The Nexus of Electricity, Economy and Capital: A Case Study of Botswana

Abstract

The study examines the relationship between electricity consumption and real GDP in Botswana, the world’s leading diamond producer, using a trivariate framework incorporating capital formation from 1980 to 2008. The research methodology applies the Zivot and Andrews (1992) unit root test, the bounds test for cointegration, and the Granger causality test. The findings indicate unidirectional causality from electricity consumption to real income, aligning with prior research by Altinay and Karagol (2005). Long-term estimates confirm this relationship, demonstrating that increased electricity consumption positively impacts economic growth over time. Additionally, unidirectional causality is observed from capital formation to real income, emphasizing the crucial role of investment in economic expansion. These results highlight Botswana’s dependence on reliable electricity for sustaining capital formation and overall economic performance. Given the nation’s reliance on energy-intensive industries, ensuring a stable electricity supply is essential for maintaining growth. The study suggests that Botswana should prioritize investments in energy infrastructure to enhance economic resilience and support long-term development. Policymakers must focus on diversifying energy sources, improving efficiency, and expanding capacity to meet growing electricity demands. Strengthening energy policies will enable Botswana to sustain its economic progress while mitigating potential disruptions caused by energy shortages. By reinforcing its energy infrastructure, Botswana can ensure continued economic stability and growth, particularly in sectors crucial to its development, such as mining and manufacturing.