The Dynamic and Causal Relationship between Tourism and Economic Growth in Sri Lanka

Abstract

Introduction : The tourism industry has grown to be one of the largest industries and fastest growing economic sectors in the world. Tourism is considered as a most powerful tool and an economic activity to trigger economic growth in developing countries. Over the years tourism has contributed towards the generation of remittances and creating of job opportunities by using local resources. Tourism accounts for 10.4% of global GDP and 313 million jobs globally or 9.9% of total employment in 2018 (World Bank Report, 2019). Acknowledging these facts, countries in general are heavily focused on tourism as an option for their sustainable development.

As a developing country, Sri Lanka has given high priority to the tourism sector as a result; this sector is growing rapidly as a key sector in the economy. Sri Lanka has been a popular place of attraction for foreign travelers because of its uniqueness, strategic location, natural environment, cultural diversity, wildlife sanctuaries, sandy white beaches, underwater life that surrounds the island and warm climate making visitors comfortable and attracted to it. In 2018, Lanka received over 2.3 million international visits, generating revenue of approximately US $ 4.3 billion from tourism. In 2019, contribution of travel and tourism to GDP for Sri Lanka was 12.6 %. It increased from 6 % in 2000 to 12.6 % in 2019 growing at an average annual rate of 4.28 (Sri Lanka Tourism Development Authority, 2019). In 2017, travel and tourism generated 404,000 direct jobs, equal to 5.1% of national employment (Central Bank of Sri Lanka, 2019). This has grown by 3.7% in 2018 to 419,500 jobs – 5.3% of total employment.

Several empirical studies have explored the relationship between tourism and economic growth in emerging economies (King and Gamage, 1994). Wickremasinghe (2006) examines the causal relationship between tourism and economic growth using an error correction model and variance decomposition analysis. But though tourism is considered as one of the major contributing sectors to economic growth in Sri Lanka, the relationship has not been established empirically using econometric analysis. Also, the causal relationship between tourism and economic growth has not been explored statistically for the period 1971-2019 in the Sri Lankan context. Therefore this research is an attempt to fill this gap.