Construction activity shrinks but still beats agri sector in size

Tower cranes and giant caterpillars moving busily at multiple construction sites is the first sign of a fast-moving economy.

But that was the situation a few years ago in Colombo, as many of those cranes and caterpillars have now disappeared with only a few projects continuing, as most of the investors are re-evaluating their projects or scaling back, under a volatile political and economic setting. 

Sri Lanka’s once booming construction sector— a sub-sector of the overall industrial sector—shrank by as much as 4.9 percent during the first three months of the year, reflecting clearly the drought facing the investments and industrial sector as a whole. 

This is a shockingly poor performance by the construction sector for a country, which should be rebuilding its lost future after ending a 30-year war with a brutal separatist movement. 

The weaker construction sector performance is also reflected by the 3.55 percent decrease in the total cement supply during the same period. 

The local unit of Thailand-based Siam City Cement, the manufacturers of INSEE-branded cement, recently said it has cut Sri Lanka’s cement market’s annual growth to 3-4 percent this year, from an earlier projection of 7 percent.

The slowdown in construction has had a dampening impact on the overall industrial sector performance, which grew by a mere one percent during the first quarter from the same period last year, which in turn played a bigger part in the sluggish first quarter economic growth. 

During the first quarter of this year, the economy was estimated to have grown by an unimpressive 3.2 percent year-on-year, way below the full-year expectation of between 4 and 5 percent. 

The construction sector, which grew by 6.6 percent in 2014, has languished ever since, as the good governance regime halted several infrastructure projects initiated by the previous Rajapaksa administration, over the alleged environmental and corruption claims. 

The coalition regime accused the Rajapaksa administration for boosting economic growth through state-led, commercial debt-funded infrastructure projects and vowed to change the model to a more sustainable one, based on private sector-led, foreign investment-funded model. 

But the latter never took off as the foreign direct investments to the country to this date remain weak and the private sector has adopted a wait-and-see approach, due to the uncertain political climate in the country, specially with the impending presidential election next year and parliamentary election in 2020.

Meanwhile, the government is now trapped in a foreign debt imbroglio left by the Rajapaksa administration and hence, remains unable to spend big on even the crucial physical infrastructure. 
However, even amid the dismal performance, the construction sector accounts for 7.4 percent of gross domestic product (GDP) of the country, the government state statistics office measured. 

This surpasses Sri Lanka’s shrinking agriculture sector’s share to the GDP, which languishes at 7.0 percent. The agricultural sector grew by 4.8 percent during the first quarter this year, due to the pickup in the Maha harvest.