Financial Development and Energy Consumption in Sub-Saharan Africa: Evidence From Panel Vector Error Correction Model

Abstract

This study examines the nexus between financial development and energy consumption/use in Sub-Saharan Africa (SSA) using a panel vector error correction model (VECM), cointegration, and Granger causality tests over the period ranging from 1975 to 2017. The annual panel time-series data generated from the World Bank database were tested for unit-roots processing using both the Levin–Lin–Chu and Im–Pesaran–Shin before proceeding to Johanson cointegration technique, the results of which motivated the choice of adopting the panel VECM rather than panel vector autoregression in the methodology. From the estimation result especially on the variables of interest, there exists a positive and statistically significant relationship between financial development and energy consumption in the long run, but not statistically significant in the short run. Further findings from the panel Granger causality test shows a unidirectional causality running from financial development to energy consumption, gross domestic product per capita, population growth to urbanization with no feedback. Among a series of policy recommendations, the monetary authorities in Sub-Saharan African countries should ensure optimal utilization of financial instruments and technologies available in the system to enhance more robust financial development to boost efficiency in energy consumption in the region in line with the sustainable growth theory.