An Assessment of the Impacts of Tourism in Sri Lanka

Table of Contents

List of Tables

List of Figures

1. Introduction
1.1 Introduction
1.2. Motivation and Significance of Research Area
1.3 Identification of Research Problem
1.4 Research Questions
1.5 Research Objectives and Contributions
1.6. An Overview of Research Methodology
1.7 The Structure of the Paper

2. Tourism in Sri Lanka: A Historical Narrative
2.1 Introduction
2.2 Location and Tourism Attractions
2.3 Tourism Development in Sri Lanka
2.3.1 The Ten Year National Plan and the First Tourism Boom in Sri Lanka
2.3.2 Fluctuation of Tourism during the Civil War Period
2.3.3 Comparison between Sri Lankan Tourism and its Asian Competitors
2.3.4 Post-war Tourism Boom and Optimism

3. Literature Review on Tourism Modelling
3.1 Introduction
3.2 Theoretical Framework of Economic Contribution of Tourism
3.3 Economic impact analysis modelling on tourism
3.3.1 Multiplier Methods in Estimating Economic Impact of Tourism
3.3.2 Input – Output Models of Tourism
3.3.3 Computable General Equilibrium Models on Tourism
3.4 Empirical Studies Using Tourism Focused CGE Models
3.4.1 CGE-Tourism Studies at National and Regional Levels
3.4.2 Special Shocks and Event Effects of Tourism
3.4.3 Environment and Poverty Analysis
3.5 Tourism Satellite Accounts (TSA)

4. Research Design
4.1 Conceptual Framework of Economic Impact Analysis of Tourism
4.2 Development of SLCGE-Tourism
4.3 Tourism Data Structure of the CGE models

5. References

Abstract

After the end of nearly three decades long civil war in 2009, Sri Lanka is experiencing a tourism boom with a record level of international tourist arrivals. The Sri Lankan government has now identified tourism as a main component in its post-war development strategy. Despite this new policy enthusiasm there is dearth of research on tourism in Sri Lanka.

The purpose of this study, therefore, is to contribute to the literature on tourism in Sri Lanka in a number of ways. First, it provides a systematic historical narrative on Sri Lankan tourism and explains how Sri Lanka missed opportunities in the past. Second, it develops a Computable General Equilibrium (CGE) model focusing on tourism and constructs a database with an emphasis on tourism. Third, it examines the economy-wide effects of the post-war tourism boom in Sri Lanka.

List of Figures

Figure 1: Tourist Attractions in Sri Lanka

Figure 2: Tourist Arrivals to Sri Lanka and Year on Year Growth from 1966 to 2011

Figure 3: Tourist Arrivals to Sri Lanka and its Competitive Countries

Figure 4: The Flow of Tourism Receipts in to the Economy

Figure 5: Conceptual Framework of Economy-Wide Tourism Modelling

Figure 6: Input-Output-Database

Figure 7: Tourism CGE I-O Database

List of Tables

Table 1: A Chronology of National Economic Policies and Tourism Development Strategy in Sri Lanka

Table 2: Historical Trends in Tourism within the Context of Political Phenomenon and its Contributions to the Economy

Table 3: Benchmark Comparison of Tourism Arrivals with Neighbour Countries

Table 4: Tourism Contributions of Sri Lanka

1. Introduction

1.1 Introduction

Tourism is the term given to the activity that occurs when people travel (Mill & Morrison, 2002). The World Tourism Organization (UNWTO) defines a tourist as “any person who travels to a country other than that in which he/she usual residence, but outside his/her usual environment for a period not exceeding 12 months and whose main purpose of visit is other than the exercise of an activity remunerated within the country visited" (SLTDA, 2010 p.63). Over the past six decades the number of global tourist arrivals has expanded at an annual rate of 6.2 per cent. In absolute term the number has grown from 25 million in 1950 to 940 million in 2010 (UNWTO, 2011a). The income generated by these arrivals has increased from US$ 2.1billion in 1950 to US$ 919 billion in 2010 (UNWTO, 2011a). Consequently, at present, tourism has become as one of the leading industries in the service sector at the global level and a major provider of employment and foreign exchange earnings at the national level (United Nation, 2007). Foreign exchange earnings from tourism account for as much as 30% of the world’s exports of commercial services and 6% of overall exports of goods and services. According to the UNWTO (2011ap 2 ) report, “Globally, as an export category, tourism ranks fourth after fuels, chemicals and automotive products” and it further points out that the relative importance of the market share in international tourist arrivals has been shifting from developed countries to emerging and developing economies from 31% in 1990 to 47% in 2010. Therefore, in many developing countries, tourism has become one of the main sources for foreign exchange earnings and an important sector which creates much needed employment opportunities.

