Thursday, February 14, 2019

Brief overview of the evolving tourism sector in Nepal

The government has declared 2020 as visit Nepal year with an aim to increase the number of international visitors to two million. The number of visitors has been increasing steadily following a dip after the 2015 earthquakes. Tourist arrivals (including Indian tourists) for the first time grew by over 24% for three consecutive years. Arrivals from India grew by above 25% for three consecutive years. Arrivals from China grew by over 46% after drop in 2017. 

In 2017, 940,218 tourists visited Nepal. It was 1,117,072 in 2018, of which 17.1% were Indians and 13.1% Chinese. Increasing this number to two million within two years will be quite a challenge. Inbound tourists increased in almost all months, breaking the over-dependence on two peak seasons. Of the total visitors in 2017, 70% came for holiday and recreation, 8% for trekking and mountaineering, and 15% for pilgrimage. 

The number of domestic travelers grew by over 20% for three consecutive years. Similarly, the number of international travelers grew by over 10% for three consecutive years.  However, the number of domestic and international flights decreased in 2018. Higher growth of the number of passengers but slower growth of the number of flights indicates that passenger per flight increased and that airlines were flying with more capacity than before. 
Increasing the number of tourists alone is not sufficient. Spending by tourists also need to increase to create larger multiplier effects and to have positive effects on both forward and backward linkages in this sector. Convertible foreign exchange earnings from tourism sector grew by over 50% in the last two years, reaching US$630.9 million in FY2018. As a share of GDP, forex earning has been increasing, reaching 2.2% of GDP in FY2018. It was 3.6% of GDP in FY2015 (from mid-July 2014 to mid-July 2015 forex earnings but then the GDP slumped). As a share of total foreign exchange earnings, tourism sector’s contribution was 6.1% in 2018. The highest was in 1999 (20%). If you are wondering about the largest contributor to forex earnings, then its remittances (about 60% of total forex receipts).  

The average length of stay is around 13 days and hasn’t changed much from previous years. The average tourist spending was $537.8 in 2018. The average daily tourist spending was around $40. These need to increase along with the number of visitors. However, it will depend on the kind of services our travel and tourism industry provide. For instance, international visitors spend barely a day in Lumbini, the birthplace of Gautam Buddha. Hopefully, this will change with the increase in the number of hotels and completion of GBIA next year. 
If we look at the balance of payments table, then it won’t be hard to notice that in recent years tourism receipts (under travel heading) are actually slightly lower than tourism expenditure (under travel expenditure). For instance, in FY2018, travel receipts were 2.2% of GDP, but travel expenditures were 2.6% of GDP (including 1.3% for education). If we deduct education expenditure from tourism expenditure outside the country, then the net travel receipts is about 0.9% of GDP. On the other hand, if we compute net travel receipts after accounting for the expenditure on international transportation by Nepalis, then the net receipts is a negative 1.3% of GDP. 

Now, think why the government restricts migrant workers and those traveling outside of Nepal for education or tourism or conference from carrying too much foreign currency with them. Every time there is an external sector stress (that is, adequacy of foreign exchange reserves to finance months of imports declines due to less forex earnings—declining remittances or tourism/export earnings), then government decreases foreign currency that can be taken out of the country. Recently, the central bank restricted it to $500 for migrant workers and $1500 for nonmigrants. 
These are based on formal accounting, i.e. informal transactions or outflows might mean that there is net travel earning outflows. The increasing net tourism outflows might indicate (apart from the educational expenses) that the Nepali tourism sector hasn’t been paying much attention to the potential of intra-country tourism activities by its own citizens. If there are better facilities, and attractive as well as competitive tourism products, then some Nepalis might actually substitute their international travel plans for domestic travel plans. The benefits of this will be immense in terms of economic activities, employment generation, revenue for subnational governments, investment opportunities, and increase in net tourism earnings, among others. 

According the Travel and Tourism Economic Impact 2018 report, the direct contribution of travel and tourism sector (economy activity generated by hotels, travel agents, airlines, and passenger transportation services) is about 4% to 5% of GDP. If we include the wider effects from investment, supply chain and induced income effects, then the total contribution of travel and tourism sector will be about 8% of GDP. This is larger than the share of manufacturing sector in GDP. Travel and tourism generated about five million direct jobs (about a million jobs if we consider the wider effects).

Increasing the number of international tourists as well as the overall competitiveness travel and tourism sector requires more than advertisement of Nepal as a good tourist destination and Lumbini as the birth place of Lord Buddha. Nepal ranked 103 out of 136 economies in the Travel and Tourism Competitiveness Report 2017.  

