Effect of electricity consumption on industrial output in Tanzania (2005-2020)

Abstract

This study investigated the effects of electricity consumption on industrial output in Tanzania from the period of 2005 to 2020, using quarterly data from the National Bureau of Statistics, Bank of Tanzania and Tanzania Electric Supply Company. The Auto-Regressive Distributed Lag, Error Correction Model and Granger Causality were utilized to investigate the short-run and long-run effect of electricity consumption on industrial output; examine the causality effect between electricity consumption and industrial output in Tanzania. The findings revealed a long-run positive relationship between electricity consumption and Industrial output. This implies that a 1% increase in electricity consumption leads to about 0.12% long run increase in industrial output. Economic growth revealed a positive long run effect on industrial output in long run. This means that a 1% increase in economic growth resulted to a 0.39% increase in industrial output. Moreover, there was a long-run negative relationship between Foreign Direct Investment and Industrial output. A 1% increase in Foreign Direct Investment resulted to 7.77% reduction in Industrial output. The granger causality showed that electricity consumption granger caused industrial output in a unidirectional relationship between electricity and industrial output. Finally; the coefficient of the Error Correction Model was negative (-0.73) which implies that the interdependence between electricity consumption, industrial output and other macroeconomic variable included in the study corrects its previous period disequilibrium at the rate of 0.73% quarterly to reach the steady state. The study recommends, with industrialization of the economy, investment in electricity power generation should be increased to make more power available that meets the industrial sector demand at affordable prices to boost the output in the sector. The Government should strengthen its energy efficiency measures, which will ensure reliable electricity supply in the industrial sector. The government should also emphasis on electricity and allow the private entities to engage on off-grid power supply than depending on a single electricity supply and formulating policies that ensures reliable sustainable energy to industrialization.