Tourism industry crisis and the best way out

The economic destiny of Sri Lanka as a whole is closely intertwined with the performance of our tourism sector. Thus protection of this sector and related aspects, such as protection of the environment and wildlife as well as reduction in pollution are vital to our Sri Lankan national project – Pic by Shehan Gunasekara

Leading up to 2019, Sri Lanka was recognised as one of the most exciting travel destinations in the world by numerous prestigious publications, including the ‘Lonely Planet’, the New York Times and Condé Nast. Improvements to the transportation system, the development of infrastructure, world class hotels and facilities and Sri Lanka’s natural beauty and hospitality were all factors. The tourism industry, a critical component of Sri Lanka’s economy and a key foreign exchange generator, was left devastated by the 2019 Easter attacks as well as by the ongoing global pandemic.

The resulting lockdowns have impacted every facet of life and every industry, but especially Tourism; research shows that 36% of low-skilled workers and a further 36% of semi-skilled workers have been laid off; 28% of the junior and middle management segments have also been retrenched. 70% of tourism and hospitality specialists estimate that between 41% and 60% of the total industry workforce would be terminated.

Tourist arrivals have dwindled; only 507,704 between January and December 2020 with zero arrivals recorded between April and end December due to the closure of the airport and suspension of flights since 18 March 2020. This represents a decline of 73.5% over the previous corresponding period, when arrivals exceeded 1.9 million.

There are numerous service providers directly dependent on tourism; over 500 travel agents, 250 recreational outlets, 300 tourist shops, 5,000 guides and the airlines as well, with employment opportunities within these service sectors severely restricted.

Over 90% of formal sector outlets and 75% of informal sector outlets remain temporarily closed. Over 75% of the informal sector outlets have closed down operations. Dependent industries have suffered due to sectoral linkages, leading to a multiplier effect, with millions of livelihoods left devastated.

Given the importance of tourism to the economy, the GOSL must prioritise this industry.

In this regard, we consider certain budget proposals to be counterproductive to uplifting this vital sector. Pricing and margins will suffer due to the proposed 2.5% social security contribution in addition to the 1% TDL on turnover. This impacts competitiveness of the Sri Lankan Tourism offering and these taxes are largely regressive in nature. The upcoming moratorium expiry deadlines will only lead to further cash flow constraints, plunging individuals and businesses into further debt. Disposable incomes will be virtually non-existent, fresh investments become unfeasible.

Based on the above critical issues we submit the following proposals

a) To restructure the debts obtained by the tourism sector from Licensed Commercial Banks for a period of 10 years with a grace period of two years.

b) To waive-off the total interest portion of the term loans from April 2019 until 30 June 2022 during the moratorium period.

c) Implementation of the debt restructuring plan recommended by the Monetary Board of CBSL.

We further recommend abolishing the Local Government Levy up to 1% of the Turnover and replace it with a trade license fee similar to all other industries. In fact, this proposal was presented at the last Budget by the Finance Minister but has not been implemented to date.

Hotels are also subject to higher electricity tariffs. Tariffs applicable to hotels (i.e., H-1, H-2 and H-3) should be matched with Industrial tariffs (i.e., I-1, I-2 and I-3 which is currently a lower rate than “Hotel purposes”).

The restructure of the tourism industry’s total debt portfolio of Rs. 350 billion as per recommendations of the Monetary Board of CBSL and the full implementation of concessions granted by the Cabinet of Ministers on 10 June 2020 are of vital urgency.

As a measure of immediate relief, the industry has requested authorities to intervene by mandating restructuring and rescheduling of loan facilities. The CBSL must provide clear guidelines to all Licensed Commercial Banks and finance companies regarding the enforcement of contracts and recovery of facilities.

Effective mediation is necessary, unlike the previously ad hoc approach. Facilities need to be extended to new, approved projects in the tourism pipeline.

The main objective was to ensure worker retention, even on reduced salary terms, yet these have not been met, with a continued spike in terminations across all sectors. Many previously employed in the tourist sector also lack formal social security and are thus vulnerable to bankruptcy and destitution

Revenue from tourism was Sri Lanka’s second highest net foreign exchange generator in 2018/19 with earnings of $ 4.3 billion. As per the last budget speech presented by the former Finance Minister and present Prime Minister, the valuation of the hotel industry has exceeded over $ 10 billion.

Apart from the above, the following government institutions have benefited from the inflow of Rs. 12.6 billion in 2018/19.

