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Bulletin of Energy Economics http://www.tesdo.org/JournalDetail.aspx?Id=4 A Note on Electricity-Growth Nexus in Bahrain Helmi Hamdi a, Rashid Sbia b a

CERGAM-CAE Aix-Marseille University, Financial Stability Directorate/ Central Bank of Bahrain b Economic Studies and Research Directorate, Ministry of Finance- Kingdom of Bahrain, P.O Box 333, Manama, Kingdom of Bahrain Abstract The present study examines the relationship between electricity consumption and economic growth using the data of the Kingdom of Bahrain. The study covers the period of 1980-2008. The Johansen-Fisher cointegration approach is applied and results indicate the presence of cointegration between electricity consumption and economic growth. The VECM Granger causality analysis reveals that the relationship between electricity consumption and economic growth in long run is bidirectional but in short run, economic growth is Granger cause of electricity consumption. Keywords: Electricity consumption, Growth, Bahrain JEL Classification: O13; Q43; C33

I. Introduction The historical energy shocks and their effects on global economy have showed the key role of energy (including electricity) in an economy. Therefore, numerous scholars have been investigating the relationship between energy (electricity) consumption and economic output. Empirical works on electricity-growth nexus include single country case studies as well as set of countries or regions. Further, methods used vary from one study to other. It comprises of different time series and panel techniques. The pioneer work of Kraft and Kraft [1] established unidirectional causality running from Gross National Product to energy consumption in US economy. This result initiated a discussion among policy makers as well as energy economists and some scholars suggested a contradictory conclusion comparing to Kraft and Kraft [1] as Shahbaz and Lean [2]. From the empirical literature, we can summarize results in four different sets according to the direction of causality between energy (electricity) consumption and growth. The first set of the literature suggests bidirectional causality between energy (electricity) consumption and economic growth (Jumbe, [3]; Ghali and El-Sakka, [4]; Wolde-Rufael, [5]; Shahbaz et al. [6]; Shahbaz and Lean, [2] and Shahbaz et al. [7]). The second set of the literature study establishes a causality running from economic output to energy consumption (Kraft and Kraft, [1]; Chang and Wong, [8]; Narayan and Smyth, [9]; Jamil and Ahmad, [10] and Shahbaz and Feridun, [11]. It points out that implementing energy conservation policies will hamper economic activity and encourages energy exploration to avoid any energy supply disruption that may negatively affect economic growth. However, the third set found an opposite direction of causality. This means a unidirectional causality running from energy consumption to economic growth. The last set notifies that there is no causal relationship between economic growth and energy consumption (Akarca and Long, [12]; Yu and Choi, [13]; Stern, [14]). This is known as neutrality hypothesis.

- 28 Citation: Hamdi, H., and Sbia, R., (2013). A Note on Electricity-Growth Nexus in Bahrain. Bulletin of Energy Economics, 1(4), 28-34.

