ECONOMYNEXT – Delayed elections in local government bodies, had had a cascading effect on the construction industry in 2017, compounding the effects of a drought and currency depreciation, a top cement maker has said.
The government and agencies are the single biggest purchaser of construction services ranging from national level projects to a large number of small rehabilitation and building projects across the island, Tokyo Cement Plc said.
"Therefore, the capital budgets of local government bodies going into limbo, over a period of approximately 15 months, had a ripple effect across the construction sector, as unpaid contractors extended credit or defaulted on payments from retailers, who in turn attempted to extend credit with material manufacturer," Managing Director S R Gnanam told shareholders.
"This, of course reduced industry liquidity, to an overall fall in demand for construction materials due to held stock or constrained cashflow necessary for reordering, culminating in the entire industry slowing down."
The construction sector has also been hit by inflation coming from currency depreciation, the firm said.
Unlike high performing East Asian countries like Singapore, Korea, Hong Kong and China, which have fixed or appreciating currencies over the long term, Sri Lanka has a permanently depreciating currency like Indonesia, Philippines or unstable South American nations leading political unrest and instability.
Drought had also hit incomes and construction in many areas, but the main reason was the delayed local government polls, the firm said.
In 2017 Sri Lanka also went through a stabilization program involving collecting forex reserves, which tends to have a contractionary ripple effect through the credit system, slowing growth.
However analysts say the tighter policy may have helped the development of a massive property bubble, which would have had severe costs if it had become bigger leading to a ‘hard landing’.
Tokyo Cement said or the first time in a decade national demand for cement did not see any growth in 2017 and group sales fell 2 percent from a year earlier.
Group net profits fell to 2.3 billion rupees in 2017 from 3.3 billion a year earlier.
Chairman Harsha Cabraal said the construction industry grew only 3.1 percent in 2017, down from 8.3 percent in 2016.
As a result cement production had fallen 4.6 percent and imports by 7.1 percent. In 2016 cement production had grown 17.8 percent and imports 29.5 percent.
"While the current financial year has been anti-climatic, I am confident of an industry revival in the new financial year and a continued, if intermittent, growth over the medium to long term," Gnanam said. " On our part, Tokyo Cement will continue to invest in expansion plans to meet this impending demand growth."