WORLD ECONOMY Archives

15/02/2024by EOS Intelligence EOS Intelligence No Comments

eNaira: Is It Here to Stay or Are Nigerians Going to Say ‘Nay’?

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Although Nigeria boasts about its digital currency launch, there are contradictory opinions about eNaira’s subsequent adoption. The eNaira has the potential to impact Nigeria’s economy positively, however, it is not possible without its widespread acceptance.

CBDC – A global picture

Central Bank Digital Currency (CBDC) is virtual currency or money issued and controlled by a country’s central bank. According to the Atlantic Council, a leading US-based think tank, 130 countries were considering a CBDC as of September 2023, while only 35 countries were exploring a CBDC as of May 2020. This steep rise in the number of countries considering CBDC in a span of just over three years shows an increasing interest in CBDC across the globe. Even more so, some 64 countries are already in an advanced phase of exploration of the currency (development, pilot, or launch phase).

Among the G20 countries, 19 are in the advanced stage of developing CBDC, and 9 out of these 19 G20 countries are in the pilot phase. There are some 11 countries that have launched a CBDC. China’s CBDC is in the pilot stage and is presently reaching 260 million people taking part in this pilot while being tested in more than 200 scenarios, including e-commerce, public transit, and stimulus payments. In Europe, the European Central Bank is currently on course to start its pilot for CBDC, the digital euro.

More than 20 other countries are stepping towards piloting their digital currency in 2023. Countries such as Australia, Thailand, and Russia plan on continuing pilot testing. Brazil and India intend to launch their CBDC in 2024.

eNaira – A choice or compulsion?

eNaira is Nigeria’s digital currency, issued and regulated by the Central Bank of Nigeria (CBN) for retail use. It is a liability of the CBN, similar to coins and cash.

Cryptocurrencies such as Bitcoin and Ethereum are similar to eNaira in terms of the underlying Bitcoin technology. Apart from this, both cryptocurrencies and eNaira are stored in digital wallets and can be used for payments and digital transfers across the globe to anyone with an eNaira account at no cost.

However, what makes eNaira different from Bitcoin or Ethereum is that the CBN has access rights controls over the Nigerian digital currency. Secondly, the eNaira is not a financial asset but rather a digital form of the physical naira, to which it is pegged at parity.

With the release of eNaira in October 2021, Nigeria became the first country in the African continent and second in the world after the Bahamas to launch a CBDC. Major motivations behind launching CBDC in Nigeria included encouraging financial inclusion, improving cross-border transactions, complementing the current payment systems, and enabling diaspora remittances. However, the adoption of eNaira has been low, with only 0.5% of the Nigerian population using CBDC within a year of its launch.

In a rather desperate move to compel its people to adopt eNaira, the government caused cash shortages in the country. This resulted in protests, riots, and unrest among Nigerians. As a result of the currency shortages in early 2022, Nigeria witnessed a 12-fold increase in the number of e-Naira wallets to 13 million since October 2021.

As of July 2023, the value of transactions had also seen a 63% rise to N22 billion (US$48 million) since its launch in October 2021. According to the International Monetary Fund (IMF), 98.5% of the eNaira wallets were inactive one year after the launch of the CBDC, meaning 98.5% of eNaira wallets have not been used even once during any given week. These low levels of activity mirror the low public adoption of eNaira.

eNaira Is It Here to Stay or Are Nigerians Going to Say ‘Nay’ by EOS Intelligence

Motivations to launch eNaira: Strong enough to sustain adoption?

CBN conceived multiple advantages of adopting eNaira, such as fostering financial inclusion, facilitating remittances, and minimizing informality in the economy. These serve as motivations for launching eNaira and are expected to take shape with the eNaira becoming more widespread along with strong support of the regulatory system.

Fostering financial inclusion

Currently, eNaira can be used by people with bank accounts, but the idea is to expand the coverage to anyone with a mobile phone, even if they do not have a bank account. Around 38% of the adult population in Nigeria do not have bank accounts. If this section of the adult population could be provided with access to eNaira through mobile phones, Nigeria could potentially achieve 90% financial inclusion.

Facilitating remittances

Nigeria is one of the Sub-Saharan African countries that receives considerable remittances. In 2019, Nigeria received US$24 billion in remittances, which are usually made through international money transfer operators. These operators charge around 1-5% of the value of the transaction as their fee. One of the motivations for launching eNaira is to reduce the costs associated with remittance transfers.

Minimizing informality in the economy

With more than half of the economy being informal, it becomes imperative for the Nigerian government to introduce a digital currency across the country to reduce the informality in the economy and increase the country’s tax revenues. Therefore, eNaira was launched in Nigeria to strengthen the tax base along with obtaining higher transparency in informal payments.

Can Nigeria overcome implementation challenges to spur eNaira adoption?

It comes as no surprise that Nigeria is facing a range of adoption barriers on its journey to eNaira’s widespread implementation. Apart from perceptual barriers such as considering eNaira wallets as deposits at the central bank, which might decrease the demand for deposits in commercial banks, there are cybersecurity risks and operational barriers linked to eNaira. These adoption barriers to Nigeria’s CBDC include a combination of factors such as lack of required tech infrastructure, lack of training of bank personnel managing the process, trust issues, and electricity and internet issues.

Lack of tech infrastructure

The CBN is looking to revamp the technological platform used for eNaira and was in talks for that with a company called R3 in early 2023. CBN is contemplating having complete control over the platform, while eNaira was initially developed in collaboration with a fintech multinational called Bitt. The change of technology platform vendor in less than two years might suggest a lack of vision of CBN regarding the technological infrastructure necessary for the seamless adoption of eNaira.

Lack of training

The CBN is expected to oversee the ledger and manage the system, while other financial institutions, such as banks, are to provide users with access to CBDC wallets. The bank staff is required to onboard users to the eNaira platform. However, it is observed that the bank staff is not sufficiently trained to be able to seamlessly bring users on board. This, in turn, negatively impacts the adoption of CBDC.

Trust issues

Nigeria has been considered a country with high money laundering and terrorist organizations funding risk (ML/TF). In February 2023, the Financial Action Task Force (FATF), a global money laundering and terrorism funding inspection organization, put Nigeria on its grey list owing to Nigeria not having adequate measures to curb such activities. Similarly, Basel Institute of Governance, a non-profit organization focused on improving governance and preventing corruption and other financial crimes, in its 2022 global ranking on ML/TF risks, placed Nigeria 17^th out of 128 countries, a high spot indicating a significant risk of ML/TF.

In the current design of CBDC in Nigeria, the CBN is equipped to monitor all users’ transactions using eNaira, potentially allowing it to detect and curb ML/TF activities and improve Nigeria’s standing in the risk rankings. However, this has turned out to be a double-edged sword in implementing eNaira. The high level of supervision of all transactions has brought apprehension amongst potential users in Nigeria, most of whom believe that eNaira was developed by the government to monitor the monetary transactions, breaching their right to privacy and potentially giving the government a tool to control them. This lack of trust significantly hampers the adoption of the CBDC in Nigeria.

Electricity and internet issues

With around 92 million people not having access to power in a population of 200 million, Nigeria has one of the lowest electricity access rates globally, as per the Energy Progress Report 2022 published by Tracking SDG 7. At the same time, the internet penetration in Nigeria stands at 55.4% in 2023. Seamless internet connectivity and power access are some of the critical prerequisites for the smooth implementation of the eNaira in Nigeria.

What would give eNaira adoption a much-needed push?

As the challenges to widespread adoption of the eNaira are multipronged, finding solutions to overcome the implementation challenges is not easy or quick.

One of the main infrastructural challenges, inadequate power and internet access, should be among the first to be addressed. One way to approach it is to create offline access to the eNaira platform. To achieve this, the CBN launched the Unstructured Supplementary Service Data (USSD) code for eNaira, meaning that Nigerians without internet-enabled phones can perform transactions with eNaira.

To facilitate rapid and seamless adoption of the eNaira, the CBN must make the CBDC available to everyone with a mobile phone. More and more people should be encouraged to use eNaira by incentivizing them through rebates while paying income tax. Another incentive example dates back to October 2022 when CBN offered discounts if people used eNaira to pay for cabs.

EOS Perspective

The eNaira has the potential to have a significant impact on the Nigerian economy. As transactions using eNaira are fully traceable, more widespread adoption of eNaira is expected to expand the country’s tax base by bringing higher transparency in payments, especially in informal markets. It will undoubtedly result in higher tax revenue, a development welcomed by the government.

With US$24 billion in remittance receipts in 2019, Nigeria is considered one of the key remittance destinations in Sub-Saharan Africa. As remittances are currently burdened with a 1-5% charge of the transaction value, removing these costs through the adoption of eNaira would bring more remittance income to the population and, indirectly, more capital to the Nigerian economy.

With the expanded tax base, cheaper and higher inflows of remittances, facilitated retail payments, welfare transfers, etc., the impact of the eNaira on the Nigerian economy is likely to be quite considerable. Indeed, at the time of launch, the CBN estimated that the eNaira should increase Nigeria’s GDP by US$29 billion over the first 10 years, contributing to the country’s economic growth and development. With the implementation challenges encountered so far, it is clear that these estimations were overly optimistic. Still, how well the CBN can do its homework and undertake well-directed steps to navigate the challenges remains to be seen.

12/01/2023by EOS Intelligence EOS Intelligence No Comments

Can Tourism Be the Ticket to Turkey’s Economic Recovery?

