Energy Consumption and Economic Growth in Sri Lanka: A Structural Break and Causality Analysis

Abstract

Energy consumption is a crucial factor in economic growth, industrialization, productivity, and technological progress. This study investigates the presence of structural breaks in the relationship between energy consumption and economic growth in Sri Lanka, using annual data from 1990 to 2023. In addition to energy consumption and economic growth, gross fixed capital formation and labour force participation are incorporated as key predictor variables. The Chow test is applied to detect structural breaks, and the Granger causality test is used to examine the direction and nature of causality between the variables. The confidence ellipse curve indicates a negative relationship between energy consumption and economic growth over the study period and positive relationship between economic growth and other explanatory variables. The Chow test results indicate the presence of structural breaks in 2004, 2008, 2019, and 2021. These breakpoints align with major economic and environmental shocks, including the 2004 Indian Ocean tsunami, the 2008 global financial crisis, the COVID-19 pandemic, and the recent economic crisis in Sri Lanka. The Granger causality test shows no short-term causal relationship between energy consumption and economic growth in the absence of structural breaks. However, a short-run unidirectional causal relationship exists when considering structural breaks. These findings suggest that external shocks have disrupted the energy–growth nexus in Sri Lanka. This study offers new insights for policymakers to develop effective energy policies and invest in renewable energy sources to ensure sustainable growth.