There is a growing body of literature on the relationship between international tourism and economic growth (Fernando, 2016). This body of literature has focused on the tourism-led growth hypothesis and it has established that development of the tourism sector causes economic growth (see Algieri, 2006; Balaguer & Cantavella-Jordá, 2002; Brau, Di Liberto, & Pigliaru, 2011; Brau, Lanza, & Pigliaru, 2007; Hazari & Sgro, 1995; Sinclair, Blake, & Gooroochurn, 2005). Many single country case studies and cross-country studies provide empirical support to the tourism-led growth hypothesis (See for example, Balaguer and Cantavella-Jordá (2002) for Spain, Gunduz and Hatemi-J (2005) for Turkey, Dritsakis (2004) for Greece, Sinclair et al.,(2005) for Cyprus, Malta and Mauritius and Kim, et al.,(2006) for Taiwan) . Brau, et al, (Brau et al., 2011 p 444) emphasised that, “..more recently, different studies – both analytical and empirical – go a step further by pointing out the possibility that tourism can make an economy grow at a rate comparable with, or even faster than, the ones associated with other types of specialisation, in which the potential for sector-specific technological progress is higher”. Tourism has become an engine of growth in so-called tourism countries (TCs)(Fernando, 2015) such as Maldives, Pacific Island Nations and Island Nations in the West Indies. On the basis of the well-established empirical literature, tourism has become “an increasingly popular component of development strategy in low-income countries” (Wattanakuljarus & Coxhead, 2008 p 929). According to Wattanakuljirus and Coxhead (2008 p 929 - 930), the popularity of tourism as a component in development strategies is based on three beliefs. Firstly, tourism can play a substantial role in increasing foreign exchange earnings and in contributing to economic growth. Secondly, it can play an important role in improving income distribution through creating employment opportunities since tourism is a labour-intensive industry. Finally, tourism is an environment friendly “clean” industry and its growth does not affect environment badly. On the basis of the above arguments policy makers can prepare development strategies-led by tourism to accelerate economic growth and development in some developing countries with potential for tourism development, particularly countries recovering from decades of wars and conflicts. Sri Lanka provides an excellent example for a case study.

1.2. Motivation and Significance of Research Area

There was a high level of optimism about development opportunities in Sri Lanka immediately after independence from the British colonial rule in 1948 (Fernando, Bandara, & Smith, 2013). Indeed up until the early 1970s, Sri Lanka was often seen as a role model for economic development in the third world. Indeed some observers on the early post-independent Sri Lanka saw it as the `Singapore of South Asia’ or the `Switzerland of Asia’^[1]. After opening up of the economy to trade and investment in 1977, Sri Lankan policy makers expected to develop the small island economy like Singapore through export-led industrialisation and tourism (Fernando, 2017). None of the above predictions or expectations materialised. Following the youth uprising in the South of the Island in 1971 as a socialist movement (known as the Janatha Vimukthi Peramuna, JVP), a full scale separatist war (also known as the Eelam war) began in 1983. This war was concentrated in the North and the East of the country and involved fighting between government security forces and the Liberation Tigers of Tamil Eelam (LTTE). In addition, a youth rebellion erupted in the late 1980s in the South. These ‘twin wars ’ inflicted a significant cost to the Sri Lankan economy (Abeyratne, 2004).

The tourism sector was the one most affected by the wars and violence (Fernando, Bandara, Liyanaarachch, Jayathilaka, & Smith, 2013). Sri Lanka fell far behind many of its competitors and Asian neighbours in terms of attracting international tourists. Although the Sri Lankan government managed to quell the second JVP uprising in the south in the late 1980s, the separatist war in the North and the East escalated in the next two decades. Finally, this war ended in May 2009 with the defeat of the LTTE and the gaining of control over the entire country by the Sri Lankan security forces.

