Modelling the Impact of Extreme Events in Forecasting Tourism Demand

Since the turn of this century, the international tourism industry has been affected by numerous unanticipated political, economic and environmental events. Most notably, these include the attacks in New York City on September 11, 2001, Bali Bombings, the Second Gulf War, the 2004 Indian Ocean tsunami, shocks to oil price, among many others. Against this back drop, the worldwide tourism industry has been growing. This is a very promising forecast for the industry and should be taken seriously. This paper focuses on tourism destination countries, which give strong emphasis to the sustainability of their tourism industries, particularly the Maldives. Shareef (2004) classifies such countries as Small Island Tourism Economies (SITEs). The main attributes of these economies are as follows. SITEs are sovereign island economies, surrounded by the tranquil ocean with white, unspoilt sandy beaches, where tourists travel by air and sea. These economies overwhelmingly depend on earnings from international tourism for foreign exchange to engage in international trade, expanding civilian infrastructure for sustainable development, improvement in healthcare and advancement of educational facilities and many others. [GRAPHICS] As can be seen in Figure 1, since 1994 international tourist arrivals to the Maldives has been growing rapidly with a strong linear trend. Tourist arrivals are highly seasonal with the peak tourist season being the European winter months from December to March. Furthermore, the deseasonalized monthly tourist arrivals given in Figure 2 displays the adverse impact of the events on 11 September 2001 in New York City and the Indian Ocean Tsunami in 2004. This paper addresses impact of the December 2004 Indian Ocean tsunami on international tourism demand and its macroeconomic policy implications for the Maldives. An assessment of the economic impact of the tsunami on inbound international tourism demand is particularly important to the Maldives due to 2 main reasons. First, the large proportion of the Maldivian economy is dependent on international tourism and any adverse shock to the Maldivian tourism industry would affect the economy as a whole. Second, of all the countries in the Indian Ocean region that were affected by the by the tsunami, Maldives was the only country that was entirely hit by this devastating environmental calamity affecting the whole population and civilian infrastructure.