TROUBLING NUMBERS: CAN SRI LANKA’S TOURISM SECTOR SUSTAIN ITS GROWTH?
The tourism industry in Sri Lanka continues to be one of the key sectors of the economy, contributing to growth, foreign exchange earnings, and employment. In his policy statement to Parliament in October 2016, Prime Minister Ranil Wickramasinghe noted that, “The plan to make Sri Lanka a high value destination is on the cards. It will herald in prosperity that will showcase our cultural pursuits, wild life and the environment via provinces developed as unique tourist hot spots. We believe that Sri Lanka will be one of the finest travel experiences for the global traveller.” Like successive governments before, the present government too has recognised the socio-economic development potential of tourism. There are a host of exciting new initiatives aimed at boosting tourism arrivals and earnings, including the new ‘Tourism Vision 2025’, the ‘Tourism Strategic Plan 2017-2020’, and the ‘Tourism Taskforce’. At the heart of all this are two key metrics that are used to measure the sector’s health and performance – arrivals and earnings. Yet, as this edition of the Ceylon Chamber’s ‘Strategic Insights’ will illustrate, there are some significant challenges to be overcome. In this piece, we sought to understand factors driving industry growth, and if this growth is on a sustainable trajectory.
Here are four key takeaways from our analysis:
Tourism in Sri Lanka is a key sector in the country, generating US$ 9.7Bn to GDP, accounting for 11% of the economy, and providing 894,500 jobs1, according to the World Travel and Tourism Council. It is evident that the industry plays a major role in the balance of payments, the socio-development of the country, and has a direct and indirect impact on the livelihoods of many across the island. Therefore, ensuring that the industry sustains its growth is of vital economic importance.
Given this importance, in this edition of the Ceylon Chamber’s Strategic Insights Series, we take a closer look at the key indicators of growth in the tourism sector - tourist arrivals and tourism earnings - in order to evaluate growth sustainability. While analyzing the numbers on tourist arrivals and tourism earnings we find that the data on these two key metrics throw up some interesting and worrying insights, and warrant closer inspection.
Our initial findings indicated that, a) tourist arrivals are growing at a slower pace year-on-year over the past five years, b) tourism earnings have been following this trend and has also continued to slow down year-on-year, and c) tourism earnings growth has outpaced arrivals growth since 2010 (See figure 1).
It is evident from Figure 1 below that the annual growth of tourist arrivals has not been spectacular. Following a post-war bump in 2010 and 2011 of 35% and 31% respectively, arrivals growth has dipped to 14% in 2016. Given that Sri Lanka is now considered to be a ‘safe destination’, is relatively new for most global travellers, and is receiving substantial media attention via popular global publications and online platforms, the slowdown in the growth rate of tourist arrivals is rather surprising. In order to understand what factors were driving this trend, the Economic Intelligence Unit of the Ceylon Chamber of Commerce conducted extensive in-depth interviews with 15 industry leaders (across the value chain of accommodation providers, tour operators, consultants and other industry players) and surveyed 37 industry players including both hoteliers and tour operators.
It was evident from the industry interviews that Sri Lanka is not doing enough to leverage on its tourism assets. Although authorities celebrate the achievement of arrivals milestones such as ‘1.5 millionth tourist arrival’ or ‘2 millionth tourist arrival’, the fact is that these annual arrivals are not growing at a significantly faster pace each month. The growth in average monthly arrivals for the first 6 months of 2016 was -8.8%, while for the same period in 2017 it was -10.45% (See table 1). Part of the 2017 performance was due to the partial closure of the country’s main international airport during the first three months of the year (up to April 6th 2017). Yet, even in the months thereafter, arrivals were not substantially higher than last year. During April to July 2017, total arrivals was just 3.8% higher than in the same period in 2016.
Some industry leaders, however, were not concerned about the slowdown in the growth rate of tourist arrivals, stating that it is simply a returning to normal growth levels following the sharp bump. Some of the hoteliers and tour operators conceded that, given that the growth rate of tourist arrivals more recently is measured against a high base (the immediate post-war years of 2009 – 2011), sustaining such high growth rates is unrealistic. One hotelier stated, “There was pent up demand coming into the country after the war ended from 2009 and we did expect it to slow down, because it was a high growth rate which was probably hard to sustain”. Echoing these sentiments, another industry operator stated that, “Post-war pent up demand is tapering off now, and that's to be expected”.
Yet, it is hard to imagine that a tourism hotspot like Sri Lanka would see such sluggish growth in tourism. When comparing Sri Lanka’s tourist arrivals with that of other popular tourist destinations in the region, we find that Sri Lanka falls significantly behind (See figure 2). In terms of arrivals Sri Lanka falls far behind Thailand, Cambodia, Vietnam, Malaysia, India, and Indonesia. Industry players that were interviewed acknowledged that Sri Lanka has fallen behind, as proactive steps have not been taken to sustain the growth of the sector.
