The Lesotho Government plans to spend 100 million maloti (US$12.7 million) over the next two years in an effort to breathe life into the crucial textile industry.
"The objective... is to stabilize employment in the textile industry and provide capital for companies so that they can take advantage of the global [economic] recovery," Dr Timothy Thahane, Minister of Finance and Development planning, told IRIN. "It's harder for African countries to stay competitive, but this industry is really important to the Lesotho economy, so we have to do what we can."
Lesotho's textile industry grew rapidly in the 1990s and early 2000s, thanks in large part to the African Growth and Opportunities Act (AGOA), which gave 34 eligible countries in sub-Saharan Africa duty-free access to US markets, and the Southern Africa Customs Union (SACU) credit certification scheme that allowed textile-exporting companies to earn rebates on duties they paid on imports used for production.
However, the industry has been hit hard in the past few years: the SACU scheme ended in March 2010, while the flagging US economy has reduced exports.
In 2005, the textile industry comprised 45 factories and employed around 55,000 people, making it the largest formal sector employer in the country. Exports amounted to roughly $500 million per year. Today, 40 factories employ 36,000 workers and exports amount to an estimated $300 million.
The industry still contributes close to 20 percent of Lesotho's annual gross domestic product, and is its largest employer in a country where the unemployment rate is around 40 percent.
"One textile worker can support four to five family members on their wage, so the impact of job losses in this sector across the entire country's economy is critical," said Thahane.
Minimum wages for textile workers are set at 778 maloti ($92) per month.
Many of the challenges facing the industry are beyond control of the garment companies or the government.
"Exports are down because of the US economy, the poor exchange rate, and the expiration of the SACU certification scheme" said Chin-Yi Lin, president of the Lesotho Textile Exporters Association (LTEA). "We need the US economy to recover, and the exchange rate to become more favourable in order for our industry to bounce back."
The industry is also facing increasing competition from Asia, where production costs are much lower, partly because textile companies can source raw materials locally. "Our lack of economies of scale, the fact that we have to buy goods from far away and bring them to Lesotho, is a competitive disadvantage," said Thahane.
Lesotho's currency, the maloti, which is tied to the South African rand, continues to strengthen against the dollar, rising more than 8 percent in 2010 and exacerbating the situation by driving up the costs of exports to American buyers.
Until recently, the AGOA agreement and the SACU certification scheme could offset any competitive disadvantages Lesotho-based companies had. The SACU scheme enabled companies to import fabric and other supplies cheaply from Asia, but it expired after concerns that it was being abused by those who were using it to import items from Asia unrelated to textile production.
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No announcement has been made about plans for a replacement incentive and AGOA is set to expire in 2015, a development that Johnny Lin, executive secretary of the LTEA, described as "a catastrophe for Lesotho and other African AGOA beneficiary countries".
"Textile manufacturers will not be able to compete against Asian countries in both price and lead time. A couple of factories might survive this change, but most of them would have to shut down their operations in Lesotho because of higher production costs," he predicted.
However, Thahane pointed out that US President Barack Obama’s administration has expressed its intention to extend the agreement. At a State Department briefing earlier this year, Deputy US Trade Representative Demetrios Marantis said his department was working towards "a seamless renewal of AGOA when it expires in 2015."
Thahane did not divulge details of the plan, which is still being formulated, but said the aim of the $12.7 million capital injection is to keep the textile industry afloat until the global economy bounces back and Americans start buying bigger quantities of jeans and t-shirts again.
"There's not much we can do about the US markets or the exchange rates,” Thahane said. “But we can make sure we are ready for the recovery."