Following the end of nearly three decades of brutal separatist war between the LTTE and government security forces in Sri Lanka in May 2009, Sri Lanka has witnessed an unprecedented post-war tourism boom beyond its expectation (Fernando, 2016). This experience is similar to the experience of former war affected Asian countries like Vietnam, Cambodia and Laos (Fernando, 2017). The number of international tourist arrivals to Sri Lanka has sharply increased breaking all previous historical annual and monthly tourist arrivals records. The total number of arrivals has nearly doubled within two years (from 447,890 in 2009 to 855,975 in 2011). The experience of the short history of the post-war period shows that the tourism sector has now become a main driver of the Sri Lankan economy in terms of foreign exchange earnings, employment generation and attracting foreign direct investment (FDI). In 2011, tourism generated 57,786 direct and 80,899 indirect employment opportunities and US$ million 830 foreign exchange earnings in the Sri Lankan economy. The sector attracted 20 per cent of total FDI in 2011. After recognising the key role that the tourism sector can play in post-war development the Sri Lankan government has already launched a Tourism Development Strategy (TDS) with a five year master plan for 2011-2016 setting number of important targets based on the main target in attracting large number of international tourists.

In its TDS, the Sri Lankan government has set a target of receiving 2.5 million tourists by 2016. Other targets in the TDS are doubling the current hotel room capacity from 22,745 to 45,000, an increase in foreign exchange earnings from $501million in 2010 to $2.75 billion from tourism and an increase tourism related employment from the current level of 125,000 to 500,000 by 2016. By implementing the TDS the Sri Lankan government has recognised tourism sector as key industry that can play a vital role in the post-war economic development in Sri Lanka (Smith, Bandara, Liyanaarachchi, & Fernando, 2014). It may also assist the process of reconciliation in the country through inter-regional tourism.

1.3 Identification of Research Problem

Despite its paramount importance in post-war development in Sri Lanka, there is a dearth of research on historical evolution of tourism policies, analysis of historical data and the contribution of tourism to the economy with few exceptions (for examples, Bandara, 1997a; Due, 1980; Gamage, 1978; Gamage, Shaw, & Ihalanayake, 1997; O'Hare & Barrett, 1994; Selvanathan, 2006; Tisdell & Bandara, 2005; United Nation, 1993; Wickremasinghe & Ihalanayake, 2006). To my knowledge, up to now, there are no empirical studies that examine the economy-wide effects of a tourism boom or bust in Sri Lanka.

This is partly because it is difficult to find data in order to analyse the contribution of tourism to the national GDP. Measuring the contribution of tourism to a national economy has always been a frustrating exercise. Tourism is not recognised as one single commonly acknowledged industrial sector in the national accounting framework (Fletcher, 1989). The reason for “this apparent anomaly” is that in the national accounting sense an industry is defined as a group of businesses producing a product or service, and the value of an industry is measured by how much of that product is produced (Forst, 1999). Tourism does not have specific products which represent sum of expenditure by travellers for wide range of products, for example transportation, lodging, meals, entertainment, retail sales, etc. “Since it is not possible to identify tourism as a single "industry" in the national accounts, its value to the economy is not readily revealed (Fernando, Bandara, Smith, & Pham, 2015). Tourism activity is “hidden” in other industry activities” (Pham & Dwyer, Forthcoming). All of these activities are included in different sectors such as food and beverages, trade and transport. Although, economic activities generated by tourism, it is not included in the national accounting framework. Therefore, the formal approach ignores tourism’s role as an economic activity and a generator of income and jobs in an economy. As a result of the absence of tourism in official economic statistics, its has led to a continuing battle to establish tourism credibility as an economic activity and generator of income in the economy. Therefore, policy analysts cannot use official national income statistics to measure the impact of tourism on an economy.

As a response to this problem tourism researchers have adopted a new approach, known as Tourism Satellite Accounts (TSA), recently to take into account of inter-industry links of tourism. However, the TSA does not take into account of the economy-wide feedback effects. Therefore, tourism focused CGE model is needed to simulate the economy wide feedback effects. However, there is neither a TSA data framework nor a tourism-focused CGE model for the Sri Lankan economy.

Tourism related government agencies in Sri Lanka have been just collecting basic data such as number of tourist arrivals, foreign exchange earnings from tourism, direct and indirect employment generation and hotel occupancy rate for the last three or four decades. Although tourism is expected to play a crucial role in post-war development strategy in Sri Lanka, they have not made any attempt to improve their data bases or analytical techniques. There is an urgent need to fill this research vacuum in order to prepare more realistic and proper development strategies for Sri Lanka rather than producing just policy statements with some targets without policy analysis.

1.4 Research Questions

As discussed in the previous section, there is a lack of systemic and analytical studies on tourism in Sri Lanka. There is an urgent need for such studies. The main purpose of this study is to full-fill such a need. Therefore, the key research questions that will be addressed in this thesis are:

(i) How did Sri Lanka miss opportunities in becoming a successful tourism country in the past?
(ii) What are the main tourism related activities that determine the directions and magnitude of the post-war tourism boom in Sri Lanka?
(iii) How does the post-war tourism boom affect the macroeconomic variables and the industrial output and employment in the economy?

