Abstract:
Purpose: This study investigates the nexus between tourism receipts and economic
growth in Sri Lanka in the short and long run. It is also meant to study the impact of
Foreign Direct Investments, economic freedom, and war periods on economic
growth.
Methodology: The paper's annual data ranges from 1978 to 2023, sourced from the
Annual reports of the Sri Lanka Tourism Development Authority, Central Bank of Sri
Lanka, and the World Bank. In this respect, the methodological section employs the
econometric approach by applying an Augmented Dickey-Fuller test for stationarity,
a cointegration test for the presence of long-run relationships, and a Granger Causality
test to test any causal links between all series analyzed using EViews 12.
Findings: Estimations show that In the long run, tourism receipts and economic
growth are positively and significantly related. This factually means that with a 1%
increase in tourism receipts, GDP increases by 0.601%. The FDI also positively
influences the GDP, but this influence will be significant after three years. While
doing so, the negative and significant coefficient of the economic freedom index
shows that the GDP affects it negatively, thereby signaling a complex relationship
that may require more deliberations. Finally, the war dummy variable assumes
negative significance, indicating a lower GDP growth rate at the time of war since the
government spends much on defense. Results from a Granger causality test showed
that tourist revenue contributed to economic growth via a unidirectional causal
relationship.
Practical Implication: Tourism is a strategic driver for sustainable economic growth
in Sri Lanka. Policymakers are envisaged to provide facilities and incentives to
trigger international tourism demand promotion and development for more
significant inflows of tourists, who will, in turn, create growth in tourism and the
multiplier effect to stimulate other industries' contribution to general economic
growth. Originality/ Value: The worth of this research to the existing literature lies in the fact
that it provides empirical proof for a positive relationship of tourism with economic
growth in Sri Lanka, the lagging effect of FDI, and the puzzling role of economic
freedom. In addition, it tries to highlight that tourism is one-way sustainable growth
can be achieved. Hence, policymakers might draw some valuable insights from this
while chalking out some effective strategies regarding tourism development.