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Tourism is one of the most dynamic and fastest-growing sectors in Turkey. The country is highly reliant on tourism for foreign exchange earnings. However, the COVID-19 outbreak and the Russia-Ukraine war have affected the country’s tourism industry and resulted in a decline in tourist visits. While the spike in energy and commodity costs due to war has widened the current account deficit gap, it has also made tourism cheaper in the country due to a significant decline in currency value. This has resulted in an unprecedented influx of tourists once the pandemic subsided. Furthermore, various initiatives have been taken by the government to boost tourism in hopes of reducing the current account deficit, bringing down inflation rates, and supporting economic growth.

Turkey is known for its vast historical sites in the major cities of Istanbul and Antalya, as well as the Aegean and Mediterranean Sea coasts. The tourism sector employs about 2.6 million people in the country. The sector also contributes significantly to new tourism-related business sources and foreign exchange earnings and, thus, plays a crucial role in the economic development of the country, especially in the post-COVID era. In 2021, it is estimated that Turkey generated about US$25 billion in revenue from the tourism sector.

The country’s dependence on tourism has increased significantly over the past few years. Turkey’s travel and tourism sector contribution to GDP increased to 11% in 2019 as compared with 4.7% in 2014. As per the United Nations World Tourism Organization (UNWTO), Turkey was the sixth-most visited country in the world in 2019. While the country’s rank came down to 15th in 2020 due to the COVID-19 outbreak, it jumped to fourth in 2021 in the post-COVID-19 recovery phase.

In addition to this, as per the 2022 Economic Impact Report (EIR) by the World Travel and Tourism Council, Turkey’s Travel and Tourism GDP is expected to increase by about 5.5% on an annual basis over the next decade (2022-2032) and create over 716,000 new jobs in the country. The projected growth rate in the country’s travel and tourism sector is more than double the projected growth rate of the overall economy, which is expected to be 2.5% during the same time period.

Challenges faced by the tourism sector over the years

While the tourism sector remains one of the best-performing sectors in Turkey, it has faced its own set of challenges over the past several years. Inflation has been rapidly rising in the country since 2016 due to factors such as low-interest rates, the energy crisis, an increase in commodity prices, and declining currency value. This has significantly affected domestic travelers and business owners in the tourism sector. Several terrorist attacks, particularly in the southeast part of the country and Istanbul and Ankara by the Kurdistan Workers’ Party (PKK) and ISIS, also severely affected tourist visits and economic growth in 2016.

Owing to the 2020 COVID-19 outbreak, spending on tourism by international visitors in Turkey declined by about US$20 billion, a 70% decline in comparison with 2019. This led to a decline in demand and unemployment in related sub-sectors, including airlines, travel agencies, hotels, and car rental companies, among others.

Stringent measures and trade restrictions resulted in a significant decline in air traffic and affected the aviation industry. For instance, the National carrier, Turkish Airlines, reported a net loss of about US$761 million in 2020.

The hospitality industry was also hit due to a fall in tourism in the country. Most hotels faced significant revenue loss during lockdown months. According to the Turkish Hotel Association (TUROB), the hotel occupancy rate in the first nine months of 2020 was just 35.4%, a decline of 47.8% from the same time period in the previous year. Moreover, revenue per available room declined by 52.5% to US$24.7 during the same period.

Can Tourism Be the Ticket to Turkey’s Economic Recovery? by EOS Intelligence

The 2022 war between Ukraine and Russia further affected the tourism sector growth in Turkey. Tourist visits from Russia and Ukraine used to account for a significant share of the total number of tourists visiting the country for holidays from Europe. Over 4.7 million Russians and 2 million Ukrainians visited Turkey for vacation in 2021. While 2.2 million Russians visited Turkey during January-July 2022, it is expected that the total number of tourists from Russia in 2022 will fall short of the 2021 figures due to prolonged war and the imposition of western sanctions and flight suspension. The number of tourists from Ukraine declined to 374,000 in the first seven months of 2022, in comparison with 1.1 million during the same period in 2021. The war also spiked Turkey’s inflation rate, which touched about 80% in August 2022.

While the Turkish government is trying to attract tourists from Russia by collaborating with Turkish aircraft to transport foreign guests amid war, it is not likely to recover tourist visits to pre-war levels.

Depreciating currency value boosts tourism in the country

The increase in the current account deficit due to rising energy and commodity costs in the backdrop of war in Ukraine has led to a massive currency value plunge for the Turkish Lira in 2022. Turkey is a net importer of oil and gas, and a spike in energy costs amid the Ukraine-Russia war has widened the current account deficit gap. As per the Turkish Central Bank data, the current account deficit increased to about US$32.4 billion in the first half of 2022. As of September 2022, the Turkish Lira declined to about TRY18.3 per US$1 compared with an average of TRY 8.9 per US$1 in September 2021 and is likely to decline further in 2023 with rising inflation rates due to interest rate cut.

A significant plunge in the currency value has made Turkey a more affordable destination for holidays in comparison with other European tourist destinations. The cost of stay, food, and travel has become significantly lower for foreigners. Adding to this, there has been a decline in COVID-19 cases across the globe, which has also provided the tourism sector a strong boost.

The number of foreign tourists visiting Turkey increased by 94% in 2021 (compared with 2020), reaching 24.7 million. It further witnessed a y-o-y increase of about 128% for the period of January-July 2022 to reach 23.3 million tourists during the period. The country’s revenue from tourism also witnessed a y-o-y increase of 190% in Q2 2022 to reach US$8.72 billion. In 2022, Germany accounted for the largest share of visitors, reaching 2.9 million from January to August. The number of tourists from Middle Eastern and European countries has also increased significantly in 2022. This has also resulted in an increase in share prices of Turkish Airlines. For instance, the share value of Turk Hava Yollari AO, also known as Turkish Airways, increased by about 147% between January and May 2022.

Since Turkey is highly reliant on tourism for its foreign exchange earnings, the significant boost in tourism is likely to help lower the widening current account deficit in the country. A low current account deficit is likely to increase the value of the Lira and, thus, bring down the inflation rate and support economic growth. However, further decline in interest rates by the Central Bank is resulting in an increase in the inflation rate, which reached 80.2% in September 2022. Therefore, while tourism can help soften the blow on the economy by reeling in foreign currency and earnings, it is unlikely that it will single-handedly help the economy recover from the ongoing crisis. That being said, the government is undertaking several efforts to capitalize on the growth in the tourism sector and provide a much-needed cushion to the economy as a whole.

Initiatives aimed at boosting tourism in the country

The Turkish government realizes the role tourism can play in uplifting the economy and has been undertaking several initiatives to boost the sector. For instance, in 2021, the government adopted a new promotion strategy, ‘Go Turkey’, to boost tourism. The ‘Go Turkey’ website encompasses the use of advanced technologies such as artificial intelligence and communication models. It follows over 100 media and social media outlets which cover news about the country. Additionally, it also analyses positive or negative content on Turkey and determines promotion priority based on this analysis. The aim is to focus on advanced public relations by integrating all 81 provinces under the system and promoting tourism together as a single voice.

A few other initiatives taken up to boost tourism in the country include additional domestic flight routes, medical tourism support, transportation infrastructure development, and several hotel investments. In August 2022, Turkish Airlines signed a deal with the Services Exporters’ Association (HİB) to help increase medical tourism in Turkey to meet the medical tourism industry’s export service revenue target aimed at US$5 billion in 2023.

About US$172 billion has also been invested in communication and transportation infrastructure during 2003-2021, and the government is planning to invest an additional US$198 billion by the end of 2053. Some of the key ongoing projects include The MBB – Gari – Mezitli Metro, The IBB – Kazlicesme – Sogutlucesme Metro Line, and the IMM – Ucyol-Buca Koop Light Rail, among others, aimed at boosting the transportation network in the country. Additionally, according to the Hotel Association of Turkey (TÜROB), new investments were planned in about 30 provinces in the first half of 2022. The new investment incentive includes applications for 11 five-star hotels, 18 four-star hotels, and 26 three-star hotels.

As of March 2022, TUI Group, a leading German travel and tourism company, together with its partners in Turkey, planned on expanding its holiday program and developing a winter program across destinations to attract more tourists as compared with pre-pandemic levels.

Additionally, in July 2022, Cengiz Construction, a leading construction company, started the construction of villas and hotels in Bodrum’s Cennet Bay together with Bulgari, a luxury hospitality company, with a significant increase in international visitors in the country.

Furthermore, travel companies and agencies are focusing on the adoption of digital platforms to promote tourism in the country as people are becoming more technology savvy and prefer online booking. It also helps attract travelers from different countries across the globe. Hotel booking through digital platforms increased to 81% in 2019, up from 73% in 2014, and is expected to increase further with rising penetration of smartphones and easy internet access. Turkey’s Tourism Development Agency (TGA) is likely to spend about US$100 million to promote tourism in over 120 countries through internet platforms and media in 2022.

EOS Perspective

Tourism contributes a significant amount to the Turkish GDP and is likely to help limit the consequences of increasing commodity and energy prices by reducing the widening current account deficit gap and easing the pressure on the economy. That being said, it is unlikely to help the country recover completely from its economic woes. Although the depreciating Lira has made Turkey a very affordable destination for holidays, people operating in tourism businesses are significantly affected by the high inflation levels as well. Hotels and resorts are facing high costs of employee wages, food supplies, and car rents, among others, which hurt their profits. Interest rates cut by the Central Bank are further increasing the inflation rate. In addition to this, the key tourist season, which is the summer season for Turkey, lasts for just a few months, and the sector’s revenue and profitability fall in the winter season. This makes it evident that the Turkish economy must base its recovery on a balanced mix of support across several sectors.

