The misplaced expectation that tourism earnings will resolve crisis

2 weeks ago
Kanesu Balasuresh

Kanesu Balasuresh

The manifestations of Sri Lanka’s foreign exchange crisis are now felt by all citizens – whether it is long spells without electricity or shortages of cooking gas and other imported commodities. The underlying cause for these issues is the depletion of foreign reserves and the shortage of foreign currency in the market.

Sri Lanka’s usable foreign exchange reserves had declined to $ 369 million as of end-March 2022. Total debt repayment in 2022 amounts to $ 6.9 billion, which has to be financed along with a widening current account deficit as global fuel prices have reached multi-year highs. In this context, the most pragmatic solution is for Sri Lanka to restructure its external debt, supported by an IMF program.

The Government has however taken the position that the present crisis is a short-term liquidity issue that can be addressed by short-term swaps and government-to-government loans until the impacts of the pandemic are behind us. A key expectation the Government has in terms of solving the current economic crisis is the recovery of tourism in the country. It is expected that once tourism recovers fully, it will provide sufficient foreign currency earnings to address Sri Lanka’s external debt challenges.

This expectation is likely to be misplaced. Even when Sri Lanka had its highest estimated earnings from tourism of $ 4.4 billion in 2018, the country still ran a balance of payments current account deficit of 3.2% of gross domestic product (GDP). Therefore, tourism alone is unable to generate the required surplus to meet the capital account outflows arising out of debt repayments.

A recent revision in tourism earnings

According to the most recent data for the month of January 2022, the Central Bank of Sri Lanka estimates tourist arrivals of 82,327, yielding a revenue of $ 268 million. This translates to $ 3,255 per tourist. Hence a tourist staying 10 days would have to spend $ 325 per day and a tourist staying 20 days would still be paying $ 162 per day. Even though the average length of stay may have increased due to the pandemic, it is likely that if the tourist is staying longer, they will likely switch to a cheaper option to manage total cost. 

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