Travel and tourism infrastructure needs to be adequate and of enough quality so that visitors get a sense of value for money. Subnational governments need to gear up to promote unique tourism products (religious, cultural, seasonal, adventure, etc) to entice more domestic as well as international tourists. 

The enabling environment for tourism sector should be good. For instance,
  • Nepal ranked 108 out of 136 economies in the quality of business environment. Specifically, FDI rules on tourism sector is considered to be restrictive (ranked 115) and legal framework is considered to be burdensome. On taxation, Nepal is slightly below average but that’s not too bad. 
  • Safety and security are also of paramount importance. The costs associated with safety and security of travel and tourism activities should not be too high. Furthermore, cases of bad treatment of tourists at the airport or outside will create a bad image and is an instant reputation buster. 
  • The quality of human resources and labor market is also important. Trained and service-oriented human resources add value. Hotel and restaurant sector is particularly infamous for labor union activism.
The policy environment for tourism sector should also be competitive and convincing. For instance, 
  • The extent of prioritization of this sector by the government gives a good signal to potential investors and visitors. In recent years, the government has indeed prioritized this sector as an integral pillar for rapid economic transformation. 
  • Visa requirement is very liberal, which is a good thing.
  • Bilateral Air Service Agreements need to be updated and direct flights to countries from where Nepal gets lot of tourists is important. With the expansion of international fleet of the domestic carrier, Nepal will soon have direct flights to Osaka (Japan) and South Korea. Direct flights could also be initiated in East Asian countries that have substantial population that practice Buddhism. 
  • Services need to be competitive including flight and accommodation unless the focus is on high-spending tourists and niche markets (this is unlikely for now apart from mountaineering). Ticket taxes and airport charges, hotel prices, and fuel prices should not be prohibitively high. 
The state of infrastructure should be good too. Nepal ranked 127 out of 136 economies on the state of travel and tourism infrastructure in 2017. 
  • The quality of air transport infrastructure is considered to be utterly noncompetitive (ranked 129 out of 136 economies). The only international airport is beset by traffic congestion, leading to longer flight duration and higher costs. Expansion of TIA as well as speedy completion of GBIA and PIA will help to increase both the number of flights and passengers. Securing additional air routes for landing from India will be crucial to the success of GBIA and PIA. Else, the flights will be longer and expensive. 
  • Ground transport is unreliable (ranked 135 out of 136 economies). The quality of roads is bad and prone to accident and traffic congestion.
  • The tourist service infrastructure is also not adequate. Hotel rooms are not sufficient and the quality is not competitive. Nepal ranked 126 out of 136 economies in the number of hotel rooms per 100 people. There were 1,101 hotels (125 star and 977 tourist standard) with 39,833 beds in 2017. There are a number of new hotels (including international chains) in operation phase and homestay is gaining popularity too. There were 2,860 tourist standard hotels and lodges with 75,792 beds capacity. 
  • In 2017, there were 283 affiliated houses for homestay with 554 rooms and 948 beds.
  • Car rental facilities and ATMs are not enough. 
  • The air pollution, unfinished construction work, bad garbage management, syndicates in transportation, and high tourism fees for low quality services among others are not encouraging.
Much more needs to be done to augment the quantity and quality of cultural resources and business travel. For instance,
  • The world heritage sites are not well maintained and promoted. Product branding is not up to the expected level. So far it is limited to participating in travel fares/exhibitions.
  • Sports stadiums and sports related tourism is nonexistent.
We also need to think carefully if targeting two million foreign tourists with the current state of our travel and tourism infrastructure is actually realistic. This means doubling the number of visitors from 2018 level. For comparison, India had eight million visitors (ranked 40 out of 136 economies in TTCR) and China had 56.9 million visitors (ranked 15 out of 136 economies in TTCR) in 2015. 
  • The logjam over the opening of new air routes will place short-term constraints on the growth of Nepal's aviation sector and undermine the tourism authorities' aim of increasing arrivals to two million by 2020.

Nepal can attract even larger number of tourists from China and India, but for this we need to offer attractive packages catered to their population and go for effective, targeted branding. 
  • For instance, outbound Chinese tourists numbered 162 million in 2017, of which about 48% went to Greater China (Hong Kong, Macau and Taiwan). So, about 84 million Chinese tourists went the rest of the world— most popular were Thailand, Japan, Vietnam and South Korea.  
  • There were about 22 million outbound Indian tourists in 2017. Top destinations for Indian tourists are UAE, Saudi Arabia, Bahrain, USA, Kuwait and Thailand. Dubai, Thailand, France, Singapore and Malaysia account for over 50% of Indian leisure arrivals overseas.

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