The Nexus Between Tourism and Economic Growth in Sri Lanka: Evidence from an ARDL Bounds Testing Approach

Abstract

This study investigates the nexus between tourism and economic growth in Sri Lanka from 1990 to 2021 using the Autoregressive Distributed Lag bounds testing approach. GDP growth is employed as the dependent variable, while tourism receipts, labor force participation, gross capital formation, and inflation are considered explanatory variables. Unit root properties are examined through the Augmented Dickey-Fuller test, and multicollinearity is assessed via the Variance Inflation Factor. The Bounds Test confirms a long-run relationship among the variables, while the Error Correction Model captures short-run dynamics. Empirical findings reveal that tourism receipts, labor force participation, and gross capital formation exert positive long-run effects on economic growth, whereas inflation negatively influences growth. Short-run estimates suggest that labor force participation and gross capital formation stimulate growth, though tourism shows limited immediate impact. Importantly, Granger causality tests demonstrate bidirectional causality between tourism and economic growth, validating both the tourism-led growth hypothesis and the economic-driven tourism hypothesis. Additionally, investment and labor force participation are identified as key transmission mechanisms linking tourism with broader macroeconomic performance. The results highlight the strategic role of tourism in driving sustainable growth in Sri Lanka, underscoring the need for policies that strengthen infrastructure, investment, and labor market participation.