Financial Development and Energy Consumption in Sub-Saharan Africa: Evidence From Panel Vector Error Correction Model

Chigozie Nelson Nkalu,Samuel Chinwero Ugwu,Queen O Onyeke,Mwuese Patricia Kuma,Fredrick O Asogwa

doi:10.1177/2158244020935432

Chigozie Nelson Nkalu, Samuel Chinwero Ugwu + Show 3 more

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https://doi.org/10.1177/2158244020935432

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Abstract

This study examines the nexus between financial development and energy consumption/use in Sub-Saharan Africa (SSA) using a panel vector error correction model (VECM), cointegration, and Granger causality tests over the period ranging from 1975 to 2017. The annual panel time-series data generated from the World Bank database were tested for unit-roots processing using both the Levin–Lin–Chu and Im–Pesaran–Shin before proceeding to Johanson cointegration technique, the results of which motivated the choice of adopting the panel VECM rather than panel vector autoregression in the methodology. From the estimation result especially on the variables of interest, there exists a positive and statistically significant relationship between financial development and energy consumption in the long run, but not statistically significant in the short run. Further findings from the panel Granger causality test shows a unidirectional causality running from financial development to energy consumption, gross domestic product per capita, population growth to urbanization with no feedback. Among a series of policy recommendations, the monetary authorities in Sub-Saharan African countries should ensure optimal utilization of financial instruments and technologies available in the system to enhance more robust financial development to boost efficiency in energy consumption in the region in line with the sustainable growth theory.

Highlights

Energy demand and consumption are an integral part of human daily life as it is tied to achieving improved human well-being and making lives worth living
This study conducted an empirical enquiry into the relationship between financial development and energy consumption in Sub-Saharan Africa (SSA) while incorporating other controlling variables such as population growth, gross domestic product (GDP) per capita, and Urbanization
The study adopted panel time-series data sourced from the World Bank database (i.e., WDIs) under the time period spanning from 1975 to 2017

Summary

Introduction

Energy demand and consumption are an integral part of human daily life as it is tied to achieving improved human well-being and making lives worth living. As the annual population growth and urbanization experience rise continuously over the recent years, the level of energy use or consumption tends to triple as it is needed to maintain the quality of human lives and standard of living (Dash, 2013). Energy consumption or use means, “the use of primary energy before transformation to other end-use fuels, which is equal to indigenous production plus imports and stock changes, minus exports and fuels supplied to ships and aircraft engaged in international transport” (World Bank, 2019). In Sub-Saharan Africa (SSA), the level of energy consumption has experienced relative oscillations over the years (World Bank, 2019)

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