A large number of Sri Lanka’s tourism businesses are classified as Small and Medium-sized Enterprises (SMEs), contributing heavily to the overall tourism revenue. 

In an interview with The Sunday Morning Business, Association of Small and Medium Enterprises in Tourism Sri Lanka (ASMET Sri Lanka) Immediate Past President Rohan Abeywickrema and incumbent President Prebudda Jayasinghe noted that a majority of SMEs were still recovering from the economic crisis and were in need of better promotional efforts amidst positive trends such as sustainability, digitalisation, and experiential tourism. 

ASMET Sri Lanka, founded in 2005, is an organisation created for the empowerment of the SME sector by sector stakeholders in tourism, such as restaurants, service providers, destination management companies, and accommodation providers.

Following are excerpts: 

Rohan Abeywickrema

What is the current contribution of tourism SMEs to Sri Lanka’s overall tourism revenue and how does this compare to pre-crisis levels?

In the pre-pandemic period in 2019, it can be estimated that SMEs may have even contributed to 60-70% of Sri Lanka’s overall tourism revenue, given that these enterprises cater to a large segment of budget and mid-range travellers. 

However, in the post-pandemic period from 2022-2023, the contribution of SMEs can be estimated to have declined to around 40-50% of overall tourism revenue, with the tourism sector focusing on higher-value international tourists and domestic travellers who tend to spend less than pre-pandemic levels. 

In terms of tourist arrivals, the country welcomed 1.9 million tourists in 2019, generating approximately $ 4.4 billion in revenue and SMEs played a vital role in this success. However, in 2020, tourist arrivals plummeted to 507,704 and revenue fell to $ 682 million, which ended up severely impacting SMEs. 

Arrivals recovered to 719,978 in 2022, but revenue remained low at $ 1.13 billion, indicating that SMEs continue to underperform compared to pre-crisis levels. 

It can be stated that SMEs in Sri Lanka’s tourism sector are currently at a crossroads as they are facing both significant challenges and emerging opportunities. A shift towards sustainability, digitalisation, and experiential tourism can be observed in the industry, which present opportunities for SMEs that are willing to adapt and innovate. 

However, the sector’s recovery will also depend on external factors, such as broader economic stability, supportive Government policies, and continued efforts to rebuild Sri Lanka’s image as a safe and attractive tourist experience in the global market.

What portion of SMEs in tourism are currently facing financial distress or liquidity issues, and what bottlenecks exist in securing financial support?

Unfortunately, the majority of SMEs in Sri Lanka’s tourism sector are currently facing financial distress or liquidity issues, with estimated percentages ranging from 70-80%. While various financing mechanisms have been introduced to support their recovery, certain challenges remain, especially in terms of accessibility, awareness, and effectiveness. 

Additionally, it can be observed that Government-led initiatives, international aid, and private sector support have been relatively ineffective, but more tailored solutions and increased outreach are needed to ensure a sustainable recovery for SMEs in the tourism sector. 

Government-backed policy reforms for SMEs in Sri Lanka’s tourism sector are crucial for recovery. Unfortunately, their accessibility remains limited due to drawbacks such as bureaucratic hurdles, lack of awareness, and high collateral requirements. 

Therefore, it is essential that these bottlenecks are addressed through streamlined processes, improved outreach, and tailored support mechanisms in order to ensure that financial aid reaches SMEs that need it most. 

Improving accessibility is a significant step forward for the sector as it can lead the Government to play a pivotal role in boosting the tourism sector while also promoting long-term economic growth.

How have recent policy reforms impacted SMEs in tourism, particularly in taxation, licensing, or foreign investment incentives?

There have been several policy reforms impacting SMEs in the tourism sector over the recent years. Taxes amounting to 18%, including Value-Added Tax (VAT) and other taxes, remain one of the most pressing concerns. Additionally, a service charge of over 10% causes a substantial impact on SMEs in the tourism industry, making it challenging to remain competitive with other Asian countries when it comes to cost and attracting business. 

Therefore, it would be useful if the Government encourages tax refunds to tourists when departing the country, which they could retrieve at the airport with bills. 

Another aspect that should be of concern relates to Destination Management Company (DMC) travel agents. It would be beneficial if they are to be recognised as export oriented, given that most of the DMCs deal with attracting foreign exchange to the country. As a result, there is a need to support them with reasonable tax structures.

In terms of licensing, the National Tourism Policy emphasises sustainable practices within the tourism sector. It proposes incentives for stakeholders to adopt responsible consumption and production patterns, aligning with global sustainability goals. 

This approach encourages SMEs to integrate sustainable practices into their operations, also potentially influencing licensing requirements to promote environmental and cultural conservation.

Moreover, the establishment of the Colombo Port City Special Economic Zone governed by the Colombo Port City Economic Commission offers significant incentives to attract foreign investment, including tax exemptions for up to 40 years, 100% foreign ownership of businesses, and flexible foreign exchange regulations. 

