The Nigeria Energy Sector: Electricity Consumption and The Macroeconomic Performance (1980-2009)

Abstract

This paper is an effort to fill the gap in the link between EC and Macroeconomic variables (GDP, CPI, FDI and AGRIC) for Nigerian economy. It investigates the dynamic causal relationship between EC and the Macroeconomic variables. In order to find out which of these variables is affected by EC and which in turn affects EC both in the short and long run in Nigerian economy over the period 1980-2009, this paper uses the Standard Version of Granger and the Restricted VAR Model (VECM) for the analysis. Applying the Levin, Lin and Chu (LLC), Im, Peseran and Shin (IPS), Breitung t-stat, Fisher-ADF and Fisher-P.P tests as well as Hazri Z test to determine the stationary state of our data, the result shows that the variables are not stationery at their level but at first difference except the Hazri Z test which rejects the stationary of our data at first difference. Therefore, a co-integrating test was carried out to test the existence of a long run relationship in our data. The result suggests that there exists a three (3) co integrating equation in our data or a long run relationship among the variables. As such we apply the Vector Error Correction Model (VECM) to determine the effects of EC on macroeconomic variables and vice versa. However, before applying the VECM version of Granger, we carried out the Granger Causality Test. The emerging results from the test show that there exist a bi-causal relationship between EC and the Macroeconomic variables both in the short and long run except for FDI and CPI where a uni-directional causality was found running from EC to FDI both in the short and long run as well from CPI to EC in the short run. Variably, our results from the VEC regression shows that a unidirectional relationship running from the Macroeconomic variables to EC exist in the long run, bi-causal relationship between EC and CPI exist in the short run as well as a unidirectional causality running from GDP to EC in the short run. More also, in order to consolidate our findings; we applied the Impulse Response Function and Variance decomposition. The analysis on the most influence variables show that for the Nigerian economy the GDP, FDI and AGRIC have a greater effects from EC both in the short and long run as shown by the granger causality and impulse response function. Therefore, we concluded that all the macroeconomic variables influence EC as well as EC influence all the macroeconomic variables both in the short and long run. These findings are expected to shed a light and give guide to the on going Nigerian Electricity Policy.