Determinants of External Demand for Textiles and Garments of Sri Lanka

This paper evaluates the determinants of export demand for textiles and garments of Sri Lanka, using quarterly data from 1999 to 2013. A long run relationship is found between export demand and explanatory variables. The empirical results reveal that the depreciation of the real exchange rate does not increase the demand for Sri Lanka’s textiles and garments, as this industry is found to be heavily dependent on imported raw materials. World GDP which proxies the income of buyers is also a major determinant of export demand. It is also found that the GSP plus (Generalised System of Preferences-plus) and MFA (Multifiber Arrangement) had a positive and significant impact on the demand for textiles and garments of Sri Lanka as they provided duty free access to major textile and garment markets such as USA and EU particularly when the global financial crisis and debt crisis had a negative impact on world demand for textiles and garments. It is surprising to observe that trade openness which proxies the level of trade restrictions between Sri Lanka and the rest of the world shows a negative relationship with export demand for textiles and garments from Sri Lanka.