1.5 Research Objectives and Contributions

This study seeks to gain a better understanding of the historical performance of the tourism sector in Sri Lanka from a political economy perspective and the expected economy-wide impact of tourism on the Sri Lankan economy in the context of post-war development. More specifically, this study aims to achieve two main objectives.

First, the study seeks to undertake a systematic and comprehensive historical analysis of the performance of the Sri Lankan tourism sector using historical data and policy documents and by presenting a historical narrative. This includes:

(i) a review of post-independence tourism promotion strategies within the broader context of national economic development strategies;
(ii) an identification of the link between lacklustre performance of tourism and political violence and the separatist war in Sri Lanka; and
(iii) a qualitative analysis on how Sri Lankan missed opportunities in the past sixty years in terms of tourism as a result of war and economic policies.

Second, it seeks to analyse the effects of post-war tourism boom on the Sri Lankan economy within an economy-wide framework. This involves:

(i) a development of tourism-focused Computable General Equilibrium model, named SLCGE-Tourism, of the Sri Lankan economy with a detailed treatment of tourism related activities;
(ii) a construction of an integrated tourism database in order to implement the CGE model with a detailed treatment of tourism data; and
(iii) an analysis of potential economy-wide effects of post-war tourism boom in Sri Lankan using a tourism-focused CGE model.

On the basis of above mentioned objectives, this study is expected to contribute significantly to the knowledge about the Sri Lankan tourism sector in general and the role of tourism in economic development in Sri Lanka, in particular, in a number of ways.

Firstly, the study collects scattered data and information on modern Sri Lankan tourism and synthesises in order to provide a historical narrative on tourism. This will be a contribution to the literature in the context of vital role to be played by tourism in the post-war development.

Secondly, most importantly, the study develops a first tourism-focused CGE model and a database for the Sri Lankan economy. In the context of lack of quantitative tools in analysing policy issues related Sri Lankan tourism this will be a significant contribution.

Finally, this study examines the economy-wide effects of rapid growth in tourism in Sri Lanka by using a CGE model. This type of analysis has never been done in Sri Lanka before. Therefore, the results and fin dings of this study may add to the knowledge about the role of tourism in post-war economic development in Sri Lanka.

1.6. An Overview of Research Methodology

The amount of tourism research has exploded over the past few decades and a variety of economic techniques have been employed to quantify the effects of tourism on an economy. Very often, the overall impact of tourism on an economy is estimated by looking at the effect of tourism expenditures through direct, indirect and induced spending (see Lejárraga & Walkenhorst, 2008).

In the past, the Input-Output (I-O) technique has, perhaps, been the most widely used analytical tool by policy analysts in evaluating the economic impact of tourism (for example, Archer, 1995; Archer & Fletcher, 1996; Fletcher, 1989). These models are simple and useful to measure either the direct and indirect, or the direct, indirect, and induced impact of tourism (Andrew, 1997; Archer & Fletcher, 1996; Blake, Arbache, Sinclair, & Teles, 2008; Fletcher, 1989; Henry & Deane, 1997; Wagner, 1997). Although the I-O technique can be used to capture the effects of tourism on an economy, it has some well-known limitations. It is well documented that I-O models are based on a number of assumptions such as fixed prices, linear production functions and unitary elasticities of demand (Blake, et al., 2008). In other words, it is assumed that there are no supply side constraints and all prices are exogenously determined. More recently, it has become clear that tourism spending affects an economy by raising prices and wages and changing the real exchange rate (Dwyer, Forsyth, & Spurr, 2004). Therefore, to overcome the limitations of I-O techniques some researchers have attempted to use a more sophisticated analytical tool known as the CGE model (for example, Adams & Parmenter, 1995; Dwyer, Forsyth, Madden, & Spurr, 2000; Dwyer, Forsyth, & Spurr, 2003a; Sugiyarto, Blake, & Sinclair, 2003; Zhou, Yanagida, Chakravorty, & Leung, 1997). In recent years, a number of tourism related studies have been carried out by using CGE models to analyse tourism related issues in some countries where tourism plays an important role (see the literature review in section 3).

