Sri Lankan government sets out plans for its tourism sector

With sustained double-digit growth in visitor arrivals and burgeoning foreign exchange receipts, tourism is one of the most dynamic and robust sectors of the Sri Lankan economy. The country’s growing reputation is drawing visitors from an increasingly diverse range of markets to its pristine beaches, historical landmarks and adventure-packed outdoors.

Building on this success, the government is now aiming to position Sri Lanka as Asia’s leading island destination, focusing on high-value segments such as cultural tourism and tour packages for visitors aged 60 and up. The government’s Tourism Vision 2025, under discussion at time of press, aims to improve management, investment in assets and infrastructure, and draw foreign direct investment (FDI) into the industry.

Growth Industry

Tourist arrivals increased 14% in 2016 to a record 2.05m visitors. This was up from 1.798m in 2015, according to the Sri Lanka Tourism Development Authority (SLTDA), a government organisation. This followed 17.8% growth from 2014 to 2015.

Arrivals increased year-on-year (y-o-y) for 93 consecutive months between May 2009 and February 2017, when temporary closures at Colombo Bandaranaike International Airport (CBIA) due to maintenance work caused hundreds of flights to be cancelled. Despite the disruption, the closures triggered a decline of only 0.4% in February. Visitor totals have more than quadrupled since 2008’s 438,475. This was the last full year of the 1983-2009 war, which damaged tourism but never destroyed it, with the island’s south and centre attracting visitors throughout the conflict. Since it ended, pent-up demand has contributed to the rapid rise in arrivals. “The sector faced many inherent challenges, especially in the middle of a protracted civil war,” Abbas Esufally, group director of Hemas Holdings, told OBG. “However, it has proven itself resilient in the past, and is now experiencing robust growth.”

Major Earner

Foreign exchange earnings from tourism reached $2.98bn in 2015, the last full year for which figures were available at time of press, up 23% from $2.43bn in 2014, according to the SLTDA. Foreign exchange receipts per visitor per day rose to $164.10 in 2015 from $160.80 in 2014. Official receipts from tourism have grown significantly since 2007, when they totalled $384.4m. Income per tourist per day grew from $76.70 in 2008 to $164 in 2015. This indicates that Sri Lanka is now attracting wealthier tourists who are willing to spend more money in-country, bolstering the high-end, high-margin segment.

As a result of increased arrivals, tourism now ranks as Sri Lanka’s third-largest foreign currency earner, following remittances, and textile and garment exports. Tourism accounted for 12.4% of all forex earnings in 2015, up from 10.2% the previous year. The sector employed 135,930 people in 2015, according to the SLTDA, up from 129,790 in 2014 and 112,550 in 2013.

Broader Impact

World Travel and Tourism Council (WTTC) calculations suggest that the sector’s contribution to the economy is broader still. It estimates that in 2015, tourism and travel – including domestic non-commuter travel – generated LKR478.2bn ($3.3bn) directly, accounting for 4.6% of GDP.

However, taking into account the indirect and “induced” impact of tourism – that is, including connected industries such as suppliers to tourism businesses and manufacturers of products bought by tourists – the WTTC puts the sector’s overall contribution at LKR1.107trn ($7.5bn), or 10.6% of GDP.

According to WTTC estimates, the sector directly and indirectly accounts for 798,000 jobs, or 9.7% of total employment. Given the number of employees’ dependents – such as the elderly, children and spouses – who also rely on the sector, tourism is a vital generator of household income in Sri Lanka.

The WTTC has a positive medium-term outlook for the sector, forecasting an annual average 6.3% increase in both its direct and total contribution to the economy between 2016 and 2026. This puts Sri Lanka among the top-25 countries worldwide for tourism growth over the coming decade. The organisation expects investment in tourism and travel to grow by 5.2% per year in the period, from LKR122.5bn ($835.3m) in 2015.

The optimism is shared by most in the sector; at least three luxury hotels are expected to open in Colombo in 2017 alone (see analysis). “We’re very positive about Sri Lanka, and we’re expecting growth to continue,” Markus Marti, general manager of Mövenpick Hotel Colombo, told OBG. “As well as well-known attractions, there are virgin destinations such as Jaffna, while the east coast is relatively undiscovered.”