While factors such as the closure of the Bandaranaike International Airport, the dengue epidemic coupled with mismanaged travel advisory is likely to have affected the slowdown in arrivals in 2017 (See table 1), most of the industry leaders we spoke to stated that this was due to the lack of focus, direction, and effort when marketing Sri Lanka as a tourist destination. They further stated that the country had done little in terms of preparation for the anticipated influx of tourist following the end of the war. “Just because peace was established, there was no structured growth plan for dealing with this inflow. Countries who have already been peaceful such as Singapore, Australia, and Malaysia have very strong plans to drive tourism. If you take Bhutan, even they have a very clear plan as to what they want to be”, stated an operator of a leading destination management company, emphasizing the fact that minimal effort was taken to sustaining higher growth rates of arrivals. An industry operator of experiential tours further stated that, “There is nothing driving growth, growth is happening organically. If you look at the competing regions, Malaysia gets 27 Mn visitors a year and Thailand gets 35 Mn visitors a year. What's obvious is that we have a lot of catching up to do. Technically there is nothing driving growth, but what is drawing in tourists is that we are a unique destination.”
One important fact to note is that, arrivals alone are not an indicator of industry growth, countries such as Thailand which have a mature tourism sector have understood this and seek to evaluate growth not by the number of tourist arrivals, rather by daily spend and the length of a tourist’s stay5.
In order to really understand the health and performance of Sri Lanka’s tourism sector, industry earnings or receipts must be looked at with a closer lens. Given the slowdown in the growth in arrivals, and the trend of earnings growth outpacing arrivals growth, we need to consider if Sri Lanka is attracting fewer but high spending tourists, or if Sri Lanka is becoming an increasingly costlier destination, or if there are other factors at play. The next section discusses these issues.
There appears to be a few factors at play influencing the trend of tourism earnings growth outpacing arrivals growth. One hypothesis we arrived at was that the average spend of the tourist coming to Sri Lanka today is higher than before, thus influencing the growth in earnings. However, our survey of thirty-seven industry players did not confirm this hypothesis. In fact, 63% of the respondents we surveyed disagreed that Sri Lanka is in fact attracting a majority of high spending tourists. Rather, they confirmed a second hypothesis -that Sri Lanka is becoming an increasingly costlier tourism destination. The interviews with leading tour operators and industry consultants revealed that accommodation and activities (i.e. visiting beaches, cultural destinations, parks and recreational activities) accounted for approximately 60% and 25% of tourists’ budget respectively, and these are increasingly more expensive.
Confirming the increase in costs over the past seven years, the majority of the industry players surveyed conceded that the cost of accommodation in the formal sector has increased by around 30%-40%, while the cost of accommodation in the informal sector (establishments not registered under the Sri Lanka Tourism Development Authority) had increased by less than 20%. According to industry experts who were interviewed, the increase in costs can be attributed to multiple factors - including the high cost of construction and refurbishment; the high cost of labour and shortage of skilled staff; the multiple taxes applied; and the minimum room rate requirement for establishments in Colombo city.
Furthermore, 89% of respondents to our survey stated that accommodation in Sri Lanka was ‘somewhat expensive or very expensive’ compared to accommodation in other popular tourist destinations (See figure 3) and 70% of the respondents indicated that the cost of transport was ‘somewhat expensive’.
The cost of accommodation could decline over time, with the increase in the supply of establishments. It is evident that there is going to be a considerable increase in the number of five star establishments in Colombo, but our findings revealed that the number of supplementary establishments (i.e., those falling into the category of boutique villas, home stays, bungalows, and guest houses) across the country has also significantly increased. The number of rooms in select supplementary establishments increased from around 5,000 in 2000 to nearly 9,000 in 2016 (See figures 4 & 5).
Apart from being a possible response to the increase in price of hotel accommodation, the increase in the number of establishments and number of rooms in supplementary establishments is possibly a reflection of the growing influx of ‘experiential tourists’ to the country. The arrival of experiential tourists grew at a rate of 48% YoY in 2016, outpacing overall tourist arrivals growth6. Experiential tourists are those known to see value in experiencing the destination and its culture rather than solely enjoying the amenitie s hotels have to offer. Industry leaders acknowledge that this type of traveler prioritizes authenticity and prefers experiencing the local culture and visiting local attractions, such experiential travelers prefer accommodation at boutique hotels, and homestays, villas and guesthouses which would enable them to experience Sri Lanka at a more intimate level.
