Impact of tourism earnings on economic growth in Sri Lanka during 1970 – 2020: a time series analysis

Abstract

Tourism has been identified as one of the key industries in promoting economic growth and development of Sri Lanka. The tourism industry is highly susceptible to crises and tourism demand is strongly influenced by the economic, social, environmental, health and political aspects of a destination (and source markets). Throughout the course of history, the tourism industry has encountered overwhelming challenges, with the COVID-19 pandemic being the most recent challenge, bringing the industry almost entirely to a standstill. Importance of understanding the relationship between tourism earnings and economic growth has inspired many scholars to investigate the underlying relationship between these variables. Empirical achievements and theoretical publications have also aroused considerable interest among economists and policymakers as a stimulating for tourism earning issues. The purpose of this study is to fill the existing gap and contribute to the existing literature by shedding light on the growth effects of tourism earnings on the Sri Lankan economy. The objective of this study is to examine the causal relationship between economic growth and tourism earning in Sri Lanka. The annual time series data over period of 1970 to 2020 have been used and were drawn from Johansen Co – integration test and Granger Causality tests to evaluate the long – run equilibrium relationship between the variables. The results of the Unit Root test indicated that all variables were non – stationary at levels but they were stationary at first differences. The study further found that there is one co – integration between the variables. Granger Causality test was also used to identify the long – run relationship with the variables. As per the results there is a causality relationship between tourism arrivals and tourism earnings. Vector Error Correction Model and Vector Auto Regression models are used to identify the short–run relationship with the variables. Results found there is a short – run relationship with tourism arrivals and economic growth. OLS Regression test proved there is a positive and significant relationship with tourism earnings and economic growth. The study suggests that the role of tourism in economic growth could be highly emphasized. The finding validates the need of government involvement at promoting and increasing international tourism demand to attain sustainable growth and development in the industry. The study has implication for policymakers of Sri Lanka economic development that tourism should lead to economic growth in the future; and to attain such causality, they should presently devise strategies against the tourism-led-economic growth hypothesis.