How financial inclusion is a pathway to reviving tourism

Global travel and tourism have not been the same ever since the onset of the Covid-19 pandemic. The tourism sector has endured one of the most challenging tests of survival so far, with the estimates from World Tourism Organization indicating that the travel and tourism industries lost approximately $80bn in receipts, jeopardising more than 100 million jobs.

This has particularly been true for several emerging markets and developing economies (EMDEs) in the Middle East and North Africa (MENA) region, such as the United Arab Emirates (UAE), which significantly depend on tourism not only for their survival but also as a strategy to diversify away from oil.

According to data from the World Travel and Tourism Council (WTTC), the travel and tourism contributions to GDP for the UAE was 10.9 per cent, above the Gulf Cooperation Council (GCC) countries’ average of 8.6 per cent and well above the (MENA) region average of 5.3 per cent. However, the ongoing pandemic has brought the tourism industry to a standstill in the MENA region, with UNWTO reporting a decline in tourist arrivals of 74 per cent in the Middle East in 2020, resulting in an expected GDP loss of $154bn. The current outlook does not seem very optimistic either as the Middle East recorded a drop of 78 per cent in tourist arrivals during the first quarter of 2021, compared to the same period last year.

While the struggle for survival has been real, the ongoing vaccination drive against Covid-19 seems to have offered a light at the end of the tunnel for the tourism sector. Several countries around the world, including the UAE, are now gradually opening their borders to international tourists (Dubai has already been ahead of the curve, with other emirates slowly following suit) in a concerted effort to revive their tourism sector.

The big question facing policymakers today is how can countries, especially EMDEs, ensure that the ongoing recovery proves to be robust and resilient? One potentially important avenue that has not received much attention amongst policymakers comes from achieving higher financial inclusion. Financial inclusion broadly refers to greater access to financial services, providing and enabling the firms and households in an economy with access to the formal credit market, as well as facilitating the use of those financial services.

Globally, there is a consensus among academics and policymakers that expanding financial services provision has the potential to promote equitable economic growth, especially in EMDEs. This is also the reason why it has been recognised as one of the key enablers to achieve several of the United Nations’ Sustainable Development Goals.

How can financial inclusion boost tourism?
Financial inclusion can contribute to tourism development in many ways. Firstly, greater access to financial services can spur entrepreneurial activities, which provides much-needed access to capital for SMEs. This can boost enterprise growth as well as encourage an entrepreneurial culture in the tourism sector, resulting in higher supply and demand for tourism services.

Secondly, higher financial inclusion can also boost firm innovation. Given the competitive nature of the tourism industry, SMEs are forced to innovate in order to survive. Thus, expanding financial inclusivity can enhance these firms’ abilities to innovate and improve service delivery.

Next, from a consumer’s perspective, achieving higher financial inclusion could ease borrowing constraints, allowing consumers to borrow smaller loans easily, which can generate higher demand for tourism and tourism-related services. Increasing the accessibility to and usage of financial services could also provide the right environment to generate higher domestic spending on tourism by attracting more tourists, as well as spur consumption of internal travel and tourism. For instance, higher levels of financial inclusion imply that basic but essential financial services such as the availability of ATMs and setting up of bank accounts are readily available in the destination country. This not only reduces the transaction costs for travellers but also makes it easier for them to spend in the destination country, which will increase tourism revenues. Finally, greater financial inclusion can also help manage the excessive risk in the sector through the availability and access to insurance (pooling of risk) and hedging products.

In order to make the recovery of the tourist sector resilient and robust, policymakers can focus on promoting non-traditional tools such as financial inclusion, which will help boost domestic and international tourism. We also find that EMDEs with greater access to financial services are better positioned to recover more swiftly from the current shock inflicted on the tourism industry by the pandemic, compared to those that do not.

Outbound tourism matters too
While understandably much of the policy focus is on attracting tourism inflows, our research also underlines the need to focus on outbound tourism in order to achieve a holistic recovery. A focus on outbound tourism is significant because a major chunk of outbound tourist expenditures is made in the home country. This benefits domestic businesses such as airline companies, airports, domestic transport, travel agents, and tour operators, which can help boost the domestic tourism industry, especially in countries that are not heavily dependent on inbound tourist flows.

In addition, outbound tourism can also be used as a soft power tool to deepen political and economic linkages. Similarly, the interaction of outbound tourists with the local population in the destination country can promote the home country’s image as a travel destination and acts as a source of credible information related to the source country, especially in the context of the Covid-19 pandemic.

Moving forward
As countries in the MENA region look to open up their borders to international travellers and continue their stride towards a more diversified economy, the results of our research provide some policy insights on how to support a robust and swift recovery of the tourism sector using non-traditional policy tools. Enabling wider access to financial services will not only provide the tourism-related businesses an opportunity to kickstart their businesses again but will also provide opportunities to the tourists to spend more freely on tourism-related goods and services.

Usman Khalid and Sasidaran Gopalan are assistant professors at the United Arab Emirates University