Is there really a growing middle class or are loans driving increased consumption?

Tuesday, February 18th 2014

Is there really a growing middle class or are loans driving increased consumption? By Jevans Nyabiage and Emmanuel Were Kenya: The talk of town is that Kenya’s middle class is growing. On the face of it, it is evident — the display of affluence is conspicuous. From the trendy clothes and flashy new cars on the streets to the increasing number of gated housing estates and up-market clubs and restaurants, there is a marked increase in the number of people living life in the fast lane. Luxury brands are also setting up in the shopping malls dotting Nairobi. Soon, these high street brands, such as Foschini, Bossini and Clarks, will find their way into the fastest-growing counties like Machakos and Nakuru. The debate Could this be the indicator of a rising middle class? Or is it a façade that Kenyans have deep pockets, and that what we are actually witnessing is a rise in consumerism — defined as a preoccupation with the acquisition of consumer goods? This debate is important now more than ever because Kenya’s economy is at an inflection point.

Share prices are up at the Nairobi Securities Exchange; the country is investing heavily in energy in the hope that cheaper power will be available for manufacturers and households; and the March elections were navigated peacefully. Credit is flowing into the economy at cheaper levels than three years ago when interest rates went through the roof, and investment bankers are earning their bread as mergers and acquisitions increase. To cap it all, The Economist will next week host the Kenya Summit 2014, where local and international investors and politicians will discuss how to get Kenya to middle-income status. For the country to get there, Kenyans will have to spend more on production than on luxuries. So will the much-touted rising middle class drive Kenya to the next level? Or is the hard cold truth that we are just a nation driven by an insatiable appetite to work hard and then consume our hard-earned sweat?

The African Development Bank (AfDB) says about 16.8 per cent, or around 6 million Kenyans, could be in the middle class. They include in this group anybody with an annual income exceeding Sh335,400 ($3,900), or who spends between Sh172 ($2) and Sh1,720 ($20) a day. However, the World Bank admits that less than 2 per cent of Kenyans can spend between $10 (Sh860) and $20 a day, with 45 per cent earning $1.25 (Sh107.5) a day. This means nearly one in two Kenyans is classified poor, while the official unemployment rate stands at 45 per cent. Mr David Cowan, an economist for Africa at financial services group Citi, defines the middle class consumer as someone earning at least $13.70 (Sh1178.20) per day or Sh35,346 a month. At this level and above, people can increase their purchasing of large consumer durables, notably autos and houses. Others define middle class as those spending more than $2 (Sh172) a day. Economic reports The Kenya National Bureau of Statistics (KNBS) economic survey last year said the middle class jumped to 24 per cent from 19 per cent in 2007. According to KNBS, Kenya’s middle class includes anybody spending between Sh23,670 and Sh199,999 per month. The upper class (those who spend above Sh200,000 a month) stood at 3.6 per cent last year from 1 per cent in 2007. The lower class (those who spend less than Sh23,670 per month) shrank to 72 per cent from 80 per cent between 2007 and 2011. But is this really middle class?

“Conventional facts on the middle class show that they demand quality education, are secure in their jobs, own housing and can afford good healthcare. Additionally, there are low incidences of inequality and greater political maturity among them. By casual observation, the country falls short on many of these thresholds,” said Mr Paul Otung, a Nairobi-based economist. “Quality education is still unaffordable to a majority, high unemployment is a major policy challenge, health insurance is limited to employer schemes, and mortgage accounts are hardly 20,000, with the ever-increasing housing rent pushing even the working population to indecent habitation. Also, inequality seems to be widening and citizens are polarised on non-issues.” Mr Kariithi Murimi, a fellow at the Institute of Certified Public Accountants of Kenya and a risk consultant, says the rate of growth of the middle class has been increasing, but is not yet significant enough to impact on attainment of Vision 2030. Kenya’s growth blueprint projects the country’s GDP will grow above 10 per cent, which should see the country join the ranks of middle-income economies. But economic growth has been below 6 per cent the last seven years. “What this means for the economy is that manufactured goods are stagnant. In the last 10 years, the manufacturing sector has not grown large enough — middle-income consumers would drive manufacturing,” said Mr Murimi. “What has grown are mitumba (second-hand clothes) and the kadogo economy. When you go to supermarkets, you see a majority of cheap items are imported.” Mr Aly Khan Satchu, an investment analyst, believes that the middle class is growing. “We are witnessing the emergence of a middle class, and this is evidenced by the mushrooming of malls and the parabolic growth seen in things like reserve spirits,” he said. “With an expanding middle class, we will of course suck in imports — this is a sine qua non [a thing that is absolutely necessary] of an emerging middle class.” Interestingly, Mr Satchu says our current account, which people point out at as an indicator of the state of the middle class, is in deficit because of the importation of heavy machinery for the extractive industry, and not because of middle class consumption. Dr XN Iraki, a lecturer at the School of Business, University of Nairobi, says there is growth in both the number of Kenyans entering the middle class and in consumerism. “Kenya has got a growing middle class driven by well-educated graduates and entrepreneurs — who include quailpreneurs. Some middle class people are subsidised by the Government through salaried employment, which is not supported by commensurate productivity,” he said.