While the profile of the ‘average tourist’ has not changed to that of a high spender, industry players state that Sri Lanka is attracting a small but growing number of high spend tourists (i.e., those with higher per day spend). They have unique preferences in accommodation and are deviating from choosing the typical ‘hotel experience’ that the majority of the tourists in the past opted for. Rather, they prefer accommodation in boutique hotels, which have premium prices and amenities, yet offer a more authentic experience. This in turn has driven the demand for such boutique hotels. “There is a growing trend towards boutique hotels, and there are a lot of boutique hotels popping up. The Europeans especially don't like large touristy hotels. They want a smaller more intimate surrounding. If we have relatively high spending clients, they would definitely go for boutique hotels” indicated a leading tour operator we interviewed. Echoing these sentiments yet another tour operator stated that“There is a trend of small luxury type of hotels coming up, which cost as much as $300 -$400 per night”. While authorities have identified the need for capitalizing on this trend – as was reflected in the Prime Minister’s policy statement last year - they seem to have done very little in terms of encouraging the growth of such establishments and attract tourists seeking authenticity and value in their destination.
Additionally, industry players noted a growing disparity between the price increases in the formal sector versus the informal sector. They argue that this is likely reflective of advantages that informal sector players face as they are not subjected to some taxes applicable to those in the formal sector (including Value Added Tax, National Building Tax, turn creates a disparity in price as those in the informal sector are able to offer very competitive rates as was highlighted by one tour operator who stated “There are room rates as low as $5”. Director General of the Tourism Development Authority Mr. Malraj Kiriella recently stated that they are currently in talks with online travel agencies (where many informal players list their properties) to seek their help to absorb informal sector entities into the formal sector.
However, the Director General noted that there are many practical issues, which would only be remedied by amendments to the law8.
In addition to accommodation costs, industry players also overwhelmingly agreed that the entrance fees to local attractions are high, and are arbitrarily increased. Moreover, they argue that there has been minimal or no improvement to the facilities at these sites, to justify the increase in fees. The majority of respondents to the survey agreed that the cost of entrance fees to attractions have increased by more than 30% since 2010, and 91% of the respondents stated that these sites do not offer value for money (See figures 6 & 7 below). Emphasizing this point, one industry player stated,“We are the only country where they [tourists] pay 35 Dollars as an entrance fee. If you take the Taj Mahal it is only 17 Dollars. If you go to places like the Colosseum in Rome, it’s only 12 Euros. Our entrance fees in comparison are very very high, probably the highest in the world. Sigiriya is 35 Dollars, Polonnaruwa is 25 Dollars, Anuradhapura is 25 Dollars, then you go to Dambulla temple it’s another 15 Dollars, Kandy Temple is another 15 Dollars and Pinnawala is 25 Dollars. When you add all of these a good 25% of the tour package comes to admission fees, which is colossal.”
An added dimension is that most – if not all- of these sites allow payment of fees by credit or debit card; only cash is permitted. This makes is very inconvenient for travellers, who generally do not like to carry large amounts of cash.
Having considered the drivers of the growth in arrivals and earnings, an important caveat we need to bear in mind is how the data for these two key metrics is compiled. In our survey and interviews, when commenting on the growth rates of both tourist arrivals and tourism earnings most industry players were skeptical of the accuracy of the data.
According to the SLTDA, a tourist is defined as “a visitor who stays away from home for one or more nights for any purposes noted under tourism (leisure, business and other purposes) and who is not remunerated at the place of visit”. However, when the Department of Immigration and Emigration grants visas for tourism we found that a tourist visa is given to those visiting for the purpose of holidaying, visiting friends and relatives, those seeking medical treatment and those participating in sporting events, competitions and activities relating to cultural performance10and largely excludes those travelling for business purposes. While this serves well for calculating the earnings from the sector it shows non-alignment in the definitions between the two state institutions. There is added cause for concern when industry earnings are calculated by SLTDA based on the number of arrivals collated by the Department of Immigration and Emigration.
As for the total number of tourist arrivals, the data is collated based on the number of tourist visas granted online and the number of visas awarded upon arrival at the immigration counter at Sri Lanka’s airports (and ports). Meanwhile, the data pertaining to industry earnings or receipts is calculated based on an airport survey conducted annually. It is important to note that the objective of the survey is not solely to capture earnings. Rather, it is conducted in order to profile departing foreign tourists from Sri Lanka, enrich statistics on tourism, identify factors affecting influencing present and potential tourist arrivals, and making such information available to both the public and private sectors when making strategic decisions. Yet, this is the primary instrument used to formulate the tourism earnings number.
In order to arrive at the figures on tourism earnings/receipts, a sample of tourists are surveyed at the Bandaranaike International Airport and the total figure is calculated based on the following equation:
TOURIST RECEIPTS = AVERAGE EXPENDITURE PER TOURIST PER DAY (NON PACKAGE) * AVERAGE DURATION* ARRIVALS
The average expenditure per tourist per day, and the average duration is calculated based on the sample of tourists surveyed every month. Furthermore, the survey is conducted considering flight schedules in order to capture insights from tourists arriving at all times of the day.
