This article appeared originally in Gulf News: link to original article
Tourism, which was once a beacon of hope for countries to diversify their economies, has been taking some serious battering since the spread of COVID-19.
Its association with aviation, another main casualty of the pandemic, further deepened the scars for a sector that will need years to regain its pre-pandemic number of international arrivals – and with it – spending. While how long is anyone’s guess, preserving a country’s standing in tourism would take more than the pandemic going away and travellers getting back on planes.
Akin to any other sector expected to drive diversification efforts, and overall economic growth in the country, tourism must be supported and nurtured to ensure its long-haul survival.
COVID-19 has highlighted the importance of tourism, except that such importance is not linked to the number of travellers arriving at or going through a country’s points of entry. Rather, the economic activity that they generate in sectors directly associated with tourism, like hospitality.
Pick an option
For a hotel, the business model is one where a tourist stays for longer, hence avails a lower nightly rate, and hopefully spends more within the premises. Alternatively, a tourist stays for a shorter duration, but spends more on products and services provided by the hotel, including overpriced in-room dinning.
An optimal scenario for a hotel would be if a tourist stays for a longer duration and spends more within the hotel premises, improving the hotel’s average occupancy rate. At closing of the financial cycle, all of the above need to be taken in account to show whether a specific hotel property has lost money, made money, or just broke even.
The occupancy rate – used by hotels on an operational level and by cities/countries as an indicator of the health of the hospitality sector – will show early on where a hotel is headed in terms of profitability.
Alone though, it forms part of the story and its profitability is subject to the average nightly rate during each level of occupancy. The same rate, when consistently high for a period of time, can entice governments to tax the nightly rate, in one way or another.
That is, in effect, a tax on tourism.
In principle, there is nothing wrong with taxing tourism as long as the government believes that tourism has reached the intended maturity level. This could be determined from occupancy rate obviously, which could encourage supply of more hotel rooms that would eventually lower the average city/country rate. Or from a targeted number of international visitors achieved.
In-built biases distort
With that, the target itself, no matter the amount of extensive quantitative analysis that has gone into it, may be biased for multiple reasons. That, in turn, would mean that the taxes are costing the economy more than the collected taxes are benefitting it.
Here is how.
First, a city/country interested in growing its tourism sector would keep expanding its hospitality-related infrastructure, such as handling capacity by airports and the availability of main attractions. Thus, whatever the set target is for international arrivals, it will need to be constantly increased as the city/country keeps expanding the said infrastructure.
In other words, the number of international arrivals is a moving target that can only be fixed by the city’s/country’s capacity to host a certain number of individuals within a given period of time. Whether the city/country boasts of a national carrier or not, placing the destination on the international route of airlines would serve as a catalyst towards further expansion in hospitality.