Mind the gap
Nairobi - In a cafe on the terrace of a Nairobi mall,
well-heeled Kenyans sip coffee as shoppers in the car park navigate between BMW
X5s, Toyota Land Cruisers and Mercedes. A nearby cinema last month advertised
an array of Hollywood fare including Brad Pitt's Moneyball.
Sales at this Java House outlet along the Ngong Road were up
last year, said Kevin Ashley, a Californian who co-founded the chain of 14
coffee houses 13 years ago. Kenya's rich and new middle classes have a growing
taste for lattes and ice cream.
That's just one sign that African states such as Kenya are
changing. Even as rich countries face a slowdown, sub-Saharan African economies
are expected to post nearly 6% average growth in 2012, according to the IMF.
A study by the International Finance Corporation, part of
the World Bank, has pointed to the potential of the continent's more than 1
billion people, millions of whom have moved out of subsistence agriculture and
into urban jobs over the past decade.
Such promise has helped fuel foreign investment. Kenya alone
has had a capital influx of billions of dollars in recent years: the latest
official figures show around $800m came in in 2008.
But the wealth on show at the mall has a flip side. The
consumption boom has been fuelled by fast-growing credit. In Kenya and
elsewhere that has sucked in imports - cars, shoes, clothes, wines and whiskies
- and swelled the current account deficit. Inflation in Kenya is now nearing
20%. As always, high inflation hurts the poorest most.
Java House employs 700 workers and plans to open new outlets
soon, but its co-owner worries about price rises.
The cost of sugar, electricity and gas has doubled. A
volatile currency has fed into coffee prices, which are paid in dollars. A sack
of green coffee costs close to $500, up from $150-$200 per sack three years
"This particular case right now of inflation is a
dangerous phase," Ashley said. People who were taking a bus to work may
now walk, somebody who was driving may take a bus, and somebody who was eating
in Java might now carry their own food to work.
The risk is that Africa's consumers are harvesting their
gains before their economies can bear it, economic analysts say. As more people
see inequalities widen, that could fuel unrest.
"Minimum wage earners in urban centres in East Africa
are encountering a simply unprecedented squeeze," said Aly Khan Satchu, a
Nairobi-based independent trader and analyst, and himself solidly middle class.
Inflation is a major concern, he said. "It creates a sort of reverse Robin
Hood effect where the poor carry the main burden."
A boom that hurts
Western investors have become accustomed to Africa as a boom
story in recent years. As demand from places such as China and Brazil pushed up
commodity prices, investment poured in. Since the financial crisis, investors
have ventured into Africa in search of higher returns.
In Kenya, firms have been hiring and property prices have
risen exponentially, creating a feel-good factor for home owners, especially in
towns and cities. That, in turn, has fed the appetite for consumer goods.
"Africa is about consumers," Stephen Murphy,
managing director at private equity firm Citadel Capital, told a conference in
Nairobi in December. "It is about high-impact infrastructure investing and
it is certainly about value-added exports and not just commodity exports."
But not everyone has welcomed the growth. Food prices -
especially meat - have risen sharply. In a rain-soaked field outside the Kenyan
capital, it's easy to see why. Farmer Joseph Kiarie puts the fertilizer on his
crop of cabbages by hand from a plastic bucket, and says rising costs have cut
his earnings by two-thirds in the past year.
"This has been a terrible year," he said.
A 52 metre tower
Razia Khan, head of Africa research at Standard Chartered in
London, said the problem is an Africa-wide one. "More rapid growth was
accompanied almost everywhere by a surge in imports, especially capital goods
imports related to infrastructure development."
Like other African countries, Kenya has yet to make good use
of the capital pouring into the country and encourage manufacturing.
"It is good if people think Kenya is a good place to
park their money but what Kenya needs most is long-term investments that go
into productive industries," said Wolfgang Fengler, the lead economist at
the World Bank office for Kenya.
Unlike countries such as Ghana, Nigeria, or Zambia, Kenya
doesn't have significant mineral or oil resources.
But its economy has been lifted by infrastructure investment
- including a high-speed internet connection. That should help spread the
wealth, and is already attracting home thousands of skilled, educated Kenyans,
many of whom work in the booming financial sector.
Satchu, the trader and analyst, is one of them. He returned
five years ago after working with various banks in London all his adult life,
at one point managing a balance sheet in excess of $17bn for Sumitomo Bank.
