Nexus between Electricity Demand and Gross Domestic Product in Sri Lanka : A Cointegration Analysis

Electricity has become one of the most essential factors in economic growth in Sri Lanka. This paper applies a simple econometric model to identify the causal relationship between Gross Domestic Product (GDP) and electricity consumption in industrial and commercial sectors of Sri Lanka for the period 1979 – 2006. A causal relationship between GDP and electricity demand was found. Engle - Granger two-step procedure for cointegrating regressions was employed to estimate the short run dynamics, as well as the long run equilibrium or cointegrating relationship between electricity demand and GDP. A unique equilibrium relationship was found. According to the long run relationship, when the GDP increases by one million rupees, the electricity demand goes up by 1.3 Giga Watt hours. The speed of adjustment coefficient is 73 percent and this shows that when the GDP deviates from long-run equilibrium, the electricity demand variable will return to its long term equilibrium at a rate of 73 percent