Can electricity consumption be useful in predicting Nigerian economic growth? Evidence from error correction model

• Author: Adebayo Adedokun
• Date: 01 June 2015
• Published date: 01 June 2015
• DOI: http://doi.org/10.1111/opec.12042

Can electricity consumption be useful in

predicting Nigerian economic growth?

Evidence from error correction model

Adebayo Adedokun

Lecturer, Department of Economics, Obafemi Awolowo University, Ile-Ife 234036, Nigeria.

Email: bayosmg@yahoo.com; a.adedokun@oauife.edu.ng

Abstract

This paper investigates Granger causality betweenelectricity consumption and Nigerian real GDP,

using Vector Error Correction (VEC) Granger Causality/Block Exogeneity Wald Test. The empiri-

cal result supports long run bidirectional relationship, which means that electricity consumption

predicts economic growth and vice versa in the country,though causality from electricity consump-

tion to economic growth is stronger.This finding is evidence in support of the country’s electricity

deregulation and reform programme, which is a core component of various projects towards the

realisation of Transformation Agenda (TA) and Vision 20: 2020, in which Nigeria aims to become

one of the 20 largest economies by the year 2020.

1. Introduction

In recent time, literatures have been intense on the verification of the relationship that

exists between electricity consumption and economic growth (Akinlo, 2009; Ciarreta and

Zarraga, 2010; Apergis and Payne, 2012, 2013, 2014; Tang et al., 2013; Aslan, 2014;

Nazlioglu et al., 2014). This inquisitiveness is to follow evidences in support of differ-

ences in the roles of electricity as against the aggregate energy usage in growth and devel-

opment process (Ghali and El-Sakka, 2004). Like any other developing economy,

availability of electricity alone is insufficient to account for all economic and social woes

facing Nigeria. Nonetheless, supply of electricity is necessary for its economic and social

progress; the epileptic supply of electricity is an acute problem facing Nigeria and many

other countries in Africa. Karekezi and Kimani (2002) argued that despite immense

energy potential of Africa, energy consumption in general and electricity consumption in

particular is very low.In suppor t of this, the relativeproportion of energy consumption of

countries in Africa to developed economies is insignificant; specifically, Davidson and

Sokona (2002) estimated that the average African still uses less than an English level of

electricity consumption about a hundred years ago.

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A need to study the relationship between the electricity consumption should not be

viewed as synonymous to that of energy consumption and economic growth; electricity

is an integral part of energy, but playsa different role in the growth process. In the devel-

oped economies, the role of energy is minimal, if not neutral, to economic growth. The

argument is premised on smallness of energy cost relative to the size of gross domestic

product (GDP) in the advanced economies; as such, energy consumption is unlikely to

impact significantly on the output growth. In other words, as the economy grows, pro-

duction structure is likely to shift towards service-oriented activities which make use of

lesser energy relative to the industrially dominated activities(Ghali and El-Sakka, 2004).

Conversely, improved service sector usually increases a need for electricity consumption.

For instance, a previous study by Rosenberg on the US economy suggests that the

economy was simultaneously less energy intensive but more electricity intensive

(Rosenberg, 1998).

The recent data show that the average electricity consumption per African increased

from 545 kWh in 1990 to 690 kWh in 2009. The increase notwithstanding, the inter-

country disparity is very high, ranging from 4532 kWh in South Africa to 1549 kWh in

Egypt, 265 kWh in Ghana, 203 kWh in Cote d’Ivoire, to as low as 121 kWh in Nigeria

(World Bank, 2013). Interestingly, the disparity is not limited to cross-country compari-

son but also sub-regional. While Sub-Saharan Africa consumption is 519 kWh, Sub-

Saharan Africa excluding South Africa is 181 kWh. If South Africa and Nigeria are

excluded, the average increases to 203 kWh for Sub-Saharan Africa. Meanwhile, the

North African average is 1356 kWh (World Bank, 2013). Based on this 2009 estimate, it

is implied that while high electricity consumption is paramount to North Africa and

South Africa, the level of consumption in other part of Africa is very low, while Nigeria

is one of the lowest consuming countries both inAfrica and the world. Key world energy

statistics show that consumption per head in Nigeria is 151 kWh in 2011 (International

Energy Agency, 2013).

The trend of electricity consumption in Nigeria, though low, has improved in recent

times. For instance, per head consumption which was 28 kWh in 1971, increased to

49 kWh in 1981, 88 kWh in 1991, it declined to 75 kWh in 2001 and increased to

121 kWh and 151 kWh in 2009 and 2011, respectively.It has also improved significantly

in relation to previous decades. For instance, percentage increase over two decades, from

1981 to 2001, is 53 per cent, while the increase from 1981 to 2009 and 1980 to 2011 is 147

per cent and 208 per cent, respectively. However, in just a decade (2001 to 2011), the

increase is 101 per cent, which doubled the improvementover two decades, 1981 to 2001

(WorldBank, 2013).

The argument being raised is that poor growth and development in Nigeria could be

attributed to low electricity consumption. To this effect, pressure is high on the govern-

ment to prioritise the provision of electricity. The argument is direct; if electricity

Adebayo Adedokun126

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