It is estimated that the public sector will lose approx. Rs. 12 b in revenue from the tourism sector in 2020 with similar losses expected by the end of 2021.

The loss of public sector revenue through tourism in 2020, based on 2019 earnings is estimated to be around Rs. 12,000 million. Even 2021 will see similar losses. Overall, the economy has lost around $ 3.5 b during 2020 and this trend will continue in 2021. At a time when Sri Lanka has depleted foreign exchange reserves, protecting established and proven avenues for the generation of foreign exchange has to be a primary concern of the Government.

Please also note that 90% of all tourism sector investments have been implemented by local entrepreneurs, of which 90% belong to the small and medium category.

It is notable that the 2009/10 registered hotel room capacity of 14,461 increased some 71% to 24,757 by 2018/19, a remarkable growth rate that has supported Sri Lanka’s investment portfolio.

Based on industry recommendations to the government, assurances have been given that steps to re-negotiate and re-structure the facilities extended through commercial banks will be favourably considered. However, in reality, this policy has not been equitably implemented and would not on its own be sufficient to support the industry at this crucial juncture. The following factors need urgent consideration to support the industry:

• Repayment of accumulated interest on current borrowings once the moratorium has been granted comes to an end by mid-2022.

• Repayment of any outstanding capital on borrowings by end December 2021.

• Repayment of outstanding statutory payments.

• Assistance to support a minimum of six months working capital.

• Assistance towards maintenance and product upgrading to ensure conformity with required quality and standards in keeping with classification requirements.

• Assistance for new, approved development projects that are on-hold as a result of increases in development costs, mainly due to depreciation of the Rupee and increase in construction cost – bridging finance.

• Financial assistance to industry stakeholders to be provided through local commercial banks.

• Government on obtaining cabinet approval, to set up a separate unit to plan, structure, evaluate, control and monitor the entire exercise. It could fall under the Ministry of Finance, Ministry of planning and implementation, Ministry of Tourism or at the Sri Lanka Tourism Development Authority (SLTDA) falling directly under the Ministry of Tourism.

• The Government to provide required guarantees to the fund through local banks. Perhaps a mechanism of the individual entities pledging shares to the value of borrowings or similar to be considered.

• Though, the offshore funding made available will be in US$, the lending to industry stakeholders to be in Sri Lanka Rupees. (This will also assist the Government to strengthen its depleted foreign reserves to some extent)

• After careful evaluation of applications against an established criterion, assistance in the form of soft loans to be offered. Minimum two-year grace period on repayment of capital and interest. Preferential interest rates below 4% per annum. Payback period of seven years. (In total, covering a period of 10 years.)

• Special financial package purely meant for promotions for all local inbound tour operators as local inbound tour operator business volumes equal to 65% of the total arrivals to Sri Lanka during the pre-pandemic period.

We are aware of the forthcoming tourism policy document which has been submitted for public observations. It needs to articulate an action plan for all sectors namely: Development, Promotion and Regulations with clear time lines to prevent these policy documents from gathering dust.

We do not believe that this is the appropriate time to enact a rushed Tourism Act, replacing the current Tourism Act 38 of 2005. The current act certainly does require changes but this must include adequate private sector participation in decision making.

It is also an instrument that determines how the tourism fund has to be managed and disbursed. We note with consternation that the proposed tourism act leaves governance aspects to representatives of state bodies with the private sector invited merely as ‘observers’.

It is also transparent that this proposed act has been orchestrated to suit the needs of certain individuals. This is not acceptable.

The Minister of Finance indicated the other day that the tourism fund is likely to be revoked and collections will go directly into the consolidated fund. This was the system that we did away with 15 years ago and brought the current act to enhance effective industry participation towards the development of tourism. We should not forget that the payoff was 2.3 million arrivals with tourism receipts hitting over $ 4 billion.

Sri Lanka is one destination out of over 250 competing destinations, hence it is vital that our country is positioned in source markets. We need to reach out to our primary, secondary and emerging markets aggressively to prevent ourselves from falling behind to other destinations.

We are aware of the massive shortage of foreign exchange in the country and tourism is one effective and sustainable remedy.

Indeed, given the above, it is clear that the economic destiny of Sri Lanka as a whole is closely intertwined with the performance of our tourism sector. Thus protection of this sector and related aspects, such as protection of the environment and wildlife as well as reduction in pollution are vital to our Sri Lankan national project.