21/11/2022by EOS Intelligence EOS Intelligence No Comments

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence

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Sri Lanka is currently facing its worst economic crisis since its independence and is the first country in the Asia-Pacific region to default on its external debt in over two decades. While the financial crisis is underpinned by political mismanagement, low tourism during COVID-19, and affected exports and payments due to the Ukraine-Russia war, growing Chinese debt in recent years is also considered to be a major factor in the country’s financial downfall. More so, with China withholding desired and critical support at this time, more questions are being raised over China’s relationship with Sri Lanka. This has provided India and to an extent, the West, with the perfect opportunity to strengthen its ties with the country and in turn limit China’s political and economic influence in the region.

In April 2022, the Sri Lankan economy witnessed an absolute collapse owing to skyrocketing inflation, shortage of essential goods such as fuel, food, and medicines, and foreign debt to the tune of US$50 billion with just US$2 billion in foreign reserves. The financial turmoil further spiraled into a political crisis with the president, Gotabaya Rajapaksa, fleeing the country amidst strong public outcry.

There is no one cause for the freefall of the economy. However, the situation is largely underpinned by unforeseen factors such as halt in tourism earnings due to the pandemic, the Ukraine-Russia war, which resulted in blocked payments from Russia for tea exports, along with deep-rooted issues such as political corruption, favoritism, and weak policies.

An example of weak governance could be the 2019 tax cuts and 2021 ban on imports of synthetic fertilizers and pesticides, which forced majority of farmers to go organic overnight. While the ban on pesticides import was aimed at saving US$400 million that were spent annually on import of fertilizers (in addition to reducing the adverse effect of pesticides on health and environment), the move backfired as the ban led to a substantial drop in crop production. As a result, Sri Lanka had to spend US$450 million on rice imports to cover up for the 20% drop in rice production levels. Moreover, it saw a decline in tea exports by 18% due to limited production. To offset this loss by farmers, the government had to spend several hundred million dollars as compensation and subsidies for farmers who lost their livelihoods. While the policy was removed after only five months for some sectors such as tea production, the damage was done causing a huge dent to the economy.

However, one of the key reasons for the country’s downfall is attributed to the government’s close alliance with China and to several economically unviable infrastructure projects that were green-lighted with China’s financial support and influence. Currently China is Sri Lanka’s biggest unilateral creditor.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

The Rajpaksa family, which has dominated Sri Lankan politics for the last two decades, has been a close ally of China, and has favored investments from the country at the cost of relations with India and other nations that have for long warned Sri Lanka (and other Asian and African countries) about China’s debt-trap diplomacy. Over the last 15 years or so, Sri Lanka’s government has authorized several Chinese infrastructure projects including some that were considered economically unviable.

One such example is the Sri Lankan Hambantota Port that was built by China Harbor Engineering Company on a loan of about US$1.26 billion taken by Sri Lanka from China. The project, which was also touted to be commercially unviable from the very start by several experts and was cleared primarily because of close ties between China and the Rajpaksa family, was a commercial failure. In 2017, the port was handed over to the Chinese government for a 99-year lease due to default in loan payment. Similarly, the Hambantota airport is considered to be one of the emptiest airports in the world and has not been attracting traffic as anticipated, while the Nelum Kuluna towers (touted to be the tallest building in South Asia), stand empty. This has resulted in huge debt to the Chinese government from projects that failed to generate revenue for Sri Lanka. Sri Lanka owes 10% of its total foreign debt to China alone.

Now in the midst of its worst financial crisis and ridden of the old political regime, Sri Lanka is realizing the burden of the foreign debt it has to China. Especially at the moment, when the support received from its once most valued partner has been lukewarm at best.

China has largely maintained silence on the current economic crisis faced by Sri Lanka as well as on the political turmoil and fall of the Rajapaksa clan. It has adopted a ‘wait and watch’ approach, which is being criticized globally. More so, China has only provided minimal relief support to the nation in crisis. To put it into perspective, China has provided only US$74 million of aid and has sent a large shipment of rice to Sri Lanka in response to the large-scale monetary assistance requested by the Rajapaksas, before their departure. Moreover, China has turned a deaf ear to Sri Lankan government’s plead for loan restructuring and is yet to consider the request for an additional financial aid of US$4 billion (which encompasses US$1 billion loan, US$1.5 billion credit line for Chinese imports and US$1.5 billion in bilateral currency swap). Furthermore, China has not cleared its stance on IMF’s relief package for Sri Lanka. While IMF is designing a relief package for Sri Lanka, it needs consent from all its creditors to write off some loans so that the relief sum is used for economic revival instead of just servicing foreign debt. While Sri Lanka is urging the IMF and China to work together, it is going to be a long round of negotiations.

On the other hand, India has been increasing its influence on its neighbor and has provided US$3.8 billion in monetary relief to Sri Lanka. In addition, it is willingly working with IMF to restructure loans to provide debt relief to the country in need. It is also collaborating with Japan to assist Sri Lanka during the crisis. Sri Lanka is of strategic importance to India as it connects several of its key trade routes to Africa and Europe. With China having close ties with Sri Lanka in the past, it had built a strong foothold in the Indian Ocean, which was threatening to India and led to a geopolitical rivalry between India and China.

This financial crisis comes as an opportunity to India to replace China as Sri Lanka’s preferred partner. In March 2022, the Indian government signed a deal with Sri Lanka to develop hybrid power projects in northern parts of the country after China suspended a similar project in December 2021, stating security reasons. Around the same time, India was awarded a US$12 million contract to build wind farms on three small islands in the Palk Strait (which lies between southern India and Sri Lanka) after the project was taken away from a Chinese firm. In March 2022, India’s National Thermal Power Corporation (NTPC) also signed an agreement with Ceylon Electricity Board (CEB) to jointly set up a solar power plant in Sampur, Sri Lanka.

Moreover, in July 2022, several investment proposals to strengthen the economic ties between India and Sri Lanka were discussed between officials from both countries. The key sectors that were identified for investments by India in Sri Lanka include renewable energy, hydrocarbon, ports and infrastructure, IT, and hospitality. The talks also encompassed the development of the Trincomalee Port on Sri Lanka’s northeastern coast and a proposal to use Indian Rupee for transactions in Sri Lanka. In August 2022, the Sri Lanka government also gave an approval to Lanka’s Indian Oil Corporation (LIOC, a subsidiary of India’s Indian Oil Corporation) to open 50 new fuel stations in the country. While LIOC already operates 216 fuel stations in Sri Lanka, it plans to invest US$5.5 million in the proposed expansion. In a separate deal in December 2021, LIOC gained control of 75 oil tanks in a strategically significant storage facility near Trincomalee.

For China, on the other hand, this crisis presents a precarious situation. While it holds 10% of Sri Lanka’s debt, the perception is that China is one of the key reasons for Sri Lanka’s downfall. With China’s other BRI partners, such as Pakistan, heading towards a similar fate, it is important for China to understand the grip it has in deciding the fate of countries over which it holds such significant power. At the same time, it will not like to lose the control it holds over this region to India that would gladly step in to displace China as the preferred partner.

EOS Perspective

The Sri Lankan crisis and its management is being closely observed by several global economies. While China has been Sri Lanka’s prominent partner over the last decade and a half, a new regime in Sri Lanka, China’s tepid response, and India’s support may lead to a shift in allegiances in the region. However, it is still early to offer any definite comments. China still holds significant influence in the region. This can be seen in the recent events, when in August 2022, China docked its ballistic missile and satellite tracking ship, Yuan Wang 5, (also termed ‘spy’ ship) at Sri Lanka’s Hambantota port for six days, despite significant resistance and raised security concerns by India. Therefore, while India is trying to get closer with Sri Lanka, it is very difficult to match China’s control over the region. That being said, there is definitely an opening to improve both political and business relations with Sri Lanka for India. While politically Sri Lanka is of strong geopolitical significance, the country can also prove to be a valuable economic partner with regards to growing trade as well as large scale power and infrastructure projects in the long run.

27/05/2022by EOS Intelligence EOS Intelligence No Comments

Commentary: India-Afghanistan Trade Hangs in the Air after Taliban Takeover

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Over the past two decades, India has invested substantial political, diplomatic, and economic capital to foster good relations with Afghanistan, especially since the fall of the Taliban in 2001. Trade has been one of the key components of these relations, with India being the largest market for Afghanistan’s exports in South Asia, accounting for 41.2% of its global exports in 2020. In 2021, Afghanistan’s exports to India were US$509 million, while imports from India constituted US$825 million.

However, the Taliban takeover of Afghanistan in August 2021 has impacted the India-Afghanistan relations on multiple fronts, especially damaging trade relations between the two countries. According to the Federation of Indian Export Organization (FIEO), the Taliban stopped all imports and exports from India through transit routes in Pakistan, also called the International North-South Transport Corridor (INSTC), the main trade pathway.

