Abstract
This paper investigates effects of exchange rate volatility on Sri Lanka's inbound tourism using monthly data on tourist arrivals, exchange rate and other related variables from 1990 to 2016. An Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) model is used to generate a measure of exchange rate volatility. This is then incorporated in a tourism demand model to test its impact on tourist flows into the country. The empirical methodology depends on the theory of cointegration and error correction representation. The results reveal that there are significant negative short run and long run effects of exchange rate volatility on tourist flows to Sri Lanka. Further, it suggests that the Sri Lankan tourism product is a luxury good, having high income elasticity. In addition, tourism related inflation has a significant negative impact on the growth in tourist arrivals in the short run. However, in the long run, a reduction in price sensitivity is observed. Moreover, results highlight the significant positive impact of habit persistence or/and word of mouth recommendation in increasing tourist flows to Sri Lanka. It further reveals the importance of maintaining a conducive economic, political and social environment to increase the demand for Sri Lankan tourism.
Highlights
The year 2017 has been designated as the’ International Year of Sustainable Tourism for Development’ by the United Nations and it focuses on promoting the role of tourism in five key sectors, namely “inclusive and sustainable economic growth”, “social inclusiveness, employment and poverty reduction”, “resource efficiency, environmental protection and climate change”, “cultural values, diversity and heritage”, and “mutual understanding, peace and security” (United Nations World Tourism Organization (UNWTO) International year for sustainable tourism)
The main objective of this study is to ascertain the effect of exchange rate volatility on tourist flows into Sri Lanka and its implications on tourism policy, with the secondary objectives of identifying the effect of income at origin and effect of relative prices between destination and origin (i.e. Price elasticity) on tourism demand, which is measured through tourist arrivals to Sri Lanka
The dynamic relationship between tourist arrivals, exchange rate volatility, income at origin and relative prices were assessed using the theory of cointegration and error correction representation, using monthly data from 1990 to 2016
Summary
The year 2017 has been designated as the’ International Year of Sustainable Tourism for Development’ by the United Nations and it focuses on promoting the role of tourism in five key sectors, namely “inclusive and sustainable economic growth”, “social inclusiveness, employment and poverty reduction”, “resource efficiency, environmental protection and climate change”, “cultural values, diversity and heritage”, and “mutual understanding, peace and security” (United Nations World Tourism Organization (UNWTO) International year for sustainable tourism). This highlights the significance of the tourism industry, throughout the world, in promoting sustainable economic growth. To capitalise on this growth potential many new tourist attraction destinations are adding in to this industry, increasing its competition
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