With such incentives being designed to create a business-friendly environment, they have the potential to benefit tourism-related enterprises by attracting international investors. However, streamlining and protecting the local SMEs in tourism is important for the sector.

What kind of regulatory simplifications are needed to ensure the competitiveness of SME tourism businesses in Sri Lanka?

SMEs welcome the Government decision to allow seven countries a free visa policy, which has demonstrated success in large markets such as Russia, India, and China. We believe that this approach should expand to other European countries as well as Australia. 

Simplified licensing and registration is a primary requirement, which includes the need for reducing bureaucratic red tapes by introducing a one-stop shop for all tourism-related licences and permits, allowing SMEs to register and operate faster. Furthermore, we believe it is important to implement financial relief packages during economic downturns and crisis response programmes to help SMEs recover faster.

Another important step is establishing a dedicated SME tourism advisory council to ensure their concerns are addressed in policy decisions, allowing for stronger SME representation in policy making. Finally, from a marketing and promotion support perspective, increasing Government-funded promotion of SME-run experiences and accommodation in international tourism campaigns is a significant requirement.

How has demand for SME-led tourism accommodation experiences increased following the economic crisis?

In the aftermath of the economic crisis, there has been a notable resurgence in tourism, which has positively impacted SMEs in the accommodation sector. In 2023, the country welcomed approximately 1.3 million visitors, which indicated significant recovery for the tourism industry. 

This revival has been particularly beneficial for SMEs offering unique and personalised lodging experiences, as travellers are increasingly seeking authentic and intimate accommodations such as boutique hotels, guesthouses, and eco-lodges, which are predominantly operated by SMEs.

Moreover, the introduction of sustainability certification programmes for smaller accommodation providers has added value to their offerings, while also attracting environmentally conscious travellers. 

This initiative, which was previously available only to large-scale hotel operators, now enables SMEs to improve their market appeal by demonstrating their commitment to sustainable practices.

Overall, the post-crisis tourism landscape in Sri Lanka has led to a relatively increased demand for SME-led accommodation experiences, driven by traveller trends shifting towards authenticity, personalised service, and sustainable practices.

Prebudda Jayasinghe

What are the current trends in tourism affecting the SMEs sector?

SMEs in Sri Lanka’s tourism sector are recovering from past economic crises with an increased number of tourist arrivals. Some of the key trends prevalent in the current SME sector include sustainable tourism, digitisation, and demand for unique local experiences. 

It is important to note that despite SMEs remaining a vital contributor to the tourism sector, the revenue generated from the sector still stands below pre-crisis revenue generation levels. However, growth in tourist arrivals signals a positive trend for SMEs as well.

It is also notable that aspects such as licensing, taxation, and foreign investment incentives are evolving to support SMEs as simpler licensing, easier access to finance, and incentives for sustainability are necessary to improve SME competitiveness. 

Additionally, the demand for SME-led stays such as homestays and eco-lodges is rising, as travellers increasingly seek authentic experiences, which is also boosted by Government support for sustainable tourism, helping SMEs obtain certification, training, and sponsoring. Many tourists are increasingly attracted to experiencing the local culture, which benefits SMEs, especially those from rural settings. 

The most recent policies introduced focus on crisis management, sustainable tourism, and financial stability. While supportive policy reforms exist, their accessibility is often challenging to many SMEs in the tourism sector due to bureaucracy and lack of awareness; therefore, relevant authorities should be linked in providing services. However, efforts are underway at present in order to simplify processes.

As tourist arrivals significantly increase, are there any emerging challenges that affect SMEs in particular?

Unfortunately, many SMEs still face liquidity issues and there are facilitations provided by the Government and international programmes, including sustainable tourism certifications and financial tools, which help recovery. However, formal SME revenue is much lower than the time period before the 2019 Easter Sunday attacks, especially with 2018 being the golden year for tourism. 

Due to limitations such as lack of effective marketing campaigns, the formal SME sector has been experiencing low levels of business. The SME accommodation sector remains to be the most heavily affected, even as of now, especially given the substantial investments made by them.   

Sigiriya has been named the ‘World’s Most Welcoming City’ by Booking.com, with one reason behind this being that many travellers are travelling on their own and dealing with informal stakeholders, especially drivers, affecting many formal SMEs in the industry who are registered and paying taxes. 

At times, it can be observed that the Sri Lanka Tourism Development Authority lacks sufficient manpower for effective monitoring of licensing and looking into unauthorised operators in the industry that evade the current tax structures. And at times, influencers also end up promoting only low-end tourism such as staying in hostels, which does not benefit formal SMEs with licensed accommodation and licensed transportation. 

If Sri Lanka Tourism launches a global marketing campaign, it will promote the products and services that the SME sector provides to tourists. Increased manpower in the authority as well as the formalisation of SMEs will lead to a much better business environment.