Diversify exports without abandoning apparel: Time to Re-Stitch Sri Lanka’s Export Story
For five decades, apparel has been the backbone of Sri Lanka’s export story. It built factories, created jobs, and brought in precious foreign exchange. Yet the same sector that once powered Sri Lanka’s rise now limits its future.
In the 1980s and 1990s, apparel was Sri Lanka’s miracle sector, driving double-digit export growth. Apparel exports rose from around USD 600 million in 1990 to USD 3 billion by 2000, making up 52% of the country’s total exports at the time. However, since then, momentum has steadily declined. Over the past 25 years, apparel exports have grown at below 5% per year, and the sector has effectively plateaued at around USD 5 billion over the past decade. Since no other sector has emerged to replace apparel as the main export driver, apparel still accounts for up to 40% of the country’s exports; as a result, overall exports have also stalled.
The Anatomy of Stagnation What went wrong? While Sri Lanka boasts world-class apparel firms, the country has lost its competitive edge as a manufacturing destination. It can no longer compete with regional giants like Vietnam and Bangladesh on scale or cost. Tellingly, Sri Lankan giants like MAS and Brandix now scale faster by investing in Bangladesh, Vietnam, or India than they can at home. A single statistic captures this erosion. When US tariffs on Chinese goods opened a $11 billion market gap between 2018 and 2023,r egional competitors pounced: Vietnam’s US market share grew by 3.7%, Bangladesh’s by 2.6%, Cambodia’s by 1.9% and India’s by 1.2%. Sri Lanka, however, saw no increase. The second reason is structural: apparel is a low-cost, low-skilled, labour-intensive industry, and Sri Lanka is no longer a low-wage country, nor does it have a larger labour force. Successful economies transition from this model into higher-value manufacturing when they graduate from low-income to middle-income economies. Sri Lanka has not. As Vietnam and China developed, apparel’s share of their exports fell to 9% and 5%, respectively. Yet with a per capita income of over USD 4,500, Sri Lanka remains stuck, with apparel at 40% of exports. The labour problem is further compounded by under using the available labour: female labour force participation is just 35%, compared with 68% in Vietnam. This dependency also ties Sri Lanka’s fortunes to stagnant Western markets. Meanwhile, developing Asia’s share of global imports has soared from 12% to 33% between 1980 and 2024. But this booming Asian market is not a major apparel market. It is, however, a booming market for parts and components for electronics, machinery, and automobiles, products Sri Lanka barely produces. Our exports in these categories are just 6%, versus 40% for Vietnam, Malaysia, and Thailand. This is a fundamental misalignment. From Stagnation to Strategy: A New Blueprint for Growth
Today, Sri Lanka hopes to double its goods exports to USD 25 billion by 2030, which would require an annual growth of 12% for six consecutive years, a pace the country has not achieved since the mid-1990s. That target seems implausible, while 40% of exports are tied to a stagnant sector selling to stagnant markets. Sri Lanka’s export ambitions there require structural reform, not slogans. To thrive, Sri Lanka must align its industrial capacity with Asia’s booming demand.
Yet it should be noted that diversification does not mean abandoning apparel or exporting less of it. The experience of fast-growing peers shows the opposite. Vietnam’s apparel share fell from 16% in 2004 to 9% in 2023, yet apparel exports rose from USD 4 billion to USD 31billion. China’s share dropped from 20% to 5% between 1994 and 2023, while apparel exports grew from USD 24 billion to USD 165 billion. Both expanded apparel value while outgrowing dependence on it.
In fact, amongst the world’s top 25 apparel exporters, only Sri Lanka and Bangladesh still rely on apparel for more than 40% of total exports. Bangladesh can justify this reliance as it is still transitioning to middle-income status and is the world’s second-largest apparel exporter. Sri Lanka, nearing upper-middle-income status and only the 20th largest apparel exporter, cannot. Even Cambodia, far poorer, now exports nearly USD 10 billion in apparel, twice Sri Lanka’s level, and has cut its dependence from 70% to 34% within two decades.
The way forward is to apply the same deliberate policy focus that once built the apparel sector to new industries, such as electronics, automobile components, and modern logistics. Driving this next wave requires shifting policy away from tax holidays and non-tradable real estate, and towards fundamentals. This means providing an enabling ecosystem consisting of serviced industrial land, reliable power, and efficient logistics, as well as delivering on governance, speed, and certainty. For example, this requires a functioning National Single Window, lowering red tape and corruption at border agencies and automating permits to payments. To succeed, Sri Lanka must do these faster than its competitors. Future growth must come from productivity, not volume.
Apparel delivered Sri Lanka’s first drive towards industrialisation; overreliance on it will prevent the second. The fix is clear: diversify, modernise, align with Asia’s growth, and reform the investment environment to compete on reliability, not concessions. The world has moved on. It is time Sri Lanka’s export model did, too. Mathisha Arangala is a Lead Economist at Verité Research’s International Economics Research Programme.
