The Impact of Electricity Consumption on Economic Growth in Sri Lanka

Abstract

This study investigates the dynamic relationship between electricity consumption and economic growth in Sri Lanka from 1990 to 2023, recognizing electricity as a critical driver of production and economic activities. Utilizing annual time series data, the study incorporates key macroeconomic variables including inflation, labour force participation, and gross fixed capital formation to examine their collective impact on GDP growth. Unit root tests indicate that most variables are integrated of order one, while inflation is stationary at level, supporting the application of the ARDL bounds testing approach. The ARDL bounds test confirms the existence of a long-run cointegration relationship among the variables, with the F-statistic exceeding critical values at the 1% significance level. Long-run estimates reveal that electricity consumption has a positive and significant effect on economic growth, while inflation and labour force participation exhibit negative impacts, reflecting the growth-suppressing effects of inflationary pressures and potential inefficiencies in the labour market. Gross fixed capital formation shows a positive but statistically insignificant effect in the long run. Short-run dynamics demonstrate that electricity consumption positively and significantly contributes to GDP growth, while rising electricity prices and inflation exert negative impacts on economic activity, highlighting the sensitivity of growth to energy costs and price stability. Gross fixed capital formation strongly drives growth in the short run, and the error correction term confirms rapid adjustment toward long-run equilibrium, with 85% of disequilibrium corrected within a year. The findings underscore the critical role of stable electricity supply in fostering both immediate and sustained economic growth in Sri Lanka. The study suggests that policies ensuring affordable and reliable electricity access, coupled with investment in productive infrastructure and inflation management, are essential for achieving long-term economic development in the country.