Sltda

Under the Ministry of Tourism, the SLTDA plays a central role in the sector’s regulation and development. It imposes and monitors standards of tourism businesses, and nurtures tourism development projects, bringing in agencies and private businesses to support their growth, and linking international investors to local players. The agency’s promotional work includes organising attendance at travel fairs, in which it invites private sector players. This effort maintains a focus on business-to-business activity, aiming to raise Sri Lanka’s profile with international travel agents and tour companies, and link them with local companies. “There are opportunities for international investors that can model best practices and expertise to help raise standards across the board,” Rashmini Mather, from the Prime Minister’s tourism team, told OBG.

Major Markets

India is the single biggest market for inbound tourism to Sri Lanka. In 2016 there was a 13% increase in the number of visitors from the neighbouring country, with a total of 356,729, compared to 316,247 in 2015, according to the SLTDA. Large volumes of bilateral trade and Indian investments in Sri Lanka have boosted business tourism, while leisure visits include those with family ties across the Palk Strait.

Many countries have been working to attract more tourists from the vast Chinese market in recent years, and Sri Lanka has been very successful in doing so. In 2016, 271,577 visitors came from China, up 26.4% on the previous year. Businesses across the sector have also looked to the country to fill key human resource roles. “Everyone is looking at China; we cannot afford to neglect it,” Marti told OBG. “Hotels and shopping malls are recruiting Chinese receptionists, chefs, sales professionals and other staff.” Arrivals from north-east Asia as a whole (including Korea and Japan) grew by 48% in 2015, following an 81% rise in 2014.

In third, fourth and fifth place are traditional European markets, where affluent citizens have become increasingly interested in Sri Lanka as a destination. In 2016, 188,159 visitors arrived from the UK, a nation which has historical ties to the country and a large population of Sri Lankan descent. UK-resident visitor numbers grew by 16% between 2015 and 2016. German visitors totalled 133,275 in 2016, up 15% from the previous year, while the number of arrivals from France rose by 12% to 96,440 in 2016.

The neighbouring Maldives was the sixth-biggest market, with 95,167 visitors, up 5% from 2015. Maldivians differ from other tourist demographics, as many come to Sri Lanka in transit, or for shopping. Australia ranked seventh, with 75,496 visitors in 2016, up 17.2% y-o-y. The high-income Australian market is promising for Sri Lanka; as Australians seek alternatives to traditional South-east Asian destinations, Sri Lanka is poised to see a continued increase in arrivals over the coming years. In eighth place was Russia, with 58,176 arrivals in 2016. Russian tourist numbers dropped by 5.9%, however, as the country was hit by a deep recession and weakened currency, which made travelling abroad much more expensive for Russians.

Despite the distance, North America is also an important market. The US ranked ninth in terms of arrivals in 2016, with 54,254 (up 15% y-o-y), while Canada ranked 10th, with arrivals rising 17% to 44,122 in 2016.

Market Shares

By region, Western Europe is the biggest tourism market for Sri Lanka, accounting for 30.7% of arrivals in 2015, followed by South Asia (25.5%) and North-east Asia (15.2%). Eastern Europe accounted for 8.3% of arrivals, the Middle East 5.6%, and North America and South-east Asia 4.7% each. Australasia provided 4%, with other regions – including South America and Africa – accounting for 1.3% in total.

The North-east Asia market has been growing the strongest in recent years. Overall arrivals from East Asia, including South-east Asia, grew by 17.2% in 2016. Arrivals from Australasia racked up a similar rate, with 17% growth. Other regions seeing double-digit visitor growth included North America (15.8%), Latin America and the Caribbean (21.5%), Western Europe (16.5%), and South Asia (11.8%). Arrivals from the Middle East rose by 6.5%, and those from Eastern Europe by 8.6%. The drop in arrivals from Russia was offset by strong growth in those from neighbouring countries, including a 31% rise in visitors from Ukraine, which totalled 31,302. One region saw a drop, however, with the number of visitors from Africa falling by 5.9% to 12,144.

Visitor Profiles

Sri Lanka attracts a wide range of age groups, from young families and backpackers to older cultural tourists and business visitors. In 2015, 22.6% of visitors were in the 30-39 age group; 18.9% were aged 40-49; 17.8% 20-29; 17% 50-59; and 13.9% 60 and over, while 9.9% were 19 or younger.

Over the past decade, arrivals from both developed and emerging markets have grown steadily. Between 2005 and 2015, visitor numbers from Western Europe grew at an annual average rate of 33.8%. The number from Asia rose by 32.5%, from North America by 8.6%, from Australasia by 23.8% and from the rest of the world by 45.9%. As part of its strategy development process, the SLTDA is analysing how to attract more visitors from China and the Middle East in particular. This includes research into what tourists from these regions enjoy, and working to increase the availability of the products and services they seek. Ultimately the agency aims to see a continued increase in the amount spent per tourist and a sustained rise in arrival numbers. Knowing that Middle Eastern tourists often come as families, the sector will aim to develop family-friendly attractions and accommodation, for example.