Textile industry

The route blocking has impacted many businesses across India. One of the sectors witnessing direct repercussions has been the textile industry. The halted trade resulted in stock worth US$540,000 being stuck as corporate bank holders in Afghanistan were not able to withdraw money and do any electronic transactions, as per the Afghanistan Central Bank’s order. Due to this, over 100 traders in Surat, Indian textile hub, were hit hard with delayed payments.

Sugar and dry fruit

India’s sugar exports to Afghanistan have been hit as well with Indian merchants reporting cancellations of orders as a result of the changed rule in Afghanistan. Indian traders were already treading cautiously about exporting to Afghanistan, insisting on advance payments due to the looming uncertainty and restricted trade routes. Following the political upheaval in Afghanistan, Indian sugar exports came almost to a halt in September 2021. Indian food ministry seemed optimistic and expected the trade to resume under the new Taliban regime. However, it is still uncertain how this will unfold, especially in the face of sugar export restrictions introduced by India in May 2022 to ensure domestic availability and to keep the local prices in check.

The new rule in Afghanistan has not only affected Indian exports, but also imports, with imports of dry fruit seeing a particularly major blow as India receives 85% of its dry fruit from Afghanistan. With the disruption of shipments, dry fruit prices in India saw a considerable increase (around 30%), especially as the timing coincided with the festive season (from October to December) in India, a period with the highest demand for dry fruit.

The carefully-nurtured trade relations between India and Afghanistan have been gravely affected post the Taliban takeover and routes closure. As both countries are each other’s important trade partners, there is some hope that trade relations could resume over time, although it would be naïve to expect the matters to fall back to the state from before the Taliban takeover any time soon.

Pakistan routes issue

India had already faced problems routing its exports and imports to and from Afghanistan, as Pakistan repeatedly denied India’s access to overland trade routes with Afghanistan in the past. As a result, India sought alternative routes: one route through Chabahar Port in Iran and an air freight corridor. Although these are not major trade routes, the opening up of such alternatives allowed India’s exports to Afghanistan to be less dependent on Pakistan. Pakistan’s trade routes denials in the past could be somewhat seen as a blessing in disguise, especially in the face of the current INSTC block.

However, the INSTC continued to be the key route for India’s exports to Afghanistan, and its shutting also caused some drastic consequences impacting India’s trade with other countries. Not only was this route used to export products to Afghanistan but it was also a very important trade route for India to reach European and Central Asian markets and vice versa. Although some goods are still being exported through the international North-South Corridor and the Dubai route, the INSTC is the fastest connection to a range of international markets. The closure will continue to have impact on trade timelines and pricing as traders will have to resort to longer trade routes or trim the volumes of goods traded.

EOS Perspective

When and how India-Afghanistan relations could recoup is yet to be seen, and will depend significantly on the Taliban’s recognition as a legitimate government. While the Taliban may have gained military control over Afghanistan and stated that they want better diplomatic and trade relations with all countries, they are still struggling for global recognition and economic support.

While there is not much that India can currently do regarding its trade situation with Afghanistan, it can look at nurturing and developing relationships with alternative trading partners, especially that trade with Afghanistan is unlikely to return to the previous normal. The Indian government needs to work on policies to aid traders and improve relations with other countries, such as Bangladesh and Turkey, to attempt to fill up the void left by the Taliban upheaval.

09/03/2022by EOS Intelligence EOS Intelligence No Comments

China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

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In 2013, China launched its infamous Belt and Road Initiative (BRI), which has gone about developing several infrastructure projects across developing and underdeveloped countries across the globe. However, BRI has faced significant criticism as it brought heavy debt for several countries that are unable to pay the loans. Moreover, it is believed that China exercises significant political influence on these countries, thereby building a sort of dominance across the globe. To counter this, several developed economies have come together to launch alternative projects and partnerships that facilitate the development of infrastructure across developing/underdeveloped countries without exerting significant financial and political bindings on them. However, the main aim of these deals seems to be to keep a check on China’s growing might across the Asian and African continent.

Read our previous related Perspectives: OBOR – What’s in Store for Multinational Companies? and China’s Investments in Africa Pave Way for Its Dominance

China’s BRI program has signed and undertaken several projects since its inception in 2013. As per a 2020 database by Refinitiv (a global provider of market data and infrastructure), the BRI has signed agreements with about 100 countries on projects ranging from railways, ports, highways, to other infrastructure projects and has about 2,600 projects under its belt with an estimated value of US$3.7 billion. This highlights the vast reach and influence of China under this project and its growing financial and political power across the globe.

China’s BRI – looked as a debt trap

Over the years, BRI initiative has been criticized for being a debt-trap for developing and underdeveloped nations, by imposing heavy debt through expansive projects over the host countries, the non-payment of which may lead to significant economic and political burden on them. While the USA, the EU, India, and Japan have been some of the most vocal critics of the BRI program, several participating countries now voice a similar message as they have enveloped in high debt under these projects.

In one such example, the Sri Lankan Hambantota Port was built under the BRI scheme by China Harbor Engineering Company on a loan of nearly US$1.26 billion taken by Sri Lanka from China. The project was questioned for its commercial viability from the very beginning, however, given China’s close relationship with the Sri Lankan government, the project pushed through. As expected, the project was commercially unsuccessful, which along with unfavorable re-payment plan resulted in default by Sri Lanka. Thus, in 2017, the Chinese government eventually took charge of the port and its neighboring 15,000 acres region under a 99-year lease. This transfer has given China an intelligence, commercial, and strategic foothold in a critical water route.

In a similar case, Montenegro is also facing a difficult time repaying its debt to China for a highway project under BRI. In 2014, Montenegro contracted with China Road and Bridge Corporation (CRBC) for the construction of a highway to offer a better connection between Montenegro and Serbia. However, the feasibility of the project was questionable. The Montenegro government took a loan of US$1.59 billion (85% of the first phase of the project) from China Exim Bank at a 2% interest rate over the next 20 years. However, the project, which is being undertaken by Chinese companies and workers using Chinese materials, has faced unplanned difficulties in completion, has put significant financial pressure on the Montenegro government. This is likely to further degrade the country’s economy, delay its integration with the EU, and leave it vulnerable to Chinese political influence. While the EU has refused to finance the loan altogether, it is offering special grants and preferential loans to the country from the European Investment Bank to facilitate the completion of the highway.

Moreover, as per a 2018 report by Center for Global Development, eight BRI recipient countries – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan – were at a high risk of debt distress due to BRI loans. These countries are likely to face rising debt-to-GDP ratios of more than 50%, of which at least 40% of external debt owed to China in association to BRI related projects.

Owing to the growing concern over increasing Chinese investment debt, several countries are now looking to reduce their exposure to Chinese investments and financing. In 2018, the Myanmar government, in an attempt to avoid falling deep into China’s debt-trap and becoming over-reliant on the country, scaled down China-Myanmar Kyaukpyu port project size from US$7.5 billion to US$1.3 billion.

Similarly, in 2018, the Malaysian government cancelled three BRI projects – the East Coast Rail Link (ECRL) and two gas pipelines, the Multi-Product Pipeline (MPP), and Trans-Sabah Gas Pipeline (TSGP) as these projects significantly inclined towards increasing the Malaysian debt to China to complete these projects.

China’s long-term ally, Pakistan, also opted out from China’s BRI in 2019, exposing some serious flaws with the project. In 2015, the two countries unveiled a US$62 billion flagship project under BRI, called the China-Pakistan Economic Corridor (CPEC). While it was started with an ambition to improve Pakistan’s infrastructure (especially with regards to energy), this deal resulted in severe debt woes for Pakistan as the nation started to face a balance-of-payment crisis. This in turn resulted in Pakistan turning to International Monetary Fund (IMF) for a three-year US$6.3 billion bailout package. Pakistani officials have even claimed that the CPEC project is equally (if not more) beneficial for China in terms of gaining a strategic advantage over India and by extension the USA. Thus, given its partial failure and increasing financial pressure on Pakistan, many ongoing projects under CPEC have been stalled or being rebooted in a slimmed-down manner.

Similarly, more recently, in April 2021, Australia scrapped off its deal it had with China under BRI, stating the deal to be over ambitious and inconsistent with Australia’s foreign policy.

Developed nations come together to offer alternatives

Given the push against BRI, several developed nations have come out with alternative infrastructure plans, either individually or in partnership with each other. The key purpose of this is to not only offer more viable options to developing and underdeveloped nations but also to keep a check on China’s growing global influence.

In one such move, in May 2015, Japan launched a ‘Partnership for Quality Infrastructure’ (PQI) plan, which came out as a direct competitor to China’s BRI. The PQI Japan (in collaboration with Asian Development Bank (ADB) and other organizations and countries) aimed at providing nearly US$110 billion for ‘quality infrastructure investment in Asia from 2016 to 2020. Although, on one side, this initiative is intended to secure new markets for Japanese businesses and strength export competitiveness to further bolster its economic growth, on the other side, politically PQI is a keen measure to counter China’s influence over its neighboring countries.

Just like Japan, India has also been a staunch critic of China’s BRI as it feels that the latter uses the BRI to expand its unilateral power in the Indo-Pacific region. Thus, to counter it, India, formed an alliance with Japan in November 2016, called ‘Asia-Africa Growth Corridor’ (AAGC).

The alliance aims at improving infrastructure and digital connectivity in Africa and connecting the continent with India and other Oceanic and South-East Asian countries through a sea passageway. This is expected to boost economic collaborations of India and Japan with African countries by enhancing the growth and interconnectedness between Asia and Africa.

