Evaluating the impact on electricity subsidies for industries in Rwanda

Abstract

Electricity one of the forms of energy has proven to be indispensable to improved social and economic welfare and is the most important factor for reducing poverty and raising living standards since it has a direct positive link with industrial production growth. However, its affordability is still a real challenge especially for industrial sector. In Rwanda, in order to support industrial sector, the Government prioritized to offer subsidies to industrial sector by offering low electricity tariffs to industrial customers comparing to other customers. This study evaluates how the consumption of electricity has affected the production of industrial sector from 2005 to 2019. It also examines the impact of electricity subsidies versus industrial output. In this study, the assessment of such subsidies was undertaken by execution of the complementary F-statistic, Dummy variable and structural break tests using a statistical software STATA. In fact, according to the empirical outcomes of the study, there is a positive long-run relationship between the consumption of electricity and the production growth within the industries. i.e subsidizing electricity rises electricity consumption and this affects positively the industrial productivity. The study proves that subsidizing electricity for industries in the country causes the industrial productivity to be increased by almost twelve percent. However, even if the research empirically proves that subsidizing electricity for industries stimulates the production growth, it is alleged that the total expected contribution of such subsidies do not match to the total expected production growth. Therefore, the Government should aim to redesign or amend the subsidization policy by including provisions that should reassure the efficiently use of the offered subsidies to balance their cost with the desired production growth.