Abstract
This paper examines the nexus between financial development and energy consumption in South Africa. To determine the long run and short run relationship between financial development and energy consumption in South Africa, the paper uses an Auto Regressive Distributed Lag bounds test (ARDL) and Granger causality test to establish the type of correlation between 1980 and 2018. ARDL bounds testing method offers concrete long-run estimates and t-statistics as it is flexible whether the adopted variables are I(0) or I(1). The study used per capita (kilogram, kg of oil equivalent) to measure total energy consumption, domestic credit to the private sector (percentage of gross domestic product, GDP) to measure financial development, real GDP growth (to capture economic growth), industrial value added (percentage of GDP) to measure industrialization, and urban population (percentage of total population) to capture urbanization. Results from ARDL showed that the relationship between financial development and energy consumption is positive in nature both in short-run and long-run. Granger causality test results revealed unidirectional causality from financial development to energy consumption. Policymakers need to formulate policy reforms that channels more credit to private sector development in order to bolster more energy use in South Africa. There ought to be proper balance between financial development and energy consumption to avoid electricity crisis.
Highlights
Unlike the common trend of grouping countries, this study aims to generate empirical evidence of the linkage between financial development and energy consumption specific to South Africa (Ahmed 2017)
Stationarity was attained at first differencing and outcomes of the formal unit root test as illustrated in Tables 2 and 3 showed that Energy Consumption (EC), Financial Development (FD) and Urbanisation (URB) were not stationary at levels whilst Industrialisation (IND) and Economic Growth (GDPC) were stationary at levels
Against the theoretical ambiguity on a priori expectation, the results indicate that urban population (% of total population) positively influences energy consumption
Summary
The need for what is called load shedding led to a flurry of concern about the current and future reliability of energy supply in South Africa, reducing economic growth by 1.1% (Vermeulen 2020). This raised questions about the lack of progress to recover about R9.9 billion capital cost in resolving Eskom’s financial and operational crises since the newly appointed cabinet of 2018 (Alexandra 2020). Power utility Eskom estimates that, without additional capacity, there will be an electricity supply shortfall of between 4000 and 6000 megawatts over the five years, as old coal-fired power stations reach their end life (Wirth 2020). A well-developed financial sector enables individuals, households and firms to consume more energy
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