The alliance claims to focus on providing a more affordable alternative to China’s BRI with a smaller carbon footprint, which has been another major concern in BRI project execution across Indo-Pacific region. The emphasis has been put on providing quality infrastructure while taking into account economic efficiency and durability, inclusiveness, safety and disaster-resilience, and sustainability. The countries do not have an obligation of hiring only Japanese/Indian companies for the infrastructure development projects and are open to the bids from the global infrastructure companies.

In more recent times, in May 2021, the EU and India have joined hands for a comprehensive infrastructure deal, called the ‘Connectivity Partnership’. This deal aims at strengthening cooperation on transport, energy, digital, and people-to-people contacts between India and the EU and developing countries in regions across Africa, Central Asia, and the Indo-Pacific region. Moreover, it aims at improving connectivity between the EU and India by undertaking infrastructure development projects across Europe, Asia, and Africa. It also focuses on providing a more reliable platform to the already ongoing projects between the EU and India’s private and public sectors.

While the two partners claim otherwise, the deal seems to be their collective answer to China’s BRI and its growing influence in the Asian, African, and European belt. Unlike BRI, the EU-India Connectivity Partnership aims to follow a clear rule-based approach to have greater involvement from the private sector with backend support from the public sector of both sides. This protects the host country against heavy debt and in turn restricts the level of political influence that both sides may have on the host country. This advantage over China’s infrastructure deal makes this project a serious competitor to the BRI in this region as host countries are most vary of falling into a debt-trap with China.

Another recent initiative to dethrone the BRI has been the ‘Build Back Better World’ (B3W), which has been undertaken by the Group of Seven (G7) countries in June 2021. This project, led by the USA, is focused on infrastructure development in low- and medium-income countries, and aims to accomplish infrastructure projects worth US$40 trillion in these countries by 2035. Further, the project is intended to mobilize private-sector capital in areas such as climate, health, digital technology along with gender equity and equality involving investments from financial institutions of the countries involved.

This project claims to be based on the principles of ‘transparency and inclusion’ and intends to cease China’s rising global influence (through BRI) as it aims to make B3W comparatively more value-driven, market-led, and a higher-standard infrastructure partnership for the host country. To ensure inclusivity and success of the project, the USA invited other countries such as India, Australia, South Korea, and South Africa to join the project. However, considering the nascent stage of the B3W development, the proceedings and details of the project are not explicitly clear, however, given that its intention is to help the USA compete with the BRI, it is expected to be well-funded, robust, and inclusive.

EOS Perspective

China’s BRI started on a very high note, garnering multi-billion-dollar infrastructure projects across a host of Asia, African, and European countries. However, over the last couple of years, increasing number of countries have become wary of its inherent problems, such as looming debt, increasing Chinese influence, and incompletion of projects. This has helped shift the momentum towards other developed countries that have for long wanted to counter China’s growing global influence. Using this opportunity, Japan, India, the EU, and the USA have come up with alternative infrastructure deals to compete with the BRI.

That being said, BRI will not be easy to shove aside as China has been in this game for several years now and has a significant time advantage. While countries such as India can try to compete, they do not have the financial might to take up projects that are strategically important and commercially viable.

Further, several of the alternative projects, such as India-EU Connectivity Partnership and G7 B3W aim to significantly involve the private sector for investments. While this is good news for the host countries where the project will be undertaken, private players will definitely be more concerned about financial viability of their investment and may not be able to match the BRI investment values, debt rates, etc. Moreover, geographic location puts China in an advantage for projects in the Asian region (when compared with the USA and the EU).

Therefore, while the attempt to dethrone China’s BRI has gained significant momentum and found proper backing, it is something that cannot happen in the short term. However, given the growing anti-China sentiment, it can be expected that with the right partnerships and project terms, BRI may start facing some serious competition from global powers across the globe.

21/12/2020by EOS Intelligence EOS Intelligence No Comments

Crippled by COVID-19, Tourism Gears Up to Rebound

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COVID-19 has disturbed practically every business vertical across the globe, and the travel and tourism sectors were one of the first ones to fall prey to the devastating effects of the pandemic. Complete lockdowns made taking a leisure trip or planning a vacation impossible for a long time to come. Not only were people unable to travel, but also multiple businesses serving in the tourism sector closed down temporarily, with some shutting their doors for good. Recently, leisure travel started to resume, but at a snail’s pace. In many countries, businesses, local authorities, and government agencies are developing a coordinated approach to aid the economic recovery of the sector. The actions and approaches taken in these uncertain times will lay the foundation for the future of the tourism sector.

The travel & tourism industry contributed US$ 8.9 trillion to the global economy in 2019. Leisure travel made up the majority of total travel & tourism revenue, standing at 78.6%. The trend was expected to follow in 2020, but the coronavirus outbreak crippled the entire leisure tourism sector as travels were canceled globally for at least three months (mainly from April to June, though in many locations, those cancellations have continued at least till autumn, and again at the end of the year).

Read more on the pandemic impact on business travel in our previous Perspective: Business Travel: On the Mend but Long Recovery Ahead

Travelers evolving preferences

Demand for domestic leisure travel is expected to rise as people are likely to be less inclined to travel to international destinations due to safety, hygiene, and uncertainty concerns. Unwillingness to spend on international travel in the immediate future also suggests that people are less inclined to make trips to international destinations. Self-driving trips to nearby destinations and weekend getaways are likely to increase in popularity.

In terms of traveler type, the group travel segment (irrespective of the size of the group) has always generated higher revenue for the global leisure travel market, in comparison to the solo traveler segment (in 2018, the group travel segment contributed nearly 73% of revenue to the global leisure travel market). Travelers were always able to take advantage of group discounts offered by hotels, resorts, airlines, and vehicle rental companies.

It is anticipated that group travel will continue to be a common practice among travelers (both during the pandemic and post-pandemic). However, to avoid crowded places, it is highly likely in the future, travelers will need (and perhaps also desire) to travel in smaller groups. This trend is expected to continue in the distant future, mainly due to the growing acceptance of social distancing norms as the new normal for sanitation and hygiene purposes globally. However, whether or not this type of travel arrangement will be monetarily favorable to various market stakeholders (in terms of discounts and margins when compared to larger group travels) and what discounted rates would consumers receive is yet to be seen.

It is highly likely in the future, travelers would need (and perhaps also desire) to travel in smaller groups. This trend is expected to continue in the distant future mainly due to the growing acceptance of social distancing norms as the new normal for sanitation and hygiene purposes globally.

Demand for private charter flights is also rising among leisure travelers. Wary of flying with regular flights, people are turning to charter planes for taking vacation trips to safe destinations (for both short and long-distance locations). However, this trend is expected to be short-lived mainly because only upper-class travelers will be able to afford such travel, and most of the demand for charter flights comes from business travelers (which is also limited to a need-only basis, for now, at least).

Moreover, interest in trips to off-the-beaten-path locations and niche tourism (such as adventure tourism, wellness tourism, and heritage tourism) is also expected to grow as these locations are likely to be considered safer to travel to in comparison to famous tourist locations, at least for some time in the foreseeable future.

Governments to the rescue

Travel and tourism businesses have been hit hard as they had to temporarily close business operations (many small and medium-sized business players are permanently out of business) and suffered heavy revenue losses. To mitigate the impact of coronavirus (on both the travel and tourism sectors and economies), many governments have offered aid packages to help the sector.

Governments globally have taken a range of measures to revive the sector in order to shield the economy and protect employment. For instance, Italy, one of the most popular tourist destinations and also one of the worst-hit economies by the first wave of the pandemic, announced a relief package to revive businesses in the travel sector. The package includes a US$ 645.7 million fund for the aviation sector, a US$ 129.1 million fund to support regions that generated lower revenue owing to lower number of people paying tourism taxes, US$ 19.3 million for tourism promotion, and subsidies worth US$ 129.1 million for museums and other cultural sites to recover lost ticket revenue for 2020, among others.

Similarly, under the Hong Kong government’s Anti-Epidemic Fund, licensed travel agents will receive a subsidy ranging from US$ 2,580 to US$ 25,803, travel agents’ staff and freelance tourist guides and tour escorts will receive a monthly subsidy of US$ 645 for six months, licensed hotels will receive a subsidy of US$ 38,705 or US$ 51,607 (depending on the size), and tour coach drivers a one-time subsidy of US$ 1,290. An additional US$ 90.3 million has been allotted to the Hong Kong Tourism Board for tourism promotion.

New Zealand announced that for the losses borne by travel agents for canceled travel plans by their consumers, the government will pay 7.5% of value for cash refunds or 5% of credit value to be capped at US$ 31.4 million.

In another example, the Australian government allotted a package of US$ 177.2 million for regional tourism, which will include US$ 35.4 million to support businesses in regions heavily reliant on international tourism and the remaining US$ 141.8 million to boost local infrastructure in regional communities, of which US$ 70.8 million will be used for tourism-related infrastructure. For regional tourism rebound, the Western Australian government has allotted US$ 10.2 million in the form of two funds – US$ 7.3 million as one-off cash grants of US$ 4,608 to up to 1600 individual small businesses and US$ 2.8 million as grants of US$ 17,723 to US$ 70,894 for tourism operators.