Since it has been proven that CGE models are much suitable than other techniques such as I-O techniques to examine the effects of tourism on an economy, the CGE modelling technique will be used in this study as the main methodology following recent developments in the literature (see for example, Adams and Parmenter (1995) for Australia, Sugiyarto, Blake et al. (2003) for indonesia, Narayan (2004) for Fiji, Sinclair, Blake et al.(2005) for Cyprus, Malta and Mauritius, Blake, Durbarry et al.(2006a) for Scotland and Wattanakuljarus and Coxhead (2008) for Thailand) Butt and Bandara (2008) for Pakistan.

1.7 The Structure of the Paper

The rest of the paper is organised as follows. Section 2 provides a historical narrative on tourism in Sri Lanka. In particular, it provides a historical overview of the tourism sector in Sri Lanka and its potentials role in the post war development in the economy. Section 3 reviews literature on tourism modelling focusing on recent developments. Section 4 is devoted to present a brief overview on the methodology adopted in the study. Section 4, 5 and 6 sets out the structure, expected timeline of the study and references respectively.

2. Tourism in Sri Lanka: A Historical Narrative

2.1 Introduction

This section begins with a brief introduction of Sri Lanka including its location and natural attractions. Then it reviews the missed opportunities in the past by analysing the political and tourism strategies in Sri Lanka. Following the historical analysis it emphasises future expectations and potentials of tourism in Sri Lanka.

2.2 Location and Tourism Attractions

Sri Lanka is a beautiful tropical island in the Indian Ocean, situated at the southern tip of India between 60 and 100 North and 800 to 820 East. It is separated from India by the Palk Strait, which is 32 km wide at its narrowest (UNDP and WTO, 1993 p. 2 ). The land area of the island is 65,610 square km with a maximum length of 432 km and a maximum width of 224 km. (Sri Lanka Info, 2011).The southern half of the island dominates rugged hill country, while the northern half is a large plain. It also has palm-fringed beautifully beaches on the south western, southern and south eastern coasts (Lai, 2002). As reported in tourism promotional documents “Sri Lanka’s strategic location in the Indian Ocean on the major air and sea routes between Europe and the Far East is an advantage to the country’s positioning as a global logistics hub” (Sri Lanka Info, 2011). O'Hare (1994 p. 43) pointed out “the Island ‘controls’ (as in colonial times) routes to the Far East as well as to other destinations in the Indian Ocean, the Middle East, Africa and Australasia”. This geographical location of Sri Lanka was a reason for colonisation by three western powers, the Portuguese, the Dutch and the British.

Historically Sri Lanka has always been a tourist destination for centuries because of its strategic location and uniqueness (Fernando, 2017). In the end of the 13th Century A.D. Marco Polo visited Sri Lanka, then known as Ceylon and noted “ the traveller reaches Ceylon, which is the untouchably finest island of its size all the World” (UNDP and WTO, 1993: p. i p. i). It also was known as Pearl of the Indian Ocean, Serendib, Ceylon by the explorers and merchants for many years (SLTDA, 2011). As a results of its unique mixture of golden beaches, rich cultural heritage, diverse landscapes, and a significant number of wildlife, Sri Lanka is classified as one of the most popular tourist destinations in the region (Lai, 2002). As well as noted by Kiriella (2011 p. 2 ) Sri Lanka is a well-known tourist destination because of its endowment of three “S” (Sun, Sea and Sand).

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Figure 1: Tourist Attractions in Sri Lanka. Source: (SLTDA, 2017)

Sri Lanka has 1,585 km coastline with beautiful beaches. In the South-western coast, Hikkaduwa is known for its scuba diving, Unawatuna is also known for scuba diving, Mirissa is famous for viewing whales and dolphins, Tangalle is being promoted as a diving destination. Meanwhile, Trincomalee is known for its natural harbour and has two relatively unexplored beaches. Sri Lanka is home to eight UNESCO World Heritage Sites, several Buddhist and Hindu temples. These include the central highlands area comprising of the Horton Plains National Park and Knuckles Conservation Forest, the Sinharaja Forest Reserve, the Dutch Fort in Galle, the Golden Temple of Dambulla, the Temple of Tooth in Kandy, Nallur Kandaswamy Temple in Jaffna and the ancient cities of Polonnaruwa, Anuradhapura, and Sigiriya. It has more than 2,500 years of history of civilisation and world class historical sites. It has nine ancient kingdoms and ruins with temples of Buddhist heritage. According to the World Tourism Organization, Sri Lanka has the advantage of having 49 sites classified as unique attractions, 91 as rare attractions, and 6 of the 300 ancient monuments in the world (see details, de Silva, 2000).

