On the Relationship between Electricity Consumption and Selected Macroeconomic Variables: Empirical Evidence from Nepal

Abstract

Nepal is becoming an aid dependent country. It is because of its limited and unmanaged internal resources to invest in socio-economic development. Past trend shows that majority of hydropower projects were built through aid. In this light this study attempts to investigate short- and long-run equilibrium between the variables-electricity consumption as dependent, foreign aid and GDP as explanatory variables included in the system of single equation model during the period 1974-2011. There are three co-integrating equations indicating a long-run equilibrium between the variables. The long-run elasticity coefficient reveals that the 1% change in foreign aid and GDP will change the electricity consumption by 0.27% and 2.27% respectively. The results of ECM indicate that there is both short- and long-run equilibrium in the system. The coefficient of one period lag residual coefficient is negative and significant which represents the long-run equilibrium. The coefficient is −0.72 meaning that system corrects its previous period disequilibrium at a speed of 72% annually.