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.
