The Relationship between Financial Development and Energy Consumption in South Africa

Abstract

This paper examines the nexus between financial development and energy consumption in South Africa. To determine the long run and short run relationship between financial development and energy consumption in South Africa, the paper uses an Auto Regressive Distributed Lag bounds test (ARDL) and Granger causality test to establish the type of correlation between 1980 and 2018. ARDL bounds testing method offers concrete long-run estimates and t-statistics as it is flexible whether the adopted variables are I(0) or I(1).The study used per capita (kilogram, kg of oil equivalent) to measure total energy consumption, domestic credit to the private sector (percentage of gross domestic product, GDP) to measure financial development, real GDP growth (to capture economic growth), industrial value added (percentage of GDP) to measure industrialization, and urban population (percentage of total population) to capture urbanization. Results from ARDL showed that the relationship between financial development and energy consumption is positive in nature both in short-run and long-run. Granger causality test results revealed unidirectional causality from financial development to energy consumption. Policymakers need to formulate policy reforms that channels more credit to private sector development in order to bolster more energy use in South Africa. There ought to be proper balance between financial development and energy consumption to avoid electricity crisis.

The Impact of Financial Development on Renewable Energy Consumption: A Multidimensional Analysis Based on Global Panel Data

“…A series of literature analyzed the relationship of financial development and energy consumption from the empirical perspective. Several scholars [ 9 , 10 , 11 ] discovered that financial development has a positive influence on energy consumption, and others [ 12 , 13 , 14 ] found evidence that financial development could reduce energy consumption. Besides, the empirical results of some literature indicated that the relationship between financial development and energy consumption is complex.…”

The Impact of Financial Development and Economic Growth on Renewable Energy Supply in South Africa

“…Lefatsa et al [37] concluded that various methodologies employed by researchers across different periods in both developed and developing countries, including South Africa, have yielded mixed findings regarding the relationship between renewable energy, financial development, and economic growth. Upon examining the literature, it became apparent that the conclusions reached by Lefatsa et al [37] are consistent with the findings of this study as the literature reviewed revealed that the nexus between renewable energy supply, financial development, and economic growth is inconclusive due to the findings being inconsistent, highlighting a gap that the current study aims to address.…”

“…Moreover, a study by Shahbaz et al [36] on 34 developing countries, including South Africa, discovered that financial development has a long-term effect on renewable energy supply. In a South African context, Lefatsa et al [37] concluded that financial development positively impacts renewable energy consumption, and that the government should develop policies to encourage the financial sector to fund renewable energy infrastructure development projects. Inconsistent with the results of Lefatsa et al [37], Odhiambo [38] concluded that financial development did not impact renewable energy consumption in the long run in South Africa.…”

Effects of globalization, foreign direct investment and economic growth on renewable electricity consumption

“…Efficient resource allocation in financial markets boosts growth and increases private energy consumption [ 67 , [69] , [70] , [71] ]. Although, affordable prices in the financial markets improve the purchase of consumer durables, ultimately increasing the energy demand [ 64 , 72 , 73 ].…”