When he first returned, Satchu headed straight to Mombasa, a
port city on the Indian Ocean. In the back garden of his home he erected a 52
metre tower to get a decent connection to the internet - speeds via
commercially available internet service providers were capped at 32 kilobytes
per minute - and access the New York Mercantile Exchange. A neighbour was so
puzzled he asked Satchu if he was prospecting for oil.
In 2009, though, a high-speed undersea cable plugged Kenya
into the global grid. Encouraged by new tech-friendly policies, Kenya has
pulled in investments from firms like Britain's Vodafone, France Telecom and
India's Essar Telecoms. Mobile commerce is growing.
Now Satchu has moved to Nairobi and follows the global
markets through 3G technology.
"I have a supreme conviction that the African
convergence with the rest of the world has begun, therefore I needed to place
myself not on the beach, but in the thick of things."
Satchu has a well-honed urge to consume. He likes to wear
pricey Canali suits and Hermes ties, and drives a Nissan Patrol, a behemoth
four-wheel drive. "I prefer to drive a Maserati or a fast car but it is
just not practicable on our roads," he said, pointing to one of Kenya's
"A serious opportunity"
Eventually, improved infrastructure might allow him to drive
that Maserati. For now, analysts fret about whether Kenya's exporting capacity
can keep pace with its imports.
"In most frontier markets... we haven't seen sufficient
evidence of this," Khan said. "Exports go up, but not nearly by
enough, and imports - especially of consumer goods - go up even more."
Such imports - combined with rising prices for domestic
goods such as food - speed up inflation. That's a worry for people like Vimal
Shah, a third-generation Indian-Kenyan whose grandfather first came to Mombasa
to work on the Kenya-Uganda railway. He now runs Bidco Industries, which was
started by his family 25 years ago and sells 30 brands of soap and edible oils.
Bidco is based in Thika, a manufacturing town a half hour's
drive from Nairobi, which made a name for itself in the 1970s as The Birmingham
of Kenya because of its thriving textiles factories, bakeries and motor vehicle
In the early 2000s, though, it grew to symbolise Kenya's
decline. Plants closed, unemployment and poverty grew. Today, it feels like a
typical rural Kenyan town - open air markets brimming with fresh cabbages and
potatoes, streets crowded with the small minibuses known as matatus.
Shah's firm Bidco survived the hard times. It exports 20% of
its output to other African countries with a value of $40m a year, he said. A
fast-spoken father of one, Shah believes Kenya should be well positioned to
export to markets in east and southern Africa, thanks to regional economic
The World Bank's Fengler agrees Kenya could turn Mombasa
into a trans shipment hub to serve the east African region, which has
fast-growing landlocked nations like Uganda, Rwanda and South Sudan.
"It is serious opportunity," said Shah in the
company's boardroom, furnished with comfortable, leather-padded seats and
soundproofed to muffle the noise of machinery. "All we need to do is work
on our costs of doing business."
Energy, transport and labour costs are hurting manufacturing
and exports, Shah said. "Our cost of power is more than 20 US cents per
kilowatt hour today. If we compare with Egypt, we are eight times higher."
For him, the most important thing for Kenya is to turn its
raw materials into things it can sell for more money. "Why export cotton
when you can export shirts? All that tea and coffee we produce, we should
package it and send it straight to Starbucks."
Poor people's shops?
Or perhaps a homegrown cafe such as Java House. The outlet
on Ngong Road is not far from Nairobi's biggest slum, Kibera, a vast shanty
town that lacks even basic services such as sanitation. Many Kibera residents -
there are hundreds of thousands of them - are angry that while food prices have
risen, wages have not. Many say their families now have to forgo meals.
A year ago, 300 shillings ($3.48) bought breakfast, lunch
and supper, "but now that is nothing", said Jane Mwalugha, a married
mother of five children aged between three and 15, in her one-roomed house.
"We have had to cut out lunch this year so we just take supper. Bread is
now a luxury so we have cut it out."
A few Kibera residents make their way to supermarkets in a
nearby mall to buy tiny portions of food. But they are well out of reach for
most. "The government should construct supermarkets for the rich and let
us have our own because they have decided in life that there are two tribes,
the poor and the rich. They should let us have poor people's shops,"
Kevin Ashley of Java House said cellphones and the internet
mean Africa's young people understand the opportunities people in richer
countries enjoy. That will increase the pressure to get the economy right.
"As policymakers and business leaders we need to making
sure that not only are we creating wealth at the top," he said. "We
need to be creating lots of jobs down there for that group of young people
coming now to the workforce."