Electricity consumption and economic growth in Pakistan: menace of circular debt

Abstract

This study explores the causal links among electricity consumption, circular debt and economic growth. Covering the time span from 2005-2015 and using quarterly data, Granger causality based on vector error correction model (VECM) is employed to find the direction of causality after confirming cointegration. Next, the robustness of causality results is determined through variance decomposition analysis (VDA). The present study finds short run bidirectional relationship between circular debt and economic growth and between electricity consumption and economic growth as well. On the other hand, long run unidirectional causality is found running from circular debt and economic growth to electricity consumption. The findings of VDA reinforce causality results. The study finds that Pakistan despite being rich in natural resources (coal, water) is entangled in the web of circular debt that has made the blessings as curse which shows an example of poor governance. The results of study based on two econometric tools conclude with little more conviction that there is a need for exploitation of indigenous resources and wise allocation of available resources for electricity production and suggests electricity conservation policies including improvement of distribution and transmission capacity of its power system to reduce wastage of electricity along with less reliance on oil consumption in electricity production.