Liquidity Crunch Hits Construction Business Hard

  5 min 59 sec to read
Liquidity Crunch Hits Construction Business Hard

Demand for construction materials like cement and steel has come down by half, say stakeholders.


The ongoing liquidity crunch in the banking system has hit the construction industry hard. The industry, which was trying to bounce back after being battered by the COVID-pandemic, is currently experiencing a new difficulty. Demand for construction materials has come down by nearly 50% due to slow construction activities, say stakeholders.

The pandemic affected all sectors to their core. Though the government allowed construction activities to resume by strictly adhering to social distancing protocols, construction activities couldn’t gain momentum. It made an impact on the supply chain. While the industry was showing signs of recovery, liquidity problems emerged in the banking system, slowing down construction activities across the country. As a result, demand for construction materials has come down which has directly affected cement, steel and other industries.

Tanka Nepal, General Secretary of the Nepal Construction Materials Trade Association, said the demand for construction materials is currently down by 40-50% as banks have tightened loan flow to the realty and residential housing sector. “Our business was gradually picking up in the post-pandemic period. But it has slowed down again after banks started tightening credit flow,” Nepal said. “There are only a handful of people building homes with their savings. But demand from them is very low. The situation won’t improve until there is sufficient liquidity in the financial system.”

Nepal shared that construction activities will improve only after banks start disbursing housing and residential housing loans. People in the industry are lobbying with the Nepal Rastra Bank (NRB) and the Minister of Finance to find a solution to the ongoing crisis at the earliest, he added.

Bishnu Neupane, Managing Director of Jagadamba Cements, echoed Nepal and said banks are not able to even extend small credits of say 500,000 or 700,000. Sales of Jagadamba Cements have come down by around 50% in recent days, he said. Slow demand has forced industries to cut down their production.

“Unless we see demands picking up, we won’t increase our production,” Neupane said. “There is no point in increasing production just to store the products in warehouses.”

According to Neupane, most of the companies producing cement and steel have scaled down their production. “Some have reduced production by up to 70%. Our problem is not too severe due to the previous demands. But this does not mean that we are in a comfortable situation,” added Neupane.

He further said he had no clue how and when the situation would become normal. Not only cement and steel, companies producing other construction materials like pipes, wires, paints and bricks, to name a few, are also in a similar situation. All of these industries have reduced production by a certain percentage.

The demand for bricks - one of the important construction materials - has come down by 20-30 percent, according to Mahendra Chitrakar, president of the Nepal Brick Industry Federation. “Demand has not been satisfactory since the COVID pandemic. Many industries shut down due to COVID. Those who have managed to remain afloat are seeing a drop in revenue,” Chitrakaar added.

He also pointed out tightening of bank loans for the housing and residential housing sector as the main problem behind the slump. “It is very difficult to get credit. Even if credit is available, the interest rate is very high. It has affected the purchasing power of consumers,” he said. “This is why the construction business is seeing a slowdown.”

The period after the Dashain-Tihar-Chhath festive season is considered the peak season for construction business. Most of the residential houses across the country are built in this period. Construction activities in government’s projects also gain momentum from this time of year. However, producers and dealers of construction materials haven’t seen that happen this year.

Pashupati Murarka, a former president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said few government projects have been completed while others have yet to gain pace. “The demand for construction materials are down by around 50-70%. Some might be seeing demand fall by even more than that,” Murarka said, adding: “There is no option to wait for the market to bounce back to normalcy.”

According to Murarka, banks are working hard to cope with the liquidity crisis. “The government has taken several decisions to resolve the crisis, but things aren’t working,” he said, adding: “The decision of banks to hike interest rates has compounded our woes.”

He added that it is difficult to get bank credit at the moment. “Even if credit is available, interest rates are very high. Construction activities won’t pick up unless bank credit becomes cheaper and easily available,” he said.

Murarka sees no hope from exports too. “Cement exports have begun only recently. We haven’t been able to establish our brand in India. The export volume at the moment is also not big,” he said, adding: “There still is a long way to go.”

Nepal, which became self-reliant in cement some three years ago, is on its way to become self-sufficient in clinker too. The Nepali cement industry is now seeing a rapid expansion in production of clinker. Of the cement plants in operation across the country, 20 have been producing cement only, while the rest are producing both clinker and cement.

Steel industries are also bearing the brunt of the slowdown in the construction business. According to the Nepal Steel Rolling Mills Association - the umbrella organisation of steel industries in demand, the current demand for steel bars stands at 1.4 million tonnes.

Murarka said it will be difficult for the demand to pick up until a solution is found to the liquidity crunch.

Despite all this, new plants of construction materials are coming up in several industrial areas including Birgjung-Bara-Parsa Industrial Corridor, say stakeholders. The industrial hub of central Tarai has become a hub for the production of construction materials due to its proximity to the Nepal-India border from where the majority of raw materials come.

Many say the demand for construction materials will pick up sooner or later as many infrastructure projects in sectors including hydropower, irrigation, roads and new cities are currently being built or being planned for the future.

The construction industry contributes about 10% to the national GDP. Likewise, about 60% of the nation’s capital budget and 35% of the total government budget is mobilised by the construction industry. In order to provide transportation and communication facilities in rural areas and improve the quality of existing infrastructure, the government has been allocating a significant percentage of the national budget to the infrastructure sector. 

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