Energy consumption and financial development in South Africa: An empirical investigation

Abstract

This paper examines the dynamic relationship between energy consumption and financial development in South Africa during the period 1980-2013. In order to address the omission of variable bias, the study has included economic growth as an intermittent variable between financial development and energy consumption – thereby leading to a trivariate causality model. Unlike some previous studies, this study uses three proxies for financial development: i) domestic credit to the private sector as a percentage of GDP as a proxy for financial institutions’ depth; ii) bank credit to bank deposits as a proxy for financial institutions’ stability; and iii) bank lending-deposit spread as a proxy for financial institutions’ efficiency. Using the ARDL-bounds testing approach to cointegration and ECM-based Granger-causality test, the study finds that there is a distinct long-run unidirectional causal flow from financial development to energy consumption in South Africa. This applies – irrespective of which proxy has been used to measure the level of financial development. This finding is not surprising given the level of financial development in South Africa. The study, therefore, reiterates the need for South Africa to explore affordable energy-mix in order to cope with the increased finance-led energy demand.