To revitalize tourism, some countries are assigning special reserves for campaigns as well. The UK initiated a US$ 12.9 million ‘Kick Start Tourism Package’ for the recovery and renewal of the tourism sector, wherein businesses can access government grants of up to US$ 6,462 to restart operations. Similarly, Norway allocated US$ 19.9 million for rebounding the country’s internal tourism businesses while Denmark assigned US$ 7.8 million for international tourism campaigns.

Various employee training programs and digital technology management processes are also being implemented to support the sector. One such example is the Singaporean government’s move to fund up to 90% of the training course and trainers’ fee for employee upgrading and talent development through its Training Industry Professionals in Tourism fund.

With minimal to no action happening in the travel and tourism segment, all these efforts are likely to not only protect jobs but also give the necessary push to restart the businesses, albeit from ground zero, in some cases.

Tourism-dependent least developed economies in deep waters

Considering that out of the 47 least developed countries identified by the United Nations, 45 consider travel and tourism of significant relevance to their economies in terms of job creation, growth prospects, and overall development, COVID-19 has a real potential to adversely affect these vulnerable countries.

In January 2020, through the ‘Visit Nepal Year 2020’ campaign, Nepal expected to attract two million visitors and generate US$ 2 billion in revenues in 2020. It should be noted that in normal circumstances, travel and tourism contribute nearly 6.7% to Nepal’s GDP. However, with the onset of the pandemic, not only was the campaign suspended, but also the tourist arrivals declined drastically – 177,975 tourists visited Nepal up until August 2020, only 24% of what had arrived during the same period in 2019 (739,000 tourists arrived between January and August). Also, nearly 20,000 tour and mountaineering guides risked losing jobs due to the cancellation of all mountaineering expeditions.

In Cambodia, where travel and tourism contribute nearly 26% to the nation’s GDP, the effects of the virus have also been damaging. The country may lose up to US$ 3 billion in revenues as the inflow of international travelers was down by 52% to 1.16 million between January and April 2020 (2.41 million visitors in 2019 during the same period). Up until May 2020, more than 45,000 jobs had been affected due to the pandemic.

Likewise, for countries such as Kiribati, Gambia, Sao Tome and Principe, Madagascar, Tanzania, Solomon Islands, Rwanda, and Comoros, the travel and tourism sector forms a key contributor to their economies by contributing 18%, 17.7%, 16.2%, 11.8%, 10.7%, 10.5% 10.2%, and 10.1%, respectively, to the countries’ GDPs.

In a normal scenario, the majority of the travel and tourism revenue in these countries is generated by leisure travel (for most of these countries, the leisure segment generates >50% of the revenue) as against business travelling. The sudden onset of the pandemic prohibited the entry of travelers (for vacationing purposes) within these countries, stopping cash inflow and thus hampering revenue generation.

Governments in most of these countries, through relief funds and aid packages, attempt to cushion the negative impact of the virus on the sector and the livelihoods of people involved. However, they are far from being able to fully offset the devastating repercussions, considering that these economies had already been at a disadvantageous position with limited growth and development even prior to the pandemic.

EOS Perspective

COVID-19 has altered most travelers’ perspective on vacationing, a fact that is unlikely to change in the short term. It is now upon the various stakeholders operating the leisure tourism sector to ensure that travelers will have an easy and reassuring path back to the sector’s services.

In the current scenario, regions where governments have been able to contain the spread of the virus, even if to a small extent, leisure traveling is slowly resuming. However, reduction in disposable income (due to unemployment), safety concerns, and overall economic slump are causing people to plan affordable regional trips rather than international vacations.

Globally, the impact of the pandemic on leisure tourism has been detrimental to the latter’s growth, to say the least. In some regions, people are slowly keener on booking vacation trips again but the volumes are low. They are likely to remain so, at least in the near future, especially with the returning spikes in number of infections and increased travel restrictions that follow.

Safety is not the only factor holding people back from traveling. Equally important is the financial crunch, fueled by job losses and uncertainty about the future. Travel and tourism industry stakeholders are observing this trend and trying to alter their strategies and business models in collaboration with government agencies to survive in these changing, challenging, and uncertain times.

Safety is not the only factor holding people back from traveling. Equally important is the financial crunch, fueled by the job losses and uncertainty about the future.

More so, partnerships among tourism industry stakeholders, regional communities, government authorities, and private sector enterprises would also contribute to the sector’s recovery. For instance, in October 2020, Nigeria Tourism Development Corporation (NTDC) partnered with Google to launch Google’s Arts & Culture collection called ‘Tour Nigeria’, which is an online exhibition that includes videos, photographs, and commentaries highlighting the country’s scenic beauty and cultural festivals. This collaboration aims to provide online training programs to small businesses and impart digital skills training to individuals in order to support the local tourism sector. As part of the initiative, a video series named ‘Explore Nigeria’ was also launched wherein social media influencers are roped in to publicize ‘best of Nigeria’ in order to reach a large number of viewers via influencers’ social media followers.

Post the lockdown, stakeholders in the travel and tourism landscape restarted their operations by evolving their product offerings (hotel stay packages with increased flexibility or airlines not flying to full capacity, thus practicing social distancing), experience services (such as tours and excursions or offering upgrades at no or minimal fee), and overall business approach. However, in some regions, this re-opening was short-lived and was paused by the second wave of the pandemic (with the third one on the horizon for spring 2021).

In the foreseeable future, it would not come as a surprise if customers can book a service provider for a leisure trip based on the hygiene and sanitation rating associated with it. Businesses are therefore being promoted on the basis of adopting upgraded cleaning procedures. It is highly likely that the pandemic may push tourism councils and governing bodies to come up with a hygiene assurance standard, either on a global or national level, that all players in the travel industry might need to abide by – this could be a bit of a stretch but such an initiative, if taken, is very likely to be embraced by many travelers.

Automation, though already at the forefront of travel and tourism, is likely to pick up pace. Travelers can expect to witness increased contactless interactions such as contactless check-in or check-out and usage of mobile apps such as hotel room keys, virtual reality for sightseeing, and chatbots and robots for concierge services. The usage of contact tracking apps to monitor traveler’s health and automatic disinfectors will also increase.

The adoption of digital identity and biometric tools will drive the travel industry in the future. Consolidated technology solutions offering a transparent and seamless flow of information ensuring travelers’ safety are essential. One such digital identity tool is the Known Traveler Digital Identity (KTDI), which holds the potential to offer a secure and seamless travel experience. An initiative by the World Economic Forum, KTDI not only aims at optimizing passenger processing experience but also manages risks in real time by monitoring a traveler’s health records.

Nevertheless, while it is optimistic to think that once the vaccine is widely available, the virus will be eradicated and travel will resume as before, one thing that the pandemic has brought to the forefront is that adaptability and adjustment are the key for travel and tourism sector players to keep their businesses running.

26/11/2020by EOS Intelligence EOS Intelligence No Comments

Business Travel: On the Mend but Long Recovery Ahead

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To contain the spread of coronavirus, many governments globally implemented country-wide closures resulting in discontinuation of large part of business activities. As a result, business-related travels also came to an abrupt halt as flights got cancelled and hotels temporarily shut down. Even after partial reopening, the continuing travel restrictions and the fear of contracting virus while travelling have restrained people from taking work-related trips. The shift towards working from home and conducting meetings virtually furthers the need to not travel. Thus, to revive the business travel sector, various stakeholders are devising new short and long-term strategies to minimize the impact of COVID-19 on corporate travel.

Business travel spending was expected to reach US$ 1.6 trillion in 2020. However, as per Global Business Travel Association’s estimates, due to coronavirus, the global business travel market is expected to lose US$ 820.7 billion in revenue in 2020. China, the epicenter of the pandemic, is expected to lose US$ 404.1 billion followed by Europe (US$190.5 billion) in revenue from corporate travel.

Read more on the pandemic impact on leisure travel in our next Perspective: Crippled by COVID-19, Tourism Gears Up to Rebound

Innovative travel protocols to the rescue

For the most part of 2020, tourism sector took a beating due to the multifaceted crisis presented by coronavirus. Governments globally are devising new travel practices to facilitate economic recovery for the business travel industry. This new form of international travel consists of green lanes, travel bubbles, and air bridges which essentially facilitates the reopening of international air travel between countries where the COVID-19 outbreak is under control. Furthermore, each business traveler must go through strict health screening at entry and exit points to ensure safe travel.

Governments’ globally are devising new travel practices to facilitate economic recovery for the business travel industry. This new form of international travel consists of green lanes, travel bubbles, and air bridges which essentially facilitates the reopening of international air travel between countries where the COVID-19 outbreak is under control.

The key idea behind these new travel corridors is primarily to bestow normalcy to the tourism sector with travels currently being reserved for business travelers for whom travel is a necessity rather than an option. Such planned travel movements are an effective means to give the necessary push to tourism sector, thus economically aiding the countries, even if to a small extent.

