Electricity Consumption and Economic Growth in Kenya: an ARDL Bound Test Approach

Abstract

The purpose of this study is to analyze the causal relationship that exist between economic growth and electricity consumption in Kenya for the sample period 1990 to 2022 using ARDL bound framework. Technically, it entails determining the existence of a short run dynamics, long-run equilibrium relationship and causal link between the two variables. ARDL bound F-test is used to estimate the existence of a long-run equilibrium relationship as well as the short-term dynamics that exists between the variables. At 10% confidence level, the study provides evidence of the existence of a long-run equilibrium relationship between economic growth and electricity consumption as the calculated F statistics is greater than the upper bound I(1). The Error correction model from the ARDL bound F-test which indicates the short run dynamics, has an error correction term that is negative and significant at 5% level. The error term meets the threshold conditions to agree with the long-run equilibrium relationship established. For a shock in the GDP-energy consumption system, there is a 15.6% rate of adjustment to equilibrium. In the short-run, an increase in electricity consumption by 1% induces an increase in GDP growth by 0.69%. In addition, the diagnostics test shows that ECM model residuals have a constant variance, no correlation and normally distributed. In the long-run, electricity consumption has a positive effect on GDP growth. Granger causality test is used to determine the direction of causal link between the variables. The study provides evidence of unidirectional causal flow from GDP to electricity consumption at 10% confidence level. But there exists no causal flow from electricity consumption to GDP. Kenya is confirmed to fall in the conservation hypothesis. This implies that economic growth plays a critical role in electricity consumption growth rate.