2.3 Tourism Development in Sri Lanka

Sri Lanka had not tradition of tourism unlike industrial counties. Early travel was principally religious undertaking to shrines of Anuradhapura, Polonnaruwa or Adam’s peek and travel was domestically and very limited. However, during the colonial period, Sri Lanka was very often attracted to travellers who sailed between the West and the East through the port of Colombo on many cruise ships, freighters and other vessels since its primary location on the world sea lanes. Therefore, the passengers used to enter the port of Colombo and enjoyed sightseeing in Colombo, Kandy and their surroundings. As a result, government set up its first Tourist Bureau in 1937 mainly to service these passengers when they came ashore by greeting them and providing sightseeing tours. Although accurate records are unavailable, “ it is estimate that approximately one hundred thousand to two hundred thousand passengers visited the country per annum” (SLTDA, 2011 p. 1 ). However, the Tourist Bureau ceased its operations in 1940 due to the commencement of World War II. Due to the War there was little tourist activity.

After gaining independence in 1948, the new government decided to reorganize tourist activities by setting up the Government Tourist Bureau under the Ministry of Commerce in1948 and the task was entrusted with the functions of undertaking tourist promotional works in overseas. As the development of accommodation facilities was a primary requirement of the promotion of tourism. According to SLTDA information (SLTDA, 2011 p.1 ), there was a range of accommodation facilities throughout the country which were constructed during the British colonial rule. These facilities were not originally designed for the promotion of inbound tourism but for the use of planters, the business community and government officials. Some of these relatively luxurious accommodation facilities, which at that time were residences of colonial governors, were later converted in to prime hotels in Sri Lanka. These included the Galle Face Hotel, Grand Oriental Hotel, and the Mount Lavinia Hotel in Colombo, Queens Hotel in Kandy, Grand Hotel and St. Andrews Hotel in Nuwara Eliya, and New Oriental Hotel in Galle. These hotels were renovated and were used as prime accommodation facilities for foreign visitors. In addition to hotels, some accommodation facilities were built as Tourist Rest-houses. These accommodation establishments were developed in places of scenic beauty such as Ella, Belihul Oya, Horton Plains, Pussellawa, Polonnaruwa, Sigiriya, Dambulla, Tissa Wewa, Nuwara Wewa, Kitulgala, Bentota, and Tissamaharama. As a result of such a government promotions and foreign relations aided the tourism business enormously in gaining respect and confidence during the period of 1948 to 1953 and tourism receipts doubled from $ 1.04 million to $ 2.23 million (Due, 1980).

There was a rapid growth of international tourism around the world during the 1950s (Nordström, 2005) largely due to the introduction of jet aircrafts for civilian transport after the World War II (May & Hill, 2004). Therefore, Sri Lanka had a golden opportunity to establish a tourism hub in between the East and the West using its strategic unique central location and relatively sufficient accommodation facilities. It was necessary to invest in infrastructure in developing counties for them to attract a share of this growth in international tourism. For example, new airports with wider and long runways and parking bays, with large spaces, terminal buildings with modern facilities were required to facilitate inbound tourism. However, during the period 1954 – 1960 tourism arrivals in Sri Lanka declined rapidly. Leading hotels experienced unbelievably low occupancy rates ranging from 14 per cent to 32 per cent for those years as a result of government’s poor political strategy for tourism (Due, 1980). Like other South Asian countries Sri Lanka implemented a protectionist import-substitution regime after independence except a brief episode of 1948-1956 (Athukorala, 1998). Under this closed trade policy regime the government’s main focus was to develop import-substitution industries to accelerate growth and tourism was not considered as a key ingredient in the national economic development strategy (see Table 1 for details of the historical evolution of national development strategies and tourism promotion and market strategies). Therefore, tourism development failed to take root and Sri Lanka missed a golden opportunity to establish a tourism hub in between the East and the West while Singapore that was the main identified competitor, was moving fast strategically by improving its tourism infrastructures to develop international tourism during the 1960s. Sri Lankan policy makers missed this first opportunity to develop its tourism sector by not investing in tourism related infrastructure and not considering tourism as an important sector in its national economic development policy.

