Investigating the Impact of Economic Shocks on the Renewable Energy Industry Growth in Sri Lanka: A Cointegration Approach Using the ARDL Model

Abstract

Introduction: Sri Lanka is a country that faced many adverse situations such as the tsunami in 2004, the civil war, covid pandemic, the Easter Sunday bombing and the economic crisis. Thus, it is important to study how these changes in economic variables impact economic activities of the country. The renewable energy industry, which is an industry with immense potential and high volatility is the center of economic activity and sustainability. Therefore, this study aims to investigate the impact that macroeconomic shocks have on the renewable energy industry returns in Sri Lanka.

Methodology: This study collected data for 5 firms in the renewable energy industry listed on the Colombo Stock Exchange for a sample period of 10 years, from 2014 to 2024. Using a quantitative approach, this study collected secondary data from CapIQ. The Colombo Consumer Price Index (CCPI), Average Weighted Lending Rate (AWLR), and Industrial Production Index (IPI) were taken as the explanatory variables to reflect economic variables and were obtained from the CBSL publications. These three variables were used to investigate the long-run and short-run relationship between the variables. The Autoregressive Distributed Lag model (ARDL) was used in this study to analyze the short-run and long-run relationship between the variables.

Findings: The results of the study revealed that the average weighted lending rate has a negative and statistically significant impact on the renewable energy returns in the long-run, and in the short run the Industrial Production Index has a positive and statistically significant impact on the renewable energy returns, and in the short run the AWLR has a negative and statistically significant impact on the renewable energy returns in Sri Lanka.

Conclusion: The findings of the study can be used by industrial experts to plan ahead and mitigate risk relating to economic shocks caused by changes in macroeconomic variables and by policy makers to set policies conducive to the growth of the renewable energy sector for sustainable development of the economy.