Tourism and the bullish case for the Rupee

The pessimism around the Sri Lankan economy and its currency continues for another year. FDI inflows are sluggish at sub $1B, exports are stagnant at 13% of GDP, and total external debt levels are 10% higher at $26B. These indicators, coupled with the government's inability to push liberalization policies through interest groups, such as the GMOA and the ports union, have dented business confidence, doomed Sri Lanka for a consecutive year of below 5% GDP growth and depreciated the Sri Lankan Rupees 6% against the dollar on a rolling 12-month basis. In the midst of the gloom, however, there is a bright spot in the economy which has the potential to propel its currency to a greener pasture largely unfettered by the woes of the rest of the country. That is the tourism sector.

The tourism industry in Sri Lanka is in a self-perpetuating cycle of growth. Despite the lack of an extensive government or private sector-led advertising campaign, the travel sections of media outlets, such as National Geographic and Bloomberg, rank Sri Lanka in the top 50 holiday destinations for the 9th consecutive year. Moreover, multinational and local hoteliers, such as Shangri-La and John Keells, respectively, are investing aggressively to build the necessary infrastructure and profit from the touristic allure of the country. As a result, the Tourism Development Authority of Sri Lanka, which enjoyed a compounded annual tourist growth of ~20% in the last half decade and counted 2.2M visitors in 2016, is anticipating this number to roughly double to 4.2M visitors by 2020.

As the number of tourists and the per capita spend of each tourist rise, the flow of tourism-related foreign exchange into the country, which tallied in at $2.5B in 2016, rises simultaneously. This in turn acts as a cushion for Sri Lanka's current account deficit. Moreover, the inflow of hard currencies beefs up Sri Lanka’s foreign exchange reserves and supports what is a feeble balance of payment (BoP).

* World Bank: Tourism earnings from 2011 – 2015 have had a positive impact on Sri Lanka’s current account (BoP, in $M).

An analyst could forecast a lower growth rate for tourism in the next decade (say 10%-15% for diminished low hanging fruit) and make the prediction that our BoP could in fact turn positive by 2025. Although this scenario discounts any growth in imports, stagnation in remittances, and further increases in debt payments - all three of which will have a counter-posing impact on the BoP - it has its argument. Tourism provides Sri Lanka's BOP a sizable tailwind. If this is coupled with improvements in export competitiveness and fiscal restraint, the LKR could stabilize within a decade and turn the corner in the positive direction.