Trip Duration

Sri Lanka remains a destination where the majority of visitors stay for a week or more, partly because, for most tourists, it is a medium- or long-haul destination and short visits make little sense.

In 2015, 31.9% of visitors stayed for 4-7 nights, 27.1% for 8-14 nights, 14.3% for 15-21 nights, 11.6% for 22-30 nights, and 3.7% for 31 nights or more. The remaining 11.4% stayed for one to three nights. The duration of stay varies from market to market. Western European visitors stayed for an average of 14.3 nights, North Americans 12.7 and Eastern Europeans 8.4.

Visitors from the Middle East stayed an average of 10.5 nights and tourists from Asia 7.4 nights, ranging from 9.5 for Chinese visitors to 5 for Indians.

Seasonality

Sri Lanka’s tourism sector is not as seasonal as those of many countries, partly due to the fact that weather conditions vary in different parts of the island throughout the year. For example, the west coast and south are affected by the Yala monsoon from May to August, but the weather in the north and east is best for visitors in this period. From October to January, however, the Maha monsoon brings rains to the north and east, while the west and south are relatively dry.

Nonetheless, arrivals do fluctuate through the year, particularly as the majority of foreign leisure tourists still prefer the south, the west and the southern-central Hill Country as destinations. December to March is generally regarded as peak season. In 2015 arrivals peaked in December, with 206,114, while in May the island saw just 133,529 visitors.

Hotel occupancy also varies from season to season. In 2015 average occupancy nationwide peaked at 82.8% in December, but reached its lowest in May at 63.5%. Occupancy also dipped below 70% in June and September, but otherwise stayed in the 70-80% range.

Connectivity

As an island nation situated large distances away from all but its closest neighbour India, air connectivity is essential to Sri Lanka’s tourism industry. In 2015, 98.6% of arrivals were by air, with the remainder largely cruise passengers. There is no ferry service to India – services were reintroduced in 2011 but suspended months later.

As of 2015 the country was served by 26 airlines with scheduled flights. In the May-October peak season an average of 585 flights operated per week, with average weekly seating capacity of 129,522 passengers. From November 2014 to April 2015 there were 579 flights per week on average, and 126,926 passengers. The SLTDA is active in supporting the expansion of charter flights, which are currently minimal, accounting for 4068 passenger arrivals in 2015.

The leading scheduled airlines flying to Sri Lanka include national carrier SriLankan Airlines, which accounted for 35.4% of arrivals in 2015, Dubai-based Emirates (16.2%), Qatar Airlines (7.6%), Hong Kong flag-carrier Cathay Pacific (3.2%), and Abu Dhabi’s Etihad (3.1%). As these figures indicate, Middle Eastern airlines play an important role in bringing tourists to Sri Lanka from Europe in particular.

The temporary closures at CBIA in early 2017 indicated Sri Lanka’s over-reliance on the airport as a point of entry for tourists. Mattala Rajapaksa International Airport at Hambantota in the south of the island remains underused, largely because it is an inconvenient distance from capital and many tourist attractions. Plans are under way to increase flights to Jaffna’s airport and to develop an airport in the centre of the island, closer to the cultural and natural attractions of the Hill Country and ancient capitals.

The SLTDA is also looking into the possibility of opening military airports to commercial flights to bridge gaps in internal connectivity, which has posed significant challenges to the sector. Improvements to road and rail infrastructure would also enhance connectivity and benefit the tourism sector. While the Southern Expressway has cut travel times to parts of the south coast, road and rail transport to much of the island can be frustratingly slow, particularly to the east and north.

Business & Mice

The business segment is still small compared to leisure, accounting for 20.9% of tourism and travel GDP in 2016, according to data from the WTTC. This is partly due to the strength of leisure tourism, but also to an extent the legacy of Sri Lanka’s difficult economic history. Restrictions on foreign investment have been eased slowly.

Nonetheless, the government’s reform programme is set to draw more investors to Sri Lanka, while a raft of trade agreements should also bolster business tourism.

The SLTDA has earmarked meetings, incentives, conferences and exhibitions (MICE) tourism as an area for development. Only 0.3% of visitors in 2015 reported that they were coming to Sri Lanka for a convention or meeting. However, it is likely that there were more who entered on business or tourist visas, but did not specify that they were visiting for a MICE-related event.

