Modeling primary energy and electricity demands in Bangladesh: An Autoregressive distributed lag approach

Abstract

Bangladesh has been acknowledged as one of the fast-emerging global economies and its economy is expected to significantly grow in the years to come. As a result, the demand for energy in Bangladesh is likely to surge whereby meeting the rising energy demand would be a major policy concern for the government. Besides, the low per capita energy consumption levels have kept the nation's growth performances below par. Thus, identifying the macroeconomic factors that can elevate the energy consumption levels is pertinent for sustaining the economic growth rate of Bangladesh. Against this backdrop, this paper aims to model the macroeconomic determinants of both primary energy and electricity demands in Bangladesh between 1980 and 2018. The autoregressive distributed lag model, controlling for multiple structural breaks in the data, is used to ascertain the short- and long-run elasticities of energy demand while the Hacker and Hatemi-J causality analysis is applied to predict the causal relationships. The results from the econometric analysis, in a nutshell, reveal that the primary energy and electricity demands in Bangladesh are positively influenced by the higher levels of economic growth, household consumption expenditure, industrialization, energy imports, urbanization, and institutional quality. In contrast, higher prices of crude oil and greater incidences of income inequality are identified as the key factors that inhibit the overall energy demand in Bangladesh. Besides, energy demand is estimated to have bidirectional causal associations with economic growth, industrialization, and income inequality. Furthermore, unidirectional causations stemming from household consumption expenditure, energy imports, oil prices, and institutional quality are also witnessed. Hence, these findings impose several policy implications concerning sustainable management of energy demand in Bangladesh. It is recommended that the economic growth strategies should complement the energy sustainability objectives of the nation. Besides, it is also ideal for Bangladesh to reduce its imported energy-dependency to make use of the local energy resources. Furthermore, reducing income inequality and improving institutional quality is also recommended for enhancing the overall energy demand in Bangladesh.