Boston, MA -- (SBWIRE) -- 02/14/2014 -- We believe that the recent weakness in the Sri Lanka rupee is both a blessing and a curse for Sri Lanka's booming tourism industry. With the rupee now at the cheapest it has ever been against the euro, we expect to see an increase in arrivals from the bloc, which remains the island's top tourist market. That said, the downside of a much weaker rupee is that the cost of major tourism-related infrastructure developments is likely to face some upside pressure.

Beyond the current year, BMI believes arrivals to Sri Lanka will grow at a strong annual rate of at least 10% per annum. BMI's tourist arrival forecasts remain dependent on a peaceful security situation. Despite the ruling United People's Freedom Alliance (UPFA)'s electoral defeat in the Northern Province's recent elections, the Rajapaksa regime's success in holding largely peaceful elections in a majority-Tamil area should help in deflecting international pressure and criticism off of Colombo to enhance reconciliation efforts following the recent end of the country's decades-long civil war.

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Any recurrence of civil conflict, which we think is unlikely, would pose a clear downside risk to our forecasts. That said, the Tamil National Alliance (TNA)'s strong performance in provincial council elections in September 2013 may raise tensions in the domestic political scene as the Tamil minority's interests are further emboldened, clashing directly with the Sinhalese-dominated national government's agenda. The September polls clearly showed that economic advancement in Tamil-dominated areas (brought on by massive infrastructure development by Colombo with the help of Beijing) is not enough to sway the minority population's camp into Rajapaksa's support base. The government has accused the TNA of fuelling calls for a separate Tamil state, while the latter has sought devolution of power in a united Sri Lanka, which, for the alliance, entails the end of the army's occupation in the north. This could deter potential tourists over 2014 as they become wary of further unrest.

As part of its 'Tourism Development Strategy 2011-2016, the Sri Lankan government is looking to increase the number of tourist arrivals to 2.5mn by 2016. BMI believes that it is unlikely that this ambitious target can be met within such a short timeframe, although we believe the primacy given to boosting tourist numbers by the Sri Lankan Tourism Development Agency will be positive for the industry.

We also note the large number of utilities, water and sanitation infrastructure projects under construction and in the pipeline in Sri Lanka, with these developed with a view towards creating a more attractive environment for luxury-loving Western tourists.

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