Electricity Consumption And Economic Growth In The Presence Of Structural Breaks: Evidence From Sri Lanka

Many studies that investigates growth and energy consumption relation uses cross country pooled data and ends with contradictory results which is still debatable and inconclusive. Such outcome is obvious due to country wide heterogeneous nature in the energy sector, its complementarities with the rest of the economy and measurement issues in energy variables. Motivating by this fact this study examines energy and growth relation using electricity consumption as a proxy for energy, in the presence of structural breaks. The country in focus is Sri Lanka, a middle income, small South Asian economy that entirely imports petroleum and coal resources. Multivariate Johansen cointegration results indicate that there is cointegration between growth and electricity consumption. The direction of the causality was tested using Toda Yamamota test, a test superior to conventional Granger causality test which indicate that the causality runs from growth to electricity consumption. Electricity demand is likely to be generated by rapid urbanization, industrial and service sector growth, since Sri Lanka has achieved 100% electrification of households. This paper contributes to this literature emphasizing country specific analysis in the energy and growth relation which could be hidden in a pooled analysis.