Potentials for foreign exchange earnings in Sri Lankan tourism industry: considering leakage and linkage effect

Abstract

Introduction

Tourism is one of the fastest growing industries globally and especially in the developing countries. International tourism is crucially needed for foreign exchange earnings, employment, income, government revenue and stimulation of regional development. The tourism industry is a cluster of goods and services that incorporates numerous inter- related industries such as infrastructure, transportation, hotels, food and beverages industry etc. which can create a spillover effect across all the sectors.

Even though the tourism sector has opportunities to significantly contribute to regional economic development, tourism and hotels tend to use large wholesale retailers rather than small enterprises. Due to several reasons such as shortage of capacity, poor quality and general unreliability of service delivery, the tourism related companies import goods, services, and skilled labor that alleviate the industry’s positive impact on the local economy (Hall, 2008). This is because the revenue from the industry often flows back to foreign owners and suppliers. More than two-thirds of the revenue from international tourism never reaches the local economy because of high foreign exchange leakage (Pleumarom, 1999). In view of the fact that one third of tourism spending accounts to food (Belisle, 1983), maximizing linkages to local food sector could have a significant impact on reducing leakage. Leakage from at least six factors: (i) the cost of goods and services purchased to satisfy the needs of visitors, (ii) purchase of materials and equipment from other countries to provide infrastructures for tourism, (iii) payments to foreign factors of production, (iv) expenditure for promoting a destination abroad, (v) transfer pricing and (vi) payment of profits, dividends, royalties, and incentives etc. to attract investments in the sector (Mill and Morrison, 1999).

The foreign exchange earnings are usually overstated as leakages neglected and not taken into consideration. The leakages must be subtracted from foreign exchange earnings in order to estimate the real possible economic impacts associated to tourism. Therefore there is a research worthy area in Sri Lanka regarding the net foreign exchange earning capability of the tourism sector is left out for serious studies. The problem of this research, therefore, relates to the net foreign exchange earnings of the tourism industry in Sri Lanka.