Building blocks of economy are in limbo

Sri Lanka’s construction sector is important to the national economy, accounting for a significant share of the Gross Domestic Product. It is one of the main industrial sectors, currently accounting for around 13.7% of the country’s economy. Furthermore, the industry is regarded as a necessity to improve and innovate infrastructure capabilities as well as a powerful economic stimulant, with studies predicting a steady growth trajectory in the current decade. 

The construction sector’s expansion, currently at an average annual growth rate of 6%, potentially gives several chances for Sri Lankan construction firms to enter new projects and extend their operations. However, it is important to note that the industry’s potential for growth has been influenced by a variety of internal and external factors.

Despite its significant contributions, Sri Lanka’s construction sector faces certain challenges and limitations. One such constraint currently weighing down on the industry is the country’s diminishing foreign currency reserves and growing debt, which limits public expenditure on infrastructure projects. These financial restrictions impede the sector’s growth and development. While the state of the economy is now very much different from pre-COVID spending times, it must be noted that these projects were already started with large sunk costs and projections. 

At this point, with IMF-led assurances on recovery, the government must carefully decide which projects it keeps and continues as well as which projects it delicately axes.

The private sector had seen increased residential, commercial, and mixed-use development projects. Projects such as the Colombo Port City project, Hambantota Port project, and other port-related developments continue on, while a major project such as the Western Region Light Rail Transit (LRT) PPP project in Colombo, was reinstated in late 2022. Furthermore, a significant number of major infrastructure projects have been completed, primarily through Public-Private Partnership (PPP) arrangements.

The construction industry faces additional challenges as a result of Sri Lanka’s tourism sector’s weakness, which has been exacerbated by the COVID-19 pandemic. The decreased number of travellers and the resulting decrease in tourism-related investments seen in the past years may have an influence on the demand for new building projects, notably in the hospitality industry. This is unfortunately timed against many new and attractive projects targeting foreign tourists and workers, who were expected to set up shop and invest in projects. 

These include the ITC Colombo One Hotel and Residencies, Grand Hyatt Colombo and Cinnamon Life (integrated mixed development project) which need to see the positive ROIs that were expected.

Urgent changes are required in Sri Lanka to guarantee the long-term profitability and sustainability of the construction sector. These improvements should prioritise reducing regulatory processes, increasing transparency, and boosting project execution efficiency. 

Moreover, sustainable development practices should be integrated into the construction industry to reduce environmental impact and promote environmentally friendly construction techniques. While it faces challenges such as financial constraints and the impact of a weak tourism sector, it also has opportunities for growth and development. To overcome the industry’s shortcomings and encourage sustainable construction methods, urgent reforms are required.

The construction sector in Sri Lanka can overcome difficulties and attract additional investments by introducing reforms to improve regulatory procedures, boost transparency, and promote efficiency. Furthermore, incorporating sustainable development practices will result in a greener, more resilient industry.

Policymakers, industry stakeholders, and construction groups must work together to provide a favourable climate for the sector’s growth. Sri Lanka can exploit the potential of its construction sector in this way, contributing to economic development and job possibilities while moving towards a more sustainable future.