Table 1 A Chronology of National Economic Policies and Tourism Development Strategy in Sri Lanka

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Source: Author’s own work

2.3.1 The Ten Year National Plan and the First Tourism Boom in Sri Lanka

Although the country is extremely rich in natural, cultural and heritage-based resources to develop tourism, it took about 18 years after independence for Sri Lanka for policy makers to recognise the role of tourism in economic development. As noted in the previous section, Table 1 shows that there was an early effort to promote Sri Lankan tourism just before the World War II during the British colonial export-oriented open economic policy regime. However, consistent with closed economic policies with rigid trade and foreign exchange restrictions, there were no serious attempts to promote or market Sri Lankan tourism in the late 1950s and early 1960s. With the election of the pro-western right-of-centre government in 1965, there was a partial departure from a closed economic policy regime to an export-oriented policy regime between 1965 and 1970. After identifying tourism as a key sector in economic development within the new national economic policy framework the Sri Lankan government commissioned a study to prepare a Ten Year Master Plan for tourism in 1966 (see Table 1). This plan was developed with funding from USAID (United Nation, 1993). Following this study the Sri Lankan government passed two acts (the Tourist Board Act No. 10 of 1966 and Tourist Development Act No. 14 of 1968) to establish institutional arrangements such as the Ceylon Tourist Board, the Ceylon Hotel School and the Ceylon Hotels Corporation in order to actively engage in tourism promotion and development in Sri Lanka (see for details, United Nation, 1993). It was very difficult to attract private sector investors into this area of the economy without incentives to tourism facility operators since the number of tourist arrivals was small in 1966. Therefore, the Sri Lankan government offered an incentive package to the private sector including fiscal and financial concessions, land on concessional rates and infrastructure co-provision. This created the first tourist boom in Sri Lanka and the country witnessed a first-wave of new hotel construction mainly along the Southern Coast. As shown in Figure 2, the period of 1966-1977 witnessed a rapid growth in tourist arrivals in Sri Lanka and this growth persisted despite the departure from partial trade liberalisation to closed economic policy regime between 1970 and 1977. The pro-western United National Party (UNP) Government that came to power in 1977 introduced a far reaching economic reform package in 1977 and commenced the process of opening the economy again. This was a turning point of economic policy in Sri Lanka and this policy change not only stimulated export-led industries but also assisted the country to achieve a significant acceleration of growth in inbound tourism. During this first tourism boom Sri Lanka managed to attract a large number of tourists, increased foreign exchange earnings and to generate significant employment opportunities in tourism related activities.

Figure 2 illustrates the historical trends in tourist arrivals in Sri Lanka for a period over four decades. Table 2 also provides a comprehensive series of data related to the tourism sector (for the period 1966-2011). Figure 2 and Table 2 highlight a number of features and episodes of Sri Lankan tourism focussing on indicators such as tourist arrivals, foreign exchange earnings from tourism, employment generation and the room occupancy rate.

It is clear from Figure 2 and Table 2 that there was a rapid increase in tourist arrivals, from 18,969 in 1966 to a peak of 407,230 in 1982 during the first boom of tourism in Sri Lanka (between 1966 and1982). During this period the number of arrivals dropped only in 1971 as a result of the first youth uprising in the South. During the period from 1966 to 1970 the country witnessed an increase of 23 per cent in tourist arrivals on average per annum. Although there was negative annual growth of 14 per cent in 1971, there was a rapid rise in tourist arrivals between 1972 and 1982 at a rate around 24 per cent per annum. The number of inbound tourists in Sri Lanka reached 100,000 in 1975 for the first time. With the introduction of open economic policies in Sri Lanka in 1977 and creating an internal and external economic policy environment to promote tourism, the tourism sector enjoyed remarkable success until 1982 by recording an increase in tourist arrivals from 153,665 in 1977 to 407,230 in 1982.

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Figure 2: Tourist Arrivals to Sri Lanka and Year on Year Growth from 1966 to 2011.

Source: Based on various Annual Statistical Reports of Sri Lanka Tourism Sri Lanka (SLTDA, 2010, 2011, 2012, 2014, 2015).

Table 2: Historical Trends in Tourism within the Context of Political Phenomenon and its Contributions to the Economy

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Source: Author’s own work based on various Annual Report of SLTDA (SLTDA, 2010, 2011, 2012, 2014)

The historical data series shown in Table 2 clearly indicates that the annual hotel occupancy rate in Sri Lanka has very often been below 40 percent and fluctuated according to different episodes of war and peace. During the periods of war and political violence post 1983 this rate has been in the 30s and it has risen above 50 only during peace times. It was around 50 during the tourism boom between 1977 and 1982 because of the combination of the open economic policy and peaceful environment. As shown in Table 2, the total foreign exchange earnings from tourism and employment generation increased during 1977-1982 and they have fluctuated significantly on the basis of war-peace episodes post 1983. All in all, the period 1978-1982 can be considered as a relatively prosperous period in the early history of tourism in Sri Lanka.