Singapore is one such country which carefully weighed its reopening options and as of late September had the following agreements in place:

Fast Lane Agreement with China and South Korea – enabling essential business and official travel between both countries for travelers carrying a Safe Travel Pass issued by a company or government agency of the respective country
Reciprocal Green Lane (RGL) with Malaysia, Brunei, and Japan – facilitating short-term essential business and official travel between both countries for up to 14 days carrying a Safe Travel Pass issued by a company or government agency of the respective country; RGL with Japan is also referred to as Business Track
Periodic Commuting Arrangement (PCA) Agreement with Malaysia – permitting residents of both countries holding work passes in the other country to enter that country for work
Air Travel Pass with Brunei and New Zealand – allowing short-term visitors (including foreigners who have remained in either of the two countries in the last consecutive 14 days prior to entry in Singapore) entry into Singapore and the travel reason may extend beyond official business

Under all agreements, all travelers entering Singapore have to abide by strict health measures such as pre-departure and post-arrival testing (to be paid by the traveler), serving stay-home notice, using the TraceTogether app (that allows for digital contact tracing by notifying the user if they have been exposed to COVID-19 through close contact with other app users), and adhering to a controlled itinerary for the first 14 days of stay (being prohibited from using public transportation).

Other than Singapore, Thailand had also planned to allow foreign business travelers from Hong Kong, Singapore, South Korea, Japan, and some provinces of China into the country from July as part of its business bubble travel approach. However, the discussions were delayed amid rising cases of coronavirus in East Asian countries where previously the outbreak was under control.

Hospitality players bending rules to appeal to corporate travelers

Business travel is of great importance for both airlines and hotels. Corporate travelers purchase high-value airline tickets, airport lounge access memberships, and reside in business hotels forming a major chunk of their clientele. However, hotel and airline industries have taken a major hit due to the ongoing pandemic.

Also, travelers currently show an unprecedented concern about their health and safety, and demand assurance that they can get on a plane or check into a hotel without worrying about the risk of infection. For hotels and airlines, safety has gone up their priority list, as they are developing premise-scrubbing protocols and ensure clear information about cleaning and safety procedures to their guests.

For years, hotel industry had been rigid in regard to guest’s arrival and departure timings, cancellation policies, etc. However, in the current scenario, corporate travelers’ expectations for hotels to offer flexibility have greatly increased. Thus, hotels are focusing on extending flexible services such as round the clock check-in/check-out option, accommodating refunds in case of room cancellations, and being more pliable to room upgrades (for free or at a minimum charge) so that guests can still work in case of event cancellations (or if they have to be in quarantine when traveling internationally for longer durations).

Other than offering generous discounts on flight tickets and hotel stays, airlines and hotels are highly likely to offer extra perks and bonuses such as fee waivers, extension on rewards redemption dates, bonus reward points, and upgrades, among others, as part of loyalty programs for corporate clients. Extension on expiration date of loyalty programs also make business travelers feel welcomed.

For hotels and airlines, safety has gone up their priority list, as they are developing premise-scrubbing protocols and ensure clear information about cleaning and safety procedures to their guests.

Corporates shake up travel maneuvers

Traveling priorities changed overnight during the coronavirus pandemic driving companies to reconsider their travel protocols and develop contingency plans. It is expected that 5-10% of business-related travel will be permanently eliminated as companies reduce their travel budgets and embrace virtual interactions, wherever possible, avoiding the need to travel. Moreover, companies are working on developing robust travel policies to account for safety before sanctioning any trip.

As a result of these changes, reliance on travel management companies for corporate travel is likely to increase, however, working with a trusted partner will be key to ensure travel safety. Companies will look for partners that can help them strategize travel plans, prioritize safety, and monitor spending. Round-the-clock travel support staff, flexibility to authorize last-minute itinerary changes, ability to track employee location online via an app, and expansive portfolio of hotels and travel partners to choose from in case of replacements, sudden cancellations, etc., are some of the key requirements corporates would expect their travel partners to offer. Availability of a single digital platform for travelers, agents, and company travel managers comprehending all travel-related information will make it easy to plan and track employee’s movement.

Availability of a single digital platform for travelers, agents, and company travel managers comprehending all travel-related information will make it easy to plan and track employee’s movement.

Many companies plan to resume their travel plans on a need-only basis with sales and marketing related trips being the first ones to recommence. Companies are keen to adopt a remote work location approach, wherever applicable, to limit the number of trips their employees take and to keep them safe. Additionally, including specific COVID-19-related do’s and don’ts around booking trips (via air, rail, or road), lodging, and rentals in the travel policy will prevent companies from being at litigation risk.

Corporate events take a backseat

Restrain on public gatherings and travel bans hit the corporate event industry the hardest. Many events were cancelled or postponed indefinitely while many events gradually shifted to virtual platform. It is anticipated that between mid-February and mid-March 2020, the corporate event and conferences industry globally lost US$ 26.3 billion and US$ 16.5 billion in potential contracts and revenues, respectively. With the rising number of virtual events, some of which might never return to the real world, the corporate events industry is in troubled waters, at least in the foreseeable future.

As of now, the fear of contracting the virus at an event and the comfort of participating in an event remotely will continue to stifle the recovery rate for the event industry. However, in the medium term, a blended approach (in-person attendance and digital medium) may offer some respite. Organizing multi-location small gatherings, wherein small groups of people (located in a particular area or smaller region) connect online with other such groups to form a larger event could be a successful model for conducting corporate events.

EOS Perspective

Demand for business travel is most likely to elevate gradually. Domestic travel entailing client meetings and site visits are likely to resume first. Even when travelling within the country, travelers will prefer to undertake self-driven trips and same day return tours to avoid using public transport or rental vehicles and staying at hotels. International trips are likely to take much longer to rebound owing to diverse government regulations and quarantine procedures in each country. Moreover, it is highly probable that travel related to global events and conferences may never return to pre-pandemic levels.

It can also be expected that for some time, the business travel industry will revolve around the degree of flexibility and sanitation standards offered to customers. Business travel industry stakeholders will have to continuously readjust their business policies, product offerings, and day-to-day functions as situation improves (or worsens) to accommodate changing customer needs. For instance, while some hotel chains may decide to temporarily shut their properties, others may offer them for quarantine purposes for travelers visiting for longer work durations.

Similarly, it is up to the airlines to decide which routes to fly, how frequently to fly, and how much to charge (they can offer to sell premium and business-class tickets at much discounted rates to attract travelers, to at least recover some costs, if not to make profits). Modifying their offerings to appeal to business travelers (when travel is neither necessity nor priority) during these uncertain and volatile times would be of great merit for players operating in this space.

Nevertheless, the road to recovery for business travel sector is bumpy. Business travel will certainly pick momentum but the recovery is likely to be slow. However, whether the sector will reach pre-COVID revenue levels (and how many years it will take) is still debatable. This being said, stakeholders in the business travel industry who are adaptable and operate around customer expectations are the ones who have a higher chance to sail through this less damaged.

15/06/2020by EOS Intelligence EOS Intelligence No Comments

Iran’s Tourism Industry Sprouts despite US Sanctions

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For several years, the US sanctions on Iran continued to have a detrimental impact on the economic growth of the country, with tourism sector being severely affected throughout the period under sanctions. The 2016 sanctions removal brought many visible changes to the development of the country, with hopes for tourism industry to benefit from the potential influx of travelers and new opportunities for the industry players.

Iran’s tourism was severely affected by the US sanctions

Iran was in a quivering state for more than 35 years owing to the never-ending political tensions with the USA post the 1979 Iranian Revolution. This led to no formal diplomatic relationships between the countries since 1980, and considerable sanctions imposed on Iran over the years. The impact of these sanctions was visible through a range of profound economic problems such as inflation, unemployment, poverty, and underdevelopment of virtually all industries in the country.

One sector that faced severe repercussions of the sanctions was Iran’s tourism industry. A negative image of the country was reinforced by the mainstream media as a flag-burning, west-hating nation, a fact that caused a major dent to Iran’s tourism industry. Adding to it, lack of resources to tackle this negative discourse had further left Iran in an international isolation over all these years. Despite being rich in culture, natural history and landscapes, a country with such an image could not persuade foreign tourists to visit.

Moreover, the US sanctions drastically affected Iran’s economy, which resulted in lack of proper resources to establish a well-equipped transportation sector, including airlines, trains, and buses, which in turn led to Iran becoming even less attractive to tourists. In addition, lack of proper hospitality infrastructure such as hotels, restaurants, roads, etc., further negatively impacted international tourists’ interest in Iran. Adding to it, the US sanctions also created greater tensions between Iran and the USA which led the US government to issue a travel advisory over all these years, which restricted its citizens to travel to Iran due to safety risks, such as getting kidnapped or arbitrary arrest and detention in the country. Thus, this resulted in almost no tourist from the western countries visiting Iran.

Iran’s tourism sector did witness a very modest growth over the years, largely thanks to pilgrimage tourism visiting the shrines and originating mostly from regional countries such as Iraq, Azerbaijan, and Turkey.

According to The World Bank data, the number of international tourists’ arrivals in Iran fluctuated, increasing from 2.7 million in 2006 to just 4.9 million visitors in 2014. Iran’s tourism industry was suffering particularly badly not only from the lack of arrivals of American tourists, but generally more affluent, well-spending tourists from western hemisphere, who were universally deterred by sanctions, poor state of the tourism infrastructure, as well as the negative image of the country created by international media.

According to official figures by Iran’s Culture Heritage Organization, during the sanctions period, tourism sector contributed around 2.0% to the country’s GDP (an average of US$7.5 billion in a year), leading to sluggish infrastructural development throughout that period. Iranian tourism sector’s hopes for change and better growth started budding when Iran signed a nuclear deal with six countries in July 2015, an event that led to the US sanctions being finally lifted.