Dr Iraki added that the middle class has not grown as fast as hoped because the country rarely invests in businesses that have a large impact, particularly industries. “We have no Toyotas, DuPonts or IBMs, but we have mabati. We are more focused on services that generate few and less quality jobs,” he said. “Consumerism is on the rise and is driven by media with all those adverts and the end of the old, traditional order. We are today more focused on the now than the future.” The worry is that consumerism might increase at the expense of building a more sustainable tomorrow. “Consumerism drives economies even in developed countries but should not drown investment in the future. We must earn or invest before consuming. But in Kenya we learn to consume, and squander, money before we earn it. That must change if our economy is to grow and make Kenya the Swahili Tiger in our lifetime,” Iraki said. Deloitte & Touché notes that Africa’s middle class has a more recreational lifestyle, creating demand for products like jewellery and cosmetics. In a report titled The Rise and Rise of the African Middle Class, Deloitte says Africa is not impervious to new global trends and influences that are fast-shaping consumer behaviours and consumption patterns. “Their spending patterns are being dictated and shaped through media and other influences as Africa opens up,” says the report. Mr Otung feels this trend will hold back sustainable economic growth. “In 2012, the youth were said to have spent around Sh64 billion on fashion and mobile airtime — this is despite the widespread unemployment and underemployment levels within this demographic. “Such a path to growth can only happen at the expense of other important macroeconomic fundamentals. It represents missed opportunities to promote domestic savings, fair pricing and increase labour productivity that would enhance our regional and global competitiveness.” The economy’s overall health is reflected by the productivity at the personal level. But too many Kenyans are burning cash on consumables with little income-generating potential, with little, if anything, left over for savings that would spur investment.

Kenya’s saving rate of around 13 per cent of gross domestic product is lower than the global 26 per cent average for low-income countries. Easy loans The excess liquidity in the market has made getting loans as easy as clicking a button. And mobile phone operators have made the process even less painful. You can now apply for a loan while taking a walk, drinking tea or from the depths of your bed, and have it approved instantly. This explains why, over a 15-month period, M-Shwari, the paperless banking service offered by Commercial Bank of Africa to Safaricom’s M-Pesa customers, disbursed loans amounting to over Sh7.8 billion. But this consumer culture could be getting people into serious debt. Recent data from Consumer Insight indicates that Kenyan teenagers and young adults are spending more than Sh252 billion annually. The findings of the survey released last year stated that Kenyans between the ages of seven and 25 are taking the cue from their older counterparts and breaking the bank to spend what they don’t have. About 70 per cent of this demographic are unemployed and financially dependent on parents or guardians. This slowly weighs down the economy, hurting the shilling’s value and contributing to the high cost of living. Further, in the nine months to September 2013, Kenyans borrowed a massive Sh389.3 billion for personal or household use. This is more than a quarter of total loans, which stood at Sh1.52 trillion as at September 2013. This compares poorly with the cash borrowed to invest in sectors that could boost the economy. For instance, real estate received Sh208.1 billion in loans, while manufacturing got Sh197.1 billion, communications Sh104.9 billion, building and construction Sh77.4 billion, and agriculture Sh66.6 billion. Tourism and hotels received Sh36.5 billion, with mining and quarrying getting Sh15.3 billion.

Some of the money from personal loans is directed into business, but if more of this cash went into investments, the economy would pick up. When a country spends more than it invests, its wealth is exported. This leaves the shilling susceptible to external shocks due to the relatively higher value of what is imported than what is exported. Kenya’s trade is disproportionate, mostly in favour of imports that deplete the country’s foreign exchange reserves, which explains why our current account is in the negative. The problem is that most personal loans are spent to acquire depreciating assets, such as cars. A car has to be fed with fuel and temporarily housed during the day in parking spaces whose fees are hiked every so often. The potholes on the roads wreak havoc on its shocks and springs, hastening the speed with which they need to be replaced, and there is the constant risk of side mirrors and lights being stolen. But despite the risks, over the past five years, the uptake of personal loans has more than doubled. This is the cash that ends up financing unsustainable projects at the expense of production. Data from KNBS also that the average income has grown by 33 per cent in the last three years. In 2008, Kenya’s mean income stood at Sh57,350. In 2011, this figure shot up to Sh76,489. This means that more Kenyans today, particularly those living in urban areas, have more money to spend and they are driving up sales in Kenya’s retail market. The solutions This has further been exemplified by the growing list of multinational companies that have set up their regional headquarters in Nairobi in the last three years. This is aimed at getting a foothold in the emerging market. In addition, there has been an increase in the branch network of retail stores — and the growing shopping mall culture — with international supermarket chains now training their sights on Nairobi. Consumerism, it seems, will continue unabated. But Otung says that for the full potential of Kenya’s consumers to be realised, they must spend less today “to spend more tomorrow”. “With the growing interest in the middle class, there is a good opportunity for policy makers to define clear growth paths. But this requires long-term policy perspectives that will increase labour productivity, promote entrepreneurship, better healthcare, home ownership and expand high-income job opportunities,” he said. For Kenya to transform its economy, it also has to produce more to meet domestic requirements. There is no country that has been able to grow its economy by importing more than it exports.

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