006) a reduction in the corporate manufacturing tax rate from 15% to 0% for those that export out of SACU, and to 10% for those that sell product within SACU.

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