Investigating tourism and exchange rate dynamics on economic growth in Sri Lanka

Abstract

We re-examine the tourism-growth relationship to interrogate the role of the exchange rate as a future driver of the nexus. Using quarterly data on Sri Lanka from 1995 to 2018, preliminary tests reveal a long-run association among economic growth, tourism expenditures and the official exchange rate. Conclusions drawn from the linear models suggest that a percentage change in tourism expenditures contributes to an increase (between 0.46% and 0.52%) in growth. Likewise, the interaction with the exchange rate improves economic growth more so at the conditional distribution of economic growth (50th and 75th quartile). Additional evidence from the margin plot reveals that the effect of tourism on economic growth is positive as the Sri Lankan Rupee depreciates. From the non-linear models, the influence of the exchange rate improves the net effect of tourism on growth. These are novel contributions to the literature as it suggests that currency depreciation in Sri Lanka is pro-growth. Policy recommendations are discussed. Keywords: Exchange rate; tourism; economic growth; Sri Lanka