Hamdi and Sbia / Bulletin of Energy Economics, 1(4), 28-34. The aim of this empirical study is to find the causal relationship between electricity consumption and economic growth in case of the Kingdom of Bahrain within a bivariate framework. Since late eighties, the government of Bahrain embarked in numerous infrastructure projects to improve the well-being of Bahraini citizens and attract foreign capitals. Consequently, the economy has known a buoyant growth and the population has been growing quickly. As result, energy consumption has augmented in critical way and electricity is becoming a pillar in the local economy. The data on electricity consumption (kWh per capita) is used as the proxy for energy consumption and per capita real GDP (constant 2000 US $) have considered as economic growth in case of the Kingdom of Bahrain. Augmented Dickey–Fuller (FADF) and Philips–Perron (PP, [15]) unit root tests will use for finding the stationarity of the variables and for investigating the causal relationship Granger causality will be used. II. Electricity in Bahrain At the present time, with the rapid development of new information technologies, electricity infrastructure is playing key role in an economy for many motives. Firstly, as Bahrain is the center of finance in the Gulf Cooperation Council (GCC) region, electricity is a vital element in banking and financial sector. Secondly, Bahrain is moving toward more diversified economy and to reduce its dependency on oil, thus electricity is an important factor to reach this goal (Hamdi and Rashid [16]). Thirdly, Bahraini households are among the highest users of information and communication technology (ICT henceforth) in Arab countries (WTI [17]). Bahraini households extensively use ICT such as Internet and broadband and other technologies such as cell phones, personal computers, digital video recorders, digital music players, etc. Hence, electricity is the first element of the knowledge-based society in Bahrain. The role of electricity in the economy of Bahrain appears to be central; consequently it is worth to examine whether electricity consumption contribute to economic growth in order to implement the right energy policies. The Kingdom of Bahrain has five electric generation plants namely: Manama power station (Gas Turbine), Muharraq power station (Gas Turbine), Sitra power and water station (Gas Turbine and Steam Turbine), Riffa power station (Gas Turbine), Hidd power and water station (Gas Turbine and Steam Turbine). The total electricity generating capacity is around 2.9 Giga watts. To face the upward demand and to escape recurrent power failure during the peak summer months1, the kingdom encouraged independent projects (IPPs) and engaged in privatization process of some state-owned power sector assets. Al Ezzel plant is the first output of this initiative. It has started commercial operation in 2006. Al Dur plant is another example (Hamdi and Sbia [18]). Bahrain depends on gas in its power generation. Nevertheless, gas reserves are systematically deteriorating. Consequently, gas exhaustion is a close future issue. At the current speed of demand and supply paths of gas consumption, there will be a shortage of gas in the near future. The government is conscious about natural gas issue and is considering various options to secure sources of gas imports. Presently, none of the import options seems to offer clear scenarios. The major part of electricity generation will continue to be based on natural gas and for that The Gulf Cooperation Council (GCC) plans a unified power grid in the year 2004. In the first phase grids of Saudi Arabia, Bahrain, Qatar and Kuwait are connected and this project is completed in 2009. The remaining GCC members, UAE and Oman have integrated their grids in 2012. The aim of this project is to deliver electricity without any disconnectivity even any member’s domestic supply is disturbed by any emergency. So on the bases of these comments the study will be answer the following question. Does electricity consumption Granger cause economic growth in case of the Kingdom of Bahrain? 1 In summer of 2004 a one-day countrywide power failure occurred due to mismanagement of power flow.


Hamdi and Sbia / Bulletin of Energy Economics, 1(4), 28-34. III. Empirical Results The empirical study is based on annual data over the period of 1980-2010 collected from the World Bank Development Indicators (CD-ROM, [19]). Table-1 summarizes the main statistics associated with Electricity consumption per capita (Kwt) and GDP per capita (constant 2000 USS) in the Kingdom of Bahrain. We find that electricity consumption and economic growth have normal distributions confirmed by Jarque-Bera statistics. The correlation coefficient reveals that electricity consumption and economic growth are positively correlated and have high correlation. The average electricity consumption per capita is 8003.61 Kwt with a maximum of 11984.94 Kwt in 2004 and a minimum of 4637.43 Kwt in 1980. In Bahrain, electricity consumption per capita grows at an astonishing rate and it has doubled in less than twenty years (from 4637.43 Kwt per capita in 1980 to 8875.75 Kwt per capita in 1999). Regarding, GDP per capita, the mean is 11398.04 dollar, with a maximum of 14788.89 dollar and a minimum of 8710 dollar. At the first stage of econometric analysis this study uses the Augmented Dickey–Fuller tests (F-ADF) and Philips–Perron (PP) tests [15] for unit root problem. On the second stage for investigating the cointegration Johansen-Fisher method is used and at the last step Engle and Granger, [20] causality test is used for finding the causal relationships of the variables of the model.

Table-1: Descriptive Statistics and Correlations ln ECt ln Y t Variables Mean 8.9482 9.3279 Median 8.9925 9.3537 Maximum 9.3914 9.6016 Minimum 8.4419 9.0723 Std. Dev. 0.2868 0.1652 Skewness -0.0231 0.1050 Kurtosis 1.8903 1.8121 Jarque-Bera 1.4903 1.7583 Probability 0.4746 0.4151 ln ECt 1.0000 ln Yt 0.8834 1.0000

Variables ln EC t ln Yt

Table-2: Unit Root Analysis for Bahrain ADF Test PP Test Level 1st difference Level 1st difference -1.6854 -4.5637*** -1.7294 -4.4874*** -0.6704 -3.5515*** -0.8674 -3.4675***

Decision I(1) I(1)

Note: The lag lengths are selected using SBC. *** Denotes the rejection of the null hypothesis at 1 per cent level of significance. After checking the integration of our four variables at order one, I(1), we selected the optimal lag length of underlying Vector Auto Regression (VAR henceforth) using the conventional model selection criteria. These criteria established that the optimal lag length is one.

III.I Unit Root test: Augmented Dickey Fuller and Phillips-Perron We use the Augmented Dickey–Fuller (F-ADF) and Philips–Perron (PP, [15]) unit root tests. The results are reported in Table-2. The test statistics of electricity consumption and economic growth are statistically insignificant at level (variables are converted into logarithm before analysis). By applying the first difference, we found that both variables are stationary at first difference and reject the null - 30 Citation: Hamdi, H., and Sbia, R., (2013). A Note on Electricity-Growth Nexus in Bahrain. Bulletin of Energy Economics, 1(4), 28-34.

