Modelling the Informal Sector and Energy Consumption in Ghana

According to the IMF the informal sector accounts for 38% of economic activity in SSA and it is likely to grow further given the numerous regulations imposed on the formal sector. Since the activities of the informal sector are unrecorded, its energy needs are not considered when national energy demand and forecasting are conducted. Based on this, we investigate the effect of informal sector on energy consumption in Ghana. We apply the electricity consumption technique to construct the size of the informal sector. Also, relying on linear and nonlinear autoregressive distributed lag (ARDL) bound estimation techniques we quantify the effect of the informal sector on energy consumption. We find that the informal sector exerts weighty adverse effect on energy consumption. Further, we find that education, employment and foreign direct investment are channels through which the informal sector affects energy consumption. The findings have relevant policy implications. First, since a rise in the size of the informal sector decreases energy consumption, measures should be introduced to reduce its size to spur energy consumption. Second, higher level of education should be encouraged and measures put in place to attract huge FDI to dampen the growth of the informal sector