New data highlight shallowness of Sri Lanka’s industrial base

• New DCS data show industrial sector has been declining since 2018 
• Construction boom adds sugar highs into industrial sector from time to time 
• Construction sector absence exposes very thin industrial base SL has 
• Data suggest Sri Lanka has never been more than just a trading economy

Sri Lanka’s broader industrial sector fell into recession in 2018 and it continued through 2020, reflecting that the country’s shallow manufacturing sector had been contracting for years, even before the pandemic brought it to a complete halt for a brief period. 

Sri Lanka’s industrial sector and the gross domestic product (GDP) received a sugar high from the Port City land reclamation in 2016 and 2017 but it could not sustain the momentum, as the reclamation work slowed and came to a close in 2019. This pushed the country into a recession in 2021, the rebased GDP released by the Department of Census and Statistics (DCS) showed. 

Mirror Business last week showed that the Sri Lankan economy contracted by 0.2 percent in 2019, before deepening the shrinkage in its tiny economy by a further 3.5 percent in 2020, due to the highly myopic, utterly misguided and completely one-sided decisions by the incumbent President
Gotabaya Rajapaksa. 

When zoomed in on the industrial sector activity under the rebased GDP estimates, the state statistics office showed that the country’s industrial sector contracted by 1.1 percent in 2018, before shrinking further in the subsequent two years by 4.1 percent and 5.3 percent, respectively. 

This was after faster growth rates of 7.4 percent and 13.0 percent in 2016 and 2017, due to the beginning of the land reclamation work of the Colombo Port City, which reached a peak in its second year.  This was evident from the robust 13.1 percent and 27.3 percent expansions in the construction sector activities in the same two years, which were revised up significantly from 8.3 percent and 4.4 percent under the old base GDP. 

This also reflects what an outsized role the land reclamation work did to the country’s GDP, when the project was happening in full throttle and how the things fell apart when the 
work stopped. This was a clear indication that Sri Lanka has never had an underlying manufacturing base, which can make up for, when the construction sector slows. 

“…. the significant changes in the GDP growth rates have taken place specially in the years of 2017 and 2019, due to the changes in the growth rates of the industrial sector, which includes the ‘construction’ industry,” the DCS said. 

“As explained above, due to the inclusion of value addition of reclaimed land of Colombo Financial City to the GDP, the growth rates of industrial sector have been updated at a considerable level,” it added. 

However, the construction sector in Sri Lanka was in continuous decline from 2018 through 2020, by 8.0 percent, 14.8 percent and 9.4 percent each year, before expanding 4.1 percent in 2021.

The country’s construction activities also received a tailwind from the housing boom, which set off when the Central Bank slashed interest rates and unleashed record stimulus in the two years of
the pandemic. 

This reflects that housing and broader construction activities are deeply linked to interest rates and market liquidity. Hence, the sector cannot perform consistently across economic cycles and during unforeseen events such as pandemics and global economic crises. Conversely, manufacturing activities have shown resilience as already seen from the commodities sector boom since last year. 

Meanwhile, the fact that the broader industrial sector shrinks when the construction activities slow down also reflects some deeply rooted structural issues in the Sri Lankan economy, which is also directly responsible for the current economic malaise. Sri Lanka could not maintain its infrastructure and broader construction sector-led growth spurt achieved in the post-war years, when the country’s debt became 
unsustainable.