Hamdi and Sbia / Bulletin of Energy Economics, 1(4), 28-34. hypothesis of non-stationary. On the other hand, the same results are given by the PP test. The cointegration test (Trace test and Max-Eigen value) suggests the existence of one cointegrating vector at 1 percent level of significance. This implies that variables are cointegrated for long run relationship in case of Bahrain.

Table-2: Unit Root Analysis for Bahrain ADF Test PP Test st Level 1 difference Level 1st difference -1.6854 -4.5637*** -1.7294 -4.4874*** -0.6704 -3.5515*** -0.8674 -3.4675***

Variables ln EC t ln Yt

Decision I(1) I(1)

Note: The lag lengths are selected using SBC. *** Denotes the rejection of the null hypothesis at 1 per cent level of significance. After checking the integration of our four variables at order one, I(1), we selected the optimal lag length of underlying Vector Auto Regression (VAR henceforth) using the conventional model selection criteria. These criteria established that the optimal lag length is one.

Table-3: Results of Johansen-Fisher Cointegration Test Hypothesis Trace Statistic Maximum Eigen Value R=0 21.02689** 18.25522** R1 2.771664 2.771664 Note: Trace test and Max-eigen statistics indicate 1 cointegrating eqn(s) at the 0.05 level. ** denotes rejection of the hypothesis at 5 per cent level. **MacKinnon-Haug-Michelis (1999) p-values.

III.II Long Run and Short Run Normally, cointegration confirms the long run relationship of the variables of the model but this relationship does verify the direction of the causal relationship between the variables. For finding the short run relationship of the variables and causal relationship, the VECM is used. To test for causality, the VECM is specified as follows: p

q

 ln ECt  1   1i  ln ECt i   1i  ln Yt i  1 ECTt 1  1t i 1

p

q

 lnYt   2    2i  lnYti    2i  ln ECt i  2 ECTt 1  2t i 1

(1)

i 1

(2)

i 1

Where ECT is expressed as follows: ECT t  ln EC t   0   1 ln Yt

(3)

The results of long-run equilibrium relationship for economic growth and electricity consumption functions are given below. We find that in economic growth function, electricity consumption contributes economic growth at 1 per cent level of significance. All else is same, a 1 percent increase in per capita real GDP will increase electricity consumption by 0.5088 percent in long run. Similarly, electricity consumption function reveals that economic growth also adds in electricity demand. A 1 - 31 Citation: Hamdi, H., and Sbia, R., (2013). A Note on Electricity-Growth Nexus in Bahrain. Bulletin of Energy Economics, 1(4), 28-34.

Hamdi and Sbia / Bulletin of Energy Economics, 1(4), 28-34. increase in economic growth will linked positively with electricity consumption by 1.5336 per cent by keeping other things constant. ln Y t  4 .7745  0 .5088 ln EC t

2

(10.2669)*** (9.7962)*** ln EC t  5 .3578  1.5336 ln Yt

(-3.6683)*** (9.7962)*** Table-4 illustrates the results of the VECM Granger test. We have performed three Granger causality tests: short-run causality, long-run causality and joint short and long run. The first test indicates the significance of the sum of lagged terms of each explanatory variable by the mean of joint Fisher test; the second test indicates the significance of the error correction term by the mean of the t-test and finally the third test is the short-run adjustment to restore the long-run equilibrium. The empirical results reveal that in long run, the feedback effect is found between electricity consumption and economic growth in Bahrain. Short-run causality is found only from electricity consumption to economic growth, but not true from opposite side. Hence, there is unidirectional Granger causality. The coefficient of the ECT is found to be significant in economic growth equation and electricity consumption equation alike. The significant results of the interactive terms of change in electricity consumption shows that there is unidirectional causality running from electricity consumption to economic growth in case of the Kingdom of Bahrain.

Table-4: The VECM Granger Causality Results for Bahrain Type of Granger Causality Dependent Short-run Long-run Joint (short- and long-run) Variables ln Et ECTt 1 ln Yt , ECTt 1 ln E t , ECTt 1 ln Yt F-statistics [Significance] F-statistics ln Y t 4.077** -0.189** 4.829*** …. …. ln E t 0.759 -0.387*** 6.275*** …. …. Note: *** and ** Denote the rejection of the null hypothesis at 1 per cent and 5 per cent levels of significance, respectively.

