The effect of electricity consumption on Uganda's economic growth

Abstract

This study empirically investigates the complex relationship between electricity consumption and economic growth in Uganda over the period spanning from 1991 to 2021. Through a comprehensive analysis of annual time series data, the study employs unit root tests, the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, to assess the stationarity of key variables, revealing varying characteristics among the variables under study. While certain economic indicators exhibit stationarity at the level, other variables, including Gross Domestic Product per capita, Gross Capital Formation, Labor Force participation rate, Total Electricity Net Consumption, and the values of Services, Agriculture, and Industry, are stationary at their first differences. Subsequently, an Autoregressive Distributed Lag (ARDL) model is applied alongside cointegration tests to examine both the long-run and short-run dynamics of this relationship. The results suggest a positive association between total electricity net consumption, gross capital formation, the labor force participation rate, and domestic credit to the private sector with economic growth. Cointegration analysis further confirms the presence of a sustainable long-run equilibrium relationship between these variables, indicating their collective impact on economic growth. Notably, a counterintuitive finding emerges, revealing a negative effect of total electricity net consumption on the value of services. This suggests that heightened electricity consumption is associated with diminished value in service-oriented sectors, potentially stemming from increased operational costs and supply disruptions in the electricity-reliant sectors. The study also highlights the presence of a statistically significant and negative Error-Correction Term, underscoring the long-run equilibrium between independent and dependent variables with a convergence rate towards equilibrium. These findings provide valuable insights for policymakers and stakeholders in Uganda, emphasizing the need for balanced strategies that enhance energy efficiency, diversify energy sources, and support innovation within the service sector. Additionally, the study highlights potential areas for further research, including panel analyses across East Africa or Sub-Saharan Africa and a deeper exploration of sector-specific electricity consumption patterns within Uganda.