ENERGY CONSUMPTION AND FINANCIAL DEVELOPMENT IN NIGERIA

This study investigates the impact of energy consumption on financial development in Nigeria and also examines the direction of causality between energy consumption and financial
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development from 1981-2013. The study is motivated by the dearth of work on the relationship between energy consumption (in disaggregated form) and financial development measured by the ratio of broad money supply to GDP (M2/GDP), especially in Nigeria. The frameworks of our analyses are the Autoregressive Distributed lag Bounds testing approach (ARDL) and the Vector Error Correction Model (VECM). The result confirms the existence of long-run relationship when M2/GDP is the dependent variable. Moreover, in the long-run electricity consumption and GDP are significant and positively impact on financial development, while fossil energy consumption and GDP are significant and positively impact on financial development in the short-run. The outcome of the investigation of the long-run causality shows that there is a bi-directional causality between financial development and electricity consumption. The results of the short-run causality show that there is a uni- directional causality running from fossil energy consumption to financial development. A bi- directional causality also exists between GDP and financial development in the short-run. There is a uni-directional causality running from fossil energy consumption to GDP and a uni-directional causality running from electricity consumption to GDP without a feedback. Based on these results, we conclude that energy consumption and other relevant control variables have strong link with financial development in Nigeria. The study therefore recommends that in formulating monetary policies, loose monetary policies which have the tendency to address energy needs of the country should be enunciated. In addition to this, policies to boost energy supply through diversification of the energy sources should be prioritized. If well pursued this will boost energy consumption and enhance economic growth. With improvement in economic growth, there is the tendency that more financial services will be demanded and thus elevates the development of the financial sector.