The results of the error correction term show whatever the shocks occur in the short run will be adjusted in the long run. The empirical evidence also shows that the interactive term of economic growth also confirms that there is unidirectional causality is running from electricity consumption to economic growth in short run. The results confirm that there is bidirectional causality between electricity consumption and economic growth. IV. Concluding Remarks and Future Directions The study investigates the causal relationship of electricity consumption and economic growth in case of the Kingdom of Bahrain for the period from 1980 to 2008. We used a time series analysis based on error correction method (ECM). First set of tests show the existence of a cointegration relationship and results of the long-run elasticities demonstrate that economic growth (electricity consumption) is positively and 2

Note: *** shows significance at 1 percent level and T-statistics are given in small parentheses


Hamdi and Sbia / Bulletin of Energy Economics, 1(4), 28-34. significantly linked to per capita electricity consumption (economic growth). Results of the Granger causality test indicate the bidirectional relationship between electricity consumption and economic growth in long run. This inter-dependency between electricity and economic growth means that electricity consumption contributes to economic growth and vice versa in long run. In fact, as we discussed earlier in the introduction, the changing in life-styles and the improving living standards of Bahraini citizens during the past decade has driven energy demand. Thus, per capita income has increased. As in many countries in the region, the most demanded energy service in Bahrain is the airconditioning due to the hard weather conditions. In this case, one conclusion to be drawn is that a shortfall in the power supply will certainly results in slumps in economic activity in the long run. In this case, avoiding shortfall is a most important energy policy to guarantee continuous growth of economic activities. This could be done by building larger generating capacity to satisfy the different sectors of the economy and to develop new sources of energy such as wind energy and green energy. Turning now to short run dynamics; results reveal the unidirectional causality from electricity consumption to economic growth but not the reverse. This means that electricity consumption does contribute to economic growth in short-run but the inverse is not right. Here, the situation shows that once the GDP per capita increases, Bahraini electricity demand does not increase in short run but does it in long run. However, as soon as electricity consumption increase this will directly have a positive impact on the level of GDP. Future research agenda could include the role of ICT in driving electricity consumption and thus economic growth. Moreover, a sectoral analysis could shed light on major players in term of electricity consumption. It would help to further oriented policy advises. Reference [1]. Kraft, J., Kraft, A. (1978). On the Relationship between Energy and GNP. Journal of Energy and Development 3, 401-403. [2]. Shahbaz, M., Zeshan, M., Afza, T. (2012). Is Energy Consumption Effective to Spur Economic Growth in Pakistan? New Evidence from Bounds Test to Level Relationships and Granger Causality Tests. Economic Modelling 29, 2310-2319. [3]. Jumbe, C. B. L. (2004). Cointegration and Causality between Electricity Consumption and GDP: Empirical Evidence from Malawi. Energy Economics 26, 61-68. [4]. Ghali,-K. H., El-Sakka,-M. I. T. (2004). Energy Use and Output Growth in Canada: A Multivariate Cointegration Analysis. Energy Economics 26, 225-238. [5]. Wolde-Rufael, Y. (2005). Electricity Consumption and Economic Growth: A Time Series Experience for 17 African Countries. Energy Policy 34, 1106-1114. [6]. Shahbaz, M., Tang, C.F., Shabbir, M. (2011). Electricity Consumption and Economic Growth Nexus in Portugal Using Cointegration and Causality Approaches. Energy Policy 39, 3529-3536. [7]. Shahbaz, M., Lean, H. H. (2012b). The Dynamics of Electricity Consumption and Economic Growth: A Revisit Study of their Causality in Pakistan. Energy 39, 146-153. [8]. Chang, J., Wong, J. F. (2001). Poverty, Energy and Economic Growth in Singapore. Working Paper, Department of Economics, National University of Singapore. [9]. Narayan, P.K., Smyth, R. (2008). Energy Consumption and Real GDP in G7 Countries: New Evidence from Panel Cointegration with Structural Breaks. Energy Economics 30, 2331-2341. [10]. Jamil, F., Ahmad, E. (2010). The Relationship between Electricity Consumption, Electricity Prices and GDP in Pakistan. Energy Policy 38, 6016-6025. [11]. Shahbaz, M., Feridun, M. (2012). Electricity Consumption and Economic Growth Empirical Evidence from Pakistan. Quality & Quantity: International Journal of Methodology 46, 1583-1599. - 33 Citation: Hamdi, H., and Sbia, R., (2013). A Note on Electricity-Growth Nexus in Bahrain. Bulletin of Energy Economics, 1(4), 28-34.

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