Thursday Sep 17, 2026
Thursday Sep 17, 2026
Thursday, 17 September 2026 05:13 - - {{hitsCtrl.values.hits}}
CT Smith Securities, in an analysis of Central Bank of Sri Lanka (CBSL) data, said that the construction sector is expanding at pace on the ground, but bank lending to the industry is growing more slowly than credit to the rest of the economy.
CT Smith Securities Associate Vice President – Research Kasun Herath said real construction sector GDP grew 16.3% in the first quarter and 13.9% in the second, and the CBSL’s construction Purchasing Managers’ Index (PMI) has continued to expand. He attributed the growth largely to a mix of private construction activity, cyclone rebuilding, and Government road work, even as skilled labour shortages persist and input prices remain elevated.
Cement, sand, and steel prices rose sharply after fuel price increases and the depreciation of the rupee following the Middle East war, reflected in construction output, which grew 30.7% in nominal terms in the second quarter.
Bank lending data point the other way. Construction loans stood at Rs. 1,913 billion at end-June, or 17.1% of commercial banks’ private sector credit, Herath said. Home loans accounted for Rs. 938 billion, other construction lending, mainly to contractors and developers, made up Rs. 892 billion, and staff housing loans totalled Rs. 83 billion.
Adjusted for inflation, construction loans grew 8.7% in real terms over the year, against 19.7% for all private sector lending, according to CT Smith calculations based on CBSL data.
Construction’s share of total private credit slipped from 18.7% in April 2025 to 17.1% in June 2026, and the sector absorbed only 10.9% of the Rs. 2.44 trillion in new private credit extended over the last 12 months, Herath said.
Momentum within the sector has diverged. Home-loan growth has slowed to around 4% annualised over the last three months, while lending to contractors and developers, which had stalled in March and April, re-accelerated to about 23% annualised in June. Herath linked this to mobilisation on the May expressway contract awards, and cyclone-related road work.
The home-loan slowdown has coincided with rising borrowing costs: the CBSL raised its policy rate by 100 basis points in May to 8.75%, while the prime lending rate rose from 8.15% in October 2025 to 10.92% by early September 2026, CBSL data show.
On why construction credit is lagging the broader lending cycle, Herath pointed to other sectors driving the current credit expansion. Financial and business services accounted for 19% of the Rs. 2.44 trillion added over the year, growing 87% year-on-year (YoY), while pawning took 16%, up 52%. Construction ranked third at 11%, growing 16.1% YoY.
“Taken together, it is a household- and consumption-led credit cycle,” Herath said. Elevated input prices have also delayed new construction activity, weighing on demand for construction credit.
Herath contrasted this with the post-war period, when construction-led growth was financed mainly through external borrowing rather than bank credit. Public capital allocations continue to be made, he said, but are consistently under-executed, though not because of fiscal pressures: capital expenditure actually rose 32% YoY between January and July, while procurement and implementation bottlenecks meant only about 28% of the budgeted allocation had been utilised by end-July.
On bank appetite, Herath cited the CBSL’s 2Q26 Credit Supply Survey, which showed willingness to lend rising across retail, corporate, small and medium enterprise (SME), and State-owned enterprise (SOE) borrowers, though at a slower pace following the May rate hike. Demand rose on working capital needs and a revival in investment, with State enterprise demand linked to infrastructure and renewable energy projects.
Rejection rates rose for retail and SME applicants, covering the home-loan and small-contractor segments, amid stricter credit assessment, while falling for corporates. Non-performing loans (NPLs) rose across corporate, SME, and State enterprise books on foreign exchange-driven cost pressures. Banks expect lending appetite to keep rising at a slower pace overall, and to fall for State enterprises in the third quarter.
Herath expects construction activity to moderate further from the 13.9% recorded in the second quarter. Expressway mobilisation, road rehabilitation, cyclone rebuilding, and renewable energy projects, largely led by public sector capital expenditure, should support activity in the second half of the year.
Existing projects and essential construction work are expected to continue, but many private sector projects will take time to adjust to the new cost environment, he said, pointing to sharp increases in construction material prices after two years of stability, alongside higher borrowing costs following the rate hike.
“Inflation at a three-year high is compressing consumer spending power further, which could reduce construction-related spending as households prioritise consumption”, Herath said.
The slowdown is already showing up in the results of listed companies exposed to the sector, according to recent reports by CT Smith Securities.
In its Tokyo Cement note, CT Smith Securities said only about a fifth of the Government’s Rs. 1.4 trillion capital expenditure allocation had been used in the first half (about 28% by end-July), with a larger share expected in the second half, though full utilisation remains unlikely.
The CBSL’s construction PMI New Orders Index continued to expand through July at a higher rate, supported by steady inflow of new projects.
Retail demand is expected to stay sluggish in the near to medium term, CT Smith Securities said, even as Government-led infrastructure work, Ditwah-related reconstruction, and broader capital expenditure support overall industry momentum.
A shift towards bulk cement purchases, which rose to 14% of sales in the first quarter of FY27 from 12% a year earlier, points to early softness in retail demand, while input costs are climbing on higher raw material import costs, currency depreciation, and global supply chain disruption. Operating expenses have also risen on higher fuel and transport costs, which CT Smith Securities expects to moderate over the medium term.
In its ACL Cables note, CT Smith Securities flagged the slowdown in construction credit and higher borrowing costs as headwinds for cable demand, coming on top of a significant increase in selling prices in the June quarter, the company’s first in about two years, passed through to recover higher copper and input costs.
Revenue growth at the company was driven primarily by pricing rather than volumes, with Government capital expenditure historically back-loaded, CT Smith Securities noted.
CT Smith Securities pointed to national grid upgrades, including capacity enhancements to Colombo’s transmission and distribution network and the Kerawalapitiya Port second underground transmission cable project, now under construction, as the largest institutional demand driver cushioning the broader slowdown.
Copper prices, which remain near record levels, trading above $ 14,000 a tonne, continue to weigh on margins, with current input costs estimated at about 14% above the levels at which 1Q margins were earned.