Sri Lanka also attracts a steady stream of MICE groups for off-site events including board meetings, company reviews and senior team meetings, while resorts draw “incentive tourism” groups. As well as offering an overseas getaway to organisers and attendees, the country’s compact size means that a conference or event in Colombo can be combined with a break on the coast or in the Hill Country.

The main challenge holding back MICE tourism is the absence of a large, dedicated, flexible events space along the lines of the multifaceted Singapore Expo. However, plans are under way to develop such an events centre. Current facilities include Bandaranaike Memorial International Conference Hall, which has a 650-sq-metre main hall with a capacity of 1500 people and a 4000-sq-metre convention centre with a capacity of 2000. It also has a banquet hall and six committee rooms. In 2015 the centre hosted 866 national and four international events, attracting 645,750 delegates and generating LKR389.76m ($2.7m) in revenue.

Another facility hosting MICE events is Sri Lanka Exhibition & Convention Centre, which has around 4000 sq metres of exhibition space. These spaces are supplemented by facilities at hotels, including the Cinnamon Grand, Shangri-La and Mövenpick.

The market with the most potential to boost Sri Lanka’s MICE segment is India, a huge and rapidly growing economy on its doorstep. The Tourism Ministry sees improvements to connectivity – particularly in aviation – as the key to boosting the MICE segment. Overseas marketing campaigns are expected to encourage more organisers to hold conferences and events in Sri Lanka.

Domestic & Diaspora

The Sri Lankan diaspora is a major contributor to the sector, and its importance is often overlooked. In 2015, 25.5% of visitors said that they were coming to the country to visit friends and relatives. Many of them stay in hotels and most use some tourism-related businesses, such as restaurants, and visit tourist attractions when in the country.

Domestic travel by Sri Lankan residents is also a major contributor to the tourism sector. According to the WTTC, domestic spending accounted for 35% of travel and tourism GDP in the country in 2016; it expects the segment to grow at an annual average of 5.1% between 2017 and 2027. The government’s Vision 2020 highlights the importance of domestic tourism, particularly for sustaining the sector in months that have fewer international arrivals, and in bringing tourism to less-developed parts of the country.

Tourism Vision 2025

After the successful completion of the 2011-16 National Tourism Development Strategy, Sri Lanka is looking to the future, drawing up a bold plan for the next decade. In July 2016 the government drew up a draft for its next endeavour, Tourism Vision 2025, which aims to position Sri Lanka strategically on the international tourism market, and to catalyse growth in tourism and the overall economy.

Its goals include making tourism the country’s second-biggest generator of foreign exchange income, boosting sector employment to 1m people and increasing FDI. This entails stronger branding of Sri Lanka as an authentic island destination – and measures to ensure that this is borne out in visitors’ actual experiences – as well as improved tourism management.

Rather than focusing on arrivals numbers, the Vision places an emphasis on building value. While the government and the private sector are keen to attract more visitors, they do not want to promote mass, high-volume tourism at any expense. Instead, the aim is to build a high-value sector, attracting more high-spending visitors and pushing up yield.

Aiming For Authenticity

Emphasis will be put on marketing Sri Lanka’s biodiversity, culture, cuisine and historical sites. Rooting tourism development in the environment and culture is a priority, with the sector expected to help preserve and promote both.

Authenticity is a key concept in Tourism Vision 2025, emphasising Sri Lanka’s uniqueness in a competitive global market and preventing the homogenising effects of mass tourism. As noted in the Vision 2025 draft, “Global consumer trends show a growing inclination for the local, the authentic and the ethical, particularly in the higher value or luxury segment.”

Tourism Vision 2025 stresses the importance of attracting visitors not only based on their country of origin, but also their interests. It highlights six groups with particular potential, based on their spending power and what Sri Lanka can offer them. These are MICE tourists, adults aged 60 and over, Millennials (those aged 18-34), experts (academics and scientists), nature and cultural tourists, and the diaspora.

The Vision recognises that more needs to be done than raising hotel capacity, and that poor management, patchy infrastructure, uneven implementation of regulations and legislation, and poor integration of value-added goods and services keep Sri Lanka from reaching its tourism potential. “We want to see the transformation of the sector,” Mather told OBG. “We must be more dynamic. We have all the pieces in place as a destination, but we need to turn it up a notch.”

One of the strategy’s goals is to dispel misconceptions, including security concerns and the idea that the country is not a year-round destination. It also aims to promote the tourism sector among Sri Lankans, to foster the understanding that it is a major economic contributor and job creator rather than a threat.