Yet, taking a closer look at the data we identified significant shortcomings.
First, we identified a glaring sampling error that would dramatically affect the calculation of earnings. In 2016, a sample of 6,000 tourists was interviewed, and in this the majority of the tourists surveyed were from Germany (12%) and France (10%). However, the majority of the tourist arrivals in 2016 were from India (17%) and China (13%) (See table 2 & 3 below). Clearly, the sample of tourists surveyed was sharply unrepresentative of the number of tourist arrivals by their country of origin. This is a significant flaw in the capturing of earnings data, which is then used for policymaking as well as industry strategic planning.
Secondly, the survey questionnaire itself is far too lengthy and likely to deter tourists from participating in the survey and providing considered and accurate responses. The survey instrument includes 37 questions for tourists and 19 questions for transit passengers. Reinforcing the issue of lengthiness, we find that the survey results in both 2016 and 2015 include a disclaimer stating that the “Expected sample size could not be achieved due to issues such as lack of co-operation of some tourists and inadequacy of interviewers in some languages”
Thirdly, the survey includes general questions on spending such as “How much did you spend altogether on this trip to Sri Lanka per person?; With or without airfare? If with Airfare, what was the cost of Airfare?”. These do not capture well the expenditure patterns of experiential travelers who spend more on food, travel and sightseeing. The implications of the rise or fall in these elements are likely to be of more value to industry players, but are not captured well through the current survey.
Fourthly, the survey questionnaires target both tourists and transit passengers. The latter is a redundant feature as transit tourists are unlikely to contribute to the data on tourist expenditure or make a meaningful contribution to enriching the statistics on the industry apart for commenting as a potential tourist.
While the objective of the survey clearly states that it aims to “enrich statistics on tourism” and “make information available to the public and private sectors in order to make strategic decisions”, our view is that the survey in its current form falls short in achieving this.
Due to these flaws in the data gathering process, it is no surprise that the majority of industry players we interviewed are not confident of the accuracy of the data published by the Sri Lanka Tourism Development Authority. When asked if they are confident of the data on tourist arrivals, 86% reported ‘No’ and just 14% reported ‘Yes’. When asked if they are confident about the accuracy of the data on tourism earnings, 83% reported ‘No’ and 16% reported ‘Yes’ (See figures 8 & 9). However, we also discovered that most industry players were unaware of how the data was calculated - 51% of the respondents to our survey indicated that they were unaware of how the data on arrivals was calculated and 67% were unaware of how industry earnings was calculated. Despite this lack of awareness on the methodology, we find that the skepticism from industry players around the accuracy and quality of the data is warranted due to significant shortcomings highlighted above.
The SLTDA clearly needs to consider revising its methodology when calculating tourist earnings/receipts. Our research revealed that many countries have now adopted the Tourism Satellite Account (TSA) 12 developed by the World Tourism Organization to calculate contribution from the industry. The next step would be to check the relevance and suitability for Sri Lanka of this method, and adopt it accordingly.
Sri Lanka’s tourism industry is a mainstay of the country’s economy. Yet, if the trends in arrivals and earnings are an indicator, there are reasons to be concerned. The post-war bump in arrivals has not been sustained, despite the country having plenty to offer international visitors as a safe and authentic destination. Arrivals are now growing at their slowest pace in years.
Our research revealed substantial shortcomings in the data on tourist arrivals and tourism earnings/receipts, affecting the ability of government and industry alike to make strategic decisions. Industry players lack awareness and confidence in this data. The problematic data warrants an urgent review of, and improvement to, the methodologies employed to generate tourism data.
Our research revealed that industry players are concerned about the sustainability of growth in tourism, and are eager see concerted and focussed efforts on the part of the tourism authorities. While Sri Lanka appears to be attracting a growing number of experiential tourists, we need to harness these strengths and build an identity for Sri Lanka as an experiential tourist destination.
There is much hope being placed on the new initiatives to boost tourism – the ‘Sri Lanka Tourism Vision 2025’, the ‘Tourism Strategic Plan 2017-2020’ and the Tourism Taskforce – to reorient the industry towards higher value tourism and increasing overall socio-economic contribution of tourism. As is highlighted in the ‘Sri Lanka Tourism Vision 2025’, Sri Lanka needs to become a “high value destination offering extraordinary experiences that reflect Sri Lanka’s natural and cultural heritage, and which drives economic benefit to communities and the country”. Having conceptualized a robust vision and strategic action plan for the sector, fast implementation would be key to catalyzing - and sustaining - the growth of the industry.
In-depth interviews were conducted with the following;