Electricity consumption and economic growth: empirical evidence from a resource-rich landlocked economy

Abstract

This paper unfolds the short run and the long run causality between per capita electric power consumption (LEPC) and per capita gross domestic product (LGDP) for Nepal during the 1971–2010. The conventional Augmented Dickey Fuller (ADF) unit root tests indicate that the series are integrated of order independently and Johansen cointegration test confirms the presence of one cointegration among the variables. A vector error correction model (VECM) is then employed. It is found that LGDP Granger causes LEPC in the long run and weakly Granger causes in the short run. While reverse causality is found not to be true. Furthermore, impulse responses are included, which estimate how each variable behave upon the policy shock and variance decompositions segregate the portion of each variable on total variation. Finally, with a tight 67% confidence interval, in sample forecast and out of sample forecasts were made from 2011 till 2020. The results indicate that total electricity consumption has no causal role as a component of economic growth in Nepal. Thus, the electricity consumption policy should be designed and implemented as a cohesion to growth but not as cohesive to growth.