Regional

An important aim in tourism development is to encourage visitors to stay longer and visit more places around the island, broadening the sector’s geographic impact. Vision 2025 divides Sri Lanka into five regions, each with its own identity tailored to specific types of tourists. Colombo is to be promoted as a cosmopolitan Indian Ocean city with a range of historic and cultural sites, and a MICE tourism centre.

The south coast, already popular, will emphasise the UNESCO-listed Galle Fort, Sinharaja Forest and other national parks, the region’s combination of lush forest and sea, and the potential for marina development. A designated “tourism economic area” encompassing Ahungalla, Balapitiya and Ambalangoda will allow larger-scale development, while Arugam and Unawatuna bays will be protected tourism localities offering a focus on local coastal identity and culture. Two golf courses will be added to the region and there are plans to develop Yala National Park as a safari centre.

The Hill Country, another tourism hotspot, is to retain its focus on landscapes, culture and heritage, with better preservation of historic properties, promotion of botanical gardens and development of walking trails, with Kandy’s role as a cultural centre reinforced. What is known as the cultural heartland includes several UNESCO World Heritage Sites, including ancient cities, and the less-developed east coast, where there are plans to develop luxury resorts and facilities for sailing and deep-sea fishing. Finally, the north, off-limits during the war, is now being opened up to tourism. The Vision highlights the potential of its many islands for sailing, kitesurfing, wildlife watching and ecotourism.

Taking Action

While the Vision sets broad long-term goals, it will be followed by two strategic action plans, encompassing 2017-20 and 2021-25. These will provide more detail on how the SLTDA and the Tourism Ministry will promote tourism development. The formulation of these plans has entailed extensive, open consultation with stakeholders. A number of challenges have already been highlighted, including hotels failing to maintain standards appropriate to their star ratings, poor management of assets such as national parks, and a shortage of skills in the workforce.

The SLTDA has been working with external consultants to strengthen data collection and research, and ultimately improve sector strategy. This will include developing specific tourism segments and ensuring that planning leads to implementable policy. Digital marketing will play an increasingly important role in promotion, and an overhaul of official tourism websites is in the pipeline. New digital resources will offer a coherent, consistent overall message, while focusing on specific offerings to different demographic groups.

New Developments

As of early 2017 the SLTDA was planning a number of developments for the medium term, including bringing private luxury trains to Sri Lanka’s underutilised railways. Travelling by rail along the coast and into the Hill Country is a highlight for many visitors. Tourist-oriented services exist, but luxury services would strengthen the country’s high-value offering and provide affluent tourists with a more comfortable way of travelling in Sri Lanka. This is likely to help the Tourism Ministry reach its goal of attracting more tourists with higher spending power.

With this in mind, the sector has also looked to a neighbour to reduce competition and boost arrivals. The SLTDA and private operators alike are keen to offer tours that would include both Sri Lanka and the Maldives. Traditionally, the countries have competed for sun-and-sea tourism, but their distinct offerings could compliment one another. While there are relatively limited cultural and historical tourism options in the Maldives, Sri Lanka has many.

Thus some travel companies have begun to offer multi-centre holidays combining trips to the two nations. Tour packages include a few days at a resort in the Maldives before or after a tour of Sri Lanka’s cultural and historical sites. This change in tactic could prove highly lucrative for the tourism sectors of both countries. “Sri Lanka and the Maldives should act as complementary forces in the sector, rather than competing head-on,” Esufally told OBG.

Outlook

The growth of Sri Lanka’s tourism industry over the past decade is a remarkable success story. The sustained increase in visitor spending indicates that this is not merely a case of pent-up demand; the country is succeeding in developing higher-value tourism.

The industry will continue to grow as Sri Lanka strengthens its reputation as a top destination in Asia. However, for the government and the private sector alike, the goal is more than just a steady increase in arrivals. Current double-digit growth in visitor numbers will be difficult to sustain. Instead, the priority going forward will be developing a diverse, high-yield industry that will generate more foreign exchange earnings and more jobs. Improving the quality of tourists’ experiences, and ensuring that it is rooted in – and does not diminish – Sri Lanka’s unique landscapes and culture is a priority. To achieve these goals, greater investment will be needed. The government hopes to attract foreign investors to develop and diversify Sri Lanka’s tourism offering, build hotels, upgrade infrastructure, maintain sites and develop leisure facilities, including marinas and safari centres. As developments across the industry progress, tourism will remain a key force in