The energy consumption and gross domestic product nexus in Sri Lanka: cointegration and granger causality examination

Abstract

This research purposes to examine the bond between consumption of energy and gross domestic product of Sri Lanka over the period of time 1980 to 2017. To find the order of integration The Augmented Dicky-Fuller (ADF) and Phillips Perron (PP) unit root tests have used. Study examines long-run relationship through the application of Johanson Cointegration techniques. Dependent variable of this study is Gross Domestic Products (GDP) whereas gross capital formation, inflation, oil, gas, and electricity consumption are independent variables. This research has used secondary data and collected data is analyzed by using EViews 10 statistical software. According to the findings, gas consumption has statistically significant negative relationship to the GDP of Sri Lanka whereas labor force, gross capital formation, consumption of electricity and oil are statistically significant positive relationship with GDP. According to the Granger causality findings bi-directional causality exists in oil, gas and electricity consumption in Sri Lanka. This results reveal that consumption of electricity, gas and oil lead to GDP and GDP leads to electricity, gas and oil consumption. Oil and Gas implies the unidirectional causality with electricity. But, oil and gas have no causality in Sri Lanka. Hence, this paper concluded that consumption of energy has a statistically significant relationship with the gross domestic product of Sri Lanka. Thus, this study suggested that Sri Lanka should utilize energy consumptions in the manufacturing and commercial industries to achieve sustainable growth.