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.