Modelling electricity consumption in Ghana: the role of financial development indicators

Abstract

Access to electricity is touted as one of the ways of reducing poverty and improving the livelihoods of people. However, an increased consumption may also contribute to higher carbon dioxide emissions. While many studies have therefore assessed the determinants of electricity consumption for developing countries that have a lower electricity consumption and inadequate supply to meet demand, the effect of financial development on electricity consumption has been mixed. Consequently, this study models electricity consumption in Ghana with special attention on the effect of financial development. The results show that price reduces electricity consumption while income and population density increase consumption of electricity. When financial development is represented by domestic credit to private sector, domestic credit to private sector by banks and broad money supply, the effect is negative on electricity consumption. However, the effect is positive when financial development is represented by foreign direct investment. A financial index constructed from the four indicators shows financial development reduces electricity consumption in Ghana. Among other things the policy implication includes the need to formulate appropriate policy based on a specific indicator for financial development.