2.3.2 Fluctuation of Tourism during the Civil War Period

The first tourism boom ended with the eruption of ethnic riots in July 1983 and the escalation of the separatist war in the North and East. Within the next twenty seven year period Sri Lanka missed many opportunities to attract tourists and foreign direct investment (FDI) to the sector because of the separatist war and violence in the South. It is clear from Figure 1 that the year 1983 was a turning point in terms of missed opportunities. All expectations of reaping the benefits of liberalisation in 1977 and Sri Lanka’s dream of becoming another Singapore faded away.

As O’Hare and Barrette (1994) have pointed out, the tourism sector has been sensitive to civil disturbances and the number of tourist arrivals has fluctuated as reactions to civil disturbance and violence as well as to different episodes of peace talks (see Table 2 and Figure 2). During the first episode of war (1983-1987), the number of tourist arrivals declined at an annual rate of 15 per cent. Although the peace process started between the Sri Lanka Government and the LTTE in 1987 with the intervention of Indian government, the tourist arrivals to Sri Lanka were stagnating and low (see Table 2) as a result of ‘twin war’ the fighting between the LTTE and the Indian Peace Keeping Force (IPKF) and also the second youth uprising in the South immediately after signing a peace accord between Sri Lanka and India in 1987 (Bandara, 1997b). However, the elimination of the second youth uprising in the South in 1989 and the beginning of another round of peace talks between the Sri Lankan government and the LTTE led a temporary rebound in tourism sector in 1990. This rebound was also supported by the second wave of economic reforms including further liberalisation of the trade regime (Kelagama & Danham, 1995).

These economic reforms associated with the Second Ten Year Tourism Master Plan witnessed a recovery of tourism arrivals from 184,732 in 1989 to 393,669 in 1992. However the LTTE started the Second Eelam War in 1990 and the president of Sri Lanka was assassinated by the LTTE in 1993. As a result, Sri Lankan tourism again showed negative growth until 1996. After seventeen years in power, the right-of-centre UNP government lost power in the 1994 general elections and the left-of-centre People Alliance (PA) government led-by the former president Mrs Bandaranayake Kumaranatunga came to power with new directions and expectations. The new government began a fresh round of peace talks with the LTTE in 1994 and there was a small growth in tourist arrivals during this brief period. However, once again, peace talks collapsed and the war started again in early 1996. The Sri Lankan security forces captured Jaffna, the heart of the Northern Province, and the LTTE started to mount attacks on economic targets like tourist hotels, the Central Bank and the business district in Colombo. The LTTE attacked the Colombo International airport in 2001 and the tourism sector faced a severe crisis and the economy recorded a negative economic growth for the first time after three decades. With the economic crisis, an increase in the intensity of war in the North and East and attacks mounted by the LTTE in Colombo and the Southern part of the country, the PA government became unpopular. In 2002 the right-of-centre-pro-western government led by the UNP came in to power and began a fresh peace process in 2002 after signing a cease fire agreement (CFA) with the LTTE with international mediation led by Norway. Between 2002 and 2006, there was a relatively peaceful environment in the country and the government had six rounds of peace talks with the LTTE. The relative optimism in relation to achievement of long term peace and the relatively peaceful short term environment gave rise to an increase in tourist arrivals to Sri Lanka during this period (see Table 2). During this period the number of tourist arrivals increased from 336,794 in 2001 to 566,202 in 2004, and at the same time the hotel occupancy rate has increased from 42 in 2001 to nearly 60 in 2004. As shown in Table 2, foreign exchange earnings and employment generation also increased significantly during this same period. This was a mini-tourism boom. However, the war between the LTTE and the Sri Lankan government security forces started again in 2006 and the tourism sector was badly affected by the war once again between 2006 and 2009. During this period the growth in tourist arrivals was negative as expected. Similarly foreign exchange earnings from tourism and employment in the tourism sector declined or stagnated. Finally the war ended in May 2009 as the result of the government forces defeating the LTTE and gaining full control over the entire island and creating a post-war tourism boom.

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^[1] Jupp, J (1999), `Sri Lanka: Third World Democracy After Twenty-one Years’, paper presented at the Asia, Sri Lanka and Diasporic Communities: International Conference on Sri Lankan Studies, Canberra, 3-6 December 1999, p.10.