Construction slumps as public spending slows

Bangladesh's construction sector, one of the country's largest sectors, is reeling from a sharp contraction in public project implementation and spending, underscoring growing stress across the broader economy, according to industry insiders and analysts.

The sector's woes are laid bare in the latest Purchasing Managers' Index (PMI) report of the Metropolitan Chamber of Commerce and Industry (MCCI) and Policy Exchange Bangladesh (PEB).

It reveals that the construction index has dipped below the crucial 50-point mark. A reading under 50 signals contraction, suggesting that instead of expanding, the sector is now grappling with a downturn.

Meanwhile, the implementation rate of the Annual Development Programme (ADP) fell to a record low of 49 percent in the first 11 months of fiscal year (FY) 2024-25 (July-May).

This signals a significant slowdown in development spending compared to previous years.

"The construction sector in Bangladesh is facing unprecedented challenges," said Mir Nasir Hossain, managing director of Mir Akhter Hossain Ltd and a former president of the Federation of Bangladesh Chambers of Commerce and Industry.

He said prices of key construction materials have surged by 12 percent to 15 percent in recent years, while fund disbursement for government projects has slowed considerably.

As a result, most firms are incurring losses in one way or another, he said.

"Bank interest rates have jumped nearly 44 percent, rising from 9 percent to between 14 and 16 percent, significantly increasing borrowing costs for construction companies," said Hossain.

He further said changes in loan classification regulations have heightened the risk of companies being labelled loan defaulters, posing a serious threat to their survival.

"Although the public procurement rules allow for price adjustment clauses in projects exceeding 18 months, in practice, these clauses are not always effectively implemented, leaving contractors vulnerable to price volatility," he added.

Hossain also pointed out that foreign firms, particularly Chinese companies, continue to enjoy advantages in the local market—whether in financing, resources, or government facilitation—while domestic firms are grappling with rising costs, payment delays, and regulatory uncertainties.

Monir Uddin Ahmed, president of the Bangladesh Association of Construction Industry, said public infrastructure work has nearly ground to a halt because the interim government is not allocating sufficient funds for new projects.

"As a result, many small and mid-level contractors are facing severe financial hardship and may be forced to exit the sector due to a lack of income and work opportunities," he said.

According to Ahmed, the construction industry is passing through one of its toughest phases in recent years and is unlikely to regain momentum until an elected government takes office and revives development spending.

"The dynamics of the sector have turned negative," said M Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh.

"This contraction is concerning because construction has high entry costs, significant value chain depth, and strong linkages with domestic industries such as cement, bricks, and steel," he said.

"When the sector shrinks, the economy's value addition and employment prospects suffer," he said.

Reaz said multiple factors are driving the slowdown.

Domestic demand has weakened amid broader economic uncertainty, while high inflation has forced the government to cut back on public spending for infrastructure and development, he said.

He further said the monsoon typically halts or delays construction work, as heavy rains disrupt building activities, logistics, and the transport of materials, reducing economic activity in allied industries and creating ripple effects across the broader economy.

The cement industry, deeply tied to the construction sector, is already facing significant headwinds due to political uncertainty and sluggish public spending, said Mohammed Amirul Haque, managing director of Premier Cement Mills PLC.

"The slowdown in construction has already affected employment, economic activity, and government revenue collection," he told The Daily Star.

He said cement sales have dropped by around 15 percent over the past three months amid reduced public spending.

"While the monsoon typically dampens cement and construction material sales, this year the situation is markedly worse, with construction activities remaining severely limited," he said.

Haque added that the contraction in construction work has dealt a heavy blow to backward linkage industries that supply raw materials and services essential for construction.

However, he noted a small silver lining.

"Demand in rural areas remains relatively strong, offering some relief to industries connected to the sector," he said.

According to him, the construction sector is linked to the development of numerous ancillary industries, including those producing steel, cement, tiles, sanitary ware, cables, electrical equipment, paint, glass, aluminium, and bricks.

However, when the construction sector is affected, these subsectors are also impacted, he said.

Haque expressed hope that the sector might rebound once an elected democratic government comes to power and development projects resume in earnest.