The nuclear deal came as a ray of hope

Even before the US government removed the sanctions, the country started witnessing a slight increase in the number of foreign visitors. This was thanks to the nuclear deal signed between Iran and a group of six countries (the permanent members of the United Nations Security Council – Russia, France, UK, USA, and China, plus Germany) and the EU in July 2015. The deal included Iran’s commitment to restricting its nuclear activities, agreeing to keep check on the uranium stockpile, among other agreements.

The deal immediately mellowed down Iran’s negative image and released a positive message of lowered risks associated with visiting the country. This gave a slight boost to the tourism sector with a moderate growth of 4.5% with 5.2 million foreign tourists visiting the country in 2015, the highest arrivals number till date.

Another upward push on the growth trajectory came the following year, when the US government removed sanctions from Iran in January 2016, as part of the nuclear deal. This was expected to have a major impact on tourism sector as it offered hope for much needed economic stimulation, along with investments and development in the economy, and tourism sector in particular.

Post lifting of sanctions, tourism sector rejoiced with developments

The nuclear deal and removal of sanctions brought growth to the tourism sector, owing to removal of restrictions on imports of financial and transportation-related services. As a result, some European airlines, such as British Airways and Lufthansa, resumed direct flights to the country. As visa requirements were increasingly relaxed, tourists from western countries started to arrive. This in turn slowly raised the demand for accommodation leading to skyrocketing prices of hotel rooms. These changes finally generated higher income for local businesses such as hotels, restaurants, tourist guides, local transportation providers, and other players in the market. Iranians excitedly welcomed foreign tourists, including the Americans, along with the positive outlook for the sector’s growth.

The Iranian government, following the sanctions removal, initiated efforts to attract foreign investments with a clear agenda of reducing Iran’s oil dependency and boost the country’s economy, by betting on increasing revenues from tourism sector.

The initiatives included the launch of a scheme called “100 Hotels, 100 Businesses” that outlined 174 projects to be introduced to investors interested in hotel construction. This is was an ambitious scheme led by the Iranian government focusing on bringing the hotel industry of the country back on track. This scheme aimed at attracting investments for the construction of 100 hotels across 31 provinces with priority given to most popular regions such as Tehran, Kashan, or Mashhad. Also, through this scheme, the government focused on initiating joint ventures with foreign companies, benefiting both the government and foreign investors.

The government also announced other major plans for the development of tourism industry. These included creating regulations to facilitate investment, creating brands of hotels and restaurants, promoting new types of tourism such as sports, climate, and industrial tourism, developing knowledge-based human resources, creating a comprehensive system of standards, balancing inbound and outbound tourism by improving political relations, and creating a system for the protection and restoration of historical and natural sites.

The Iranian government further assured about the transfer of capital and profits overseas as per the foreign investment law of the country and full protection for the investors against any non-commercial risks such war or border conflict, confiscation or corruption, etc.

The government also started working on changing the image of the country and its tourism industry in the eyes of potential foreign visitors. One major change to this was to allow increased access to the internet, e.g. over social media, for the local players, which gave the restrained westerners a far greater insight into the country without the filters added from the mainstream media.

These efforts undertaken by the Iranian government were welcomed by several foreign investors, as they brought a sense of encouragement and stability to prospects of investing in the country.

This soon led to emergence of international hotel chains, the first being Novotel (296 rooms) and Ibis (196 rooms) hotels by the French hospitality company Accor which came to Tehran already in 2015. The company’s chief executive Mr. Bazin, at the launch of the venture, was optimistic in bringing up the chain of budget hotels such as Ibis and mid and upmarket hotels such as Novotel, Sofitel, and Pullman in 20 cities of Iran, but with no particular timeline given. Another hotel that came up in 2017 was Spanish Melia in Caspian Sea in 2017, built in partnership of Melia and its Iranian partners in Tehran, where the Iranians invested more than US$250 million while the management is taken over by Melia. The hotel includes 319 luxurious rooms, two residential towers, a sports center, and other services in an area of 18,000 square meters. Similarly, the Abu Dhabi’s Rotana Management Corporation planned to open four hotels in Iran’s major cities, Tehran and Mashhad, two in each. One of the hotels (a five-star hotel with 275 rooms and suites in Mashhad) was built within one year in 2017.

Overall, investments in the tourism sector started growing at a moderate level post the removal of US sanctions. According to World Tourism and Travel Council (WTTC) data on the capital investments in Iran’s tourism sector, 2016 witnessed an investment of US$2.75 billion contributing 3.25% of all investments in the country, as compared to the investment of US$2.63 billion in 2015. Since then, capital investments have been growing and are estimated to reach US$3.75 billion in 2028 with a share of 4.86% of all investments.

As a result of increased investments and rise in tourism sector, the GDP of the country also witnessed a slight growth. According to WTTC data, tourism industry’s share in the country’s GDP increased to 7.1% in 2015 contributing US$26.04 billion, up from 6.5% (US$24.38 billion) in 2014. However, it stabilized in the following years (6.8% in 2016, 6.4% in 2017, and 6.5% in 2018), with expected contribution to GDP of 6.52% amounting to US$35.39 billion by 2028. With developments in the tourism sector, the ministry of tourism is hoping to host nearly 20 million tourists per year by 2025.

But as the country started seeing benefits of the sanctions removal, with its improved economy thanks to rise in export and import, infrastructural developments, increase of foreign investments from 2016 to mid-2018, and boost in tourism sector and many other industries, the US government shocked the country by re-imposing sanctions in August 2018. The re-imposition was a consequence of the USA withdrawing its participation from the nuclear deal in May 2018 over political differences. This brought a blow to the Iranian economy with restrictions over imports and exports, thus again leaving Iran in economic struggle due to recession through shrinking oil exports.

EOS Perspective

The economic trembles coming from crude oil export ban led the Iranian government to increase its focus on tourism industry to offset the lost revenues. While American tourists are again restricted to travel to Iran, the country is still witnessing an increased influx of tourists from other regions, including the Middle East and Asia, a fact that cushions the impact of re-imposed sanctions.

Although a blessing in disguise for Iran, one of major reasons for the rise in tourism despite the US sanctions was the almost threefold fall of Iranian currency against US dollar which made travelling to Iran a low-cost affair for many foreign tourists, especially in comparison to other Middle Eastern destinations. This has contributed to the foreign tourists’ influx especially from the western countries – tourists with budget constraints as well as tourist arriving for medical tourism purposes. At the same time, the fall in rial value against the US dollar increased travel expenses for Iranians going overseas. This has constrained the outbound tourism, resulting in a decrease of 6.5% during 2018 (March 21- June 21 of Iranian Calendar).

The weakening of the currency was just one of the reasons that contributed to the slight growth in the Iran’s tourism sector, despite the US sanctions. The country continued to communicate its selling points and positive image to foreign audiences. Iran has been working on reinforcing its position as destination of religious pilgrimages, place with improved infrastructure, natural landscape, and cultural history. Through these messages on social media, the country seems to have attracted various sorts of tourists, from leisure travelers to artists to businessmen and more, resulting in growth of the industry.

According to deputy minister of the Cultural Heritage, Handicrafts and Tourism of Iran, the number of tourists’ arrivals increased by 24% during the first seven months of 2019 (starting from March 21 as per Iranian Calendar) compared to the same period previous year. In terms of tourists’ arrivals numbers, between March 2018 to March 2019, Iran witnessed 7.8 million foreign tourists visiting the country as compared to 4.7 million tourists from March 2017 to March 2018.

Encouraged by the growth in the sector, Iranian government undertook further initiatives to ensure the inflow of foreign visitors continues (and increases). In August 2019, a functionalized center was established in Cultural Heritage, Handicrafts and Tourism Organization, with a task to make decisions on reducing the negative impact of the US sanctions on tourism industry.

Following the US State Department’s warning (issued in May 2018) against travelling to Iran, citing it being an unsafe travel destination, the risk of fall of other western tourists’ arrivals increased. The Iranian government, to compensate for the fall, focused more on attracting tourists from regional countries. For instance, visa fees for Iraqi tourists (accounting for 24% of inbound tourists in 2018) were removed, while visas for Omanis were waived off.

Iran is also looking for tourists in more remote markets, especially in countries that are known to frequently stand against the USA in the international area. China is one such market which Iran is hoping to attract leisure tourism from by allowing visa-free entry of the Chinese nationals into Iran as of July 2019. Iran has an ambitious plan to increase the number of Chinese visitors from just over 50,000 in 2018 to 2 million in 2020.

Furthermore, in order to encourage foreign tourists to visit Iran, the Iranian government decided not to stamp their passports to help them avoid issues with subsequent attempts to travel to the USA. Additionally, the government is also trying to spur medical tourism by developing health tourism hubs, especially in Shiraz with a vision to increase the tourists travel for medical purposes as well.

These measures have been quite successful in promoting Iranian tourism growth, even though the American and other western visitors have (to some extent) been replaced with arrivals from the Middle Eastern and Asian countries. However, looking at the current situation of unrest, with the killing of Iranian general Qassem Soleimani in January 2020 by US military, and Iran responding to this with missile attacks on the US military troops in Iraq less than a week later, the conflict between the two countries is nowhere near its end. This political unrest, if continues, has a potential to again severely affect Iran’s tourism industry, as the country will be unable to grow the sector without reliance on western visitors. Tourists’ sentiments are tightly linked to political climate; therefore, it can be expected that only improved relations with the USA, and through this a better image, will allow Iran to truly develop its tourism industry and its economic situation in general.

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