Even as the Ghana’s commercial banking industry is grappling with the debilitating impacts of government’s ongoing public debt restructuring exercise on both their balance sheets and their profitability, their regulator, the Bank of Ghana has revealed that it is leading by example – and is taking harsh criticism for doing so.

The central bank released its annual financial statements for 2022 last week revealing that it incurred a total loss of some GHc60.8 billion last year, which has not only wiped away its entire shareholders equity (comprising core capital and reserves) but infinitely worse has left it with negative equity of a colossal GHc55.12 billion as against a positive equity position of GHc5.7 billion a year earlier.

Instructively, this situation derives almost entirely from the 50% haircut it has taken on its exposure to government in the form of holdings of public debt securities and loans made to state owned institutions, which have imposed GHc53.1 billion in impairment charges on the central bank. Most of the rest of the losses derive from the loss of value of its asset holdings due to changes in both interest rates and the cedi-United States dollar exchange rate.

In typical fashion though, the bank’s critics – both politically motivated and non-partisan but lacking in adequate technical understanding of the issues – are focusing on the admittedly sharp increases in the central bank’s running costs last year, claiming that it has been financially reckless, or even outright malfeasant.

Ironically however the simple truth is that those sharp increases in running costs would not even have been noticed by the media and public sector analysts if not for the cost the BoG incurred in propping up the economy last year and making it eligible for the US$3 billion financial bailout now being provided for the International Monetary Fund; without the impairment charges and forex translation losses the bank would have made its customary profit last year (2021: GHc1,7 billion) and the rest of its financial performance would simply have passed under the public’s radar just like in all previous years,

The impairment charges are broken down into: Impairment of Government of Ghana securities holdings of GH¢48.45 billion (2021: GH¢0.008 billion); and Impairment of loans and advances granted to Quasi-government and financial institutions amounting to GH¢6.13 billion (2021: GH¢0.19).

Add to these, a net exchange loss of GH¢5.27billion (2021: exchange gain of GH¢1.07billion) resulting from the cedi’s steep depreciation last year.
Some critics argue that the sheer size of the impairment charges suffered serves the BoG right since it would have been much smaller if the central bank had not financed government to the tune of nearly GHc50 billion last year, which is a key driver of the record high headline inflation Ghana had suffered over the past year or so.

Indeed, while the BoG’s holdings of government’s long term securities only increased marginally last year to GHc12,573,180 up from GHc12,548,910 and Short-term securities actually fell to GHc30,915,065 from GHc35,175,224 in 2021, its holdings of Money market instruments increased dramatically to GHc67,239,830by the end of 2022, up from GHc21,844,308 a year earlier, this increase being the primary mode through which the BoG financed government last year despite the legal limitation on providing such financing.

However, BoG Governor, Dr Ernest Addison has insisted that this was done to prevent the much more unsavory option of allowing government to default on its maturing debt obligations. Indeed, if that had happened, Ghana would have become a pariah on both local and international debt markets, creating the specter of a complete economic collapse.

The same reasoning underpins the BoG’s acceptance of a 50% haircut under the ongoing debt restructuring process. Dr Phillip Abradu Otoo, the BoG’s Director of Research explains that the central bank accepted the haircut to enable government meet the IMF’s key conditionality of achieving debt sustainability before being granted the financial bailout it is now receiving.

This followed creditor’s rejection of an initial proposal to accept a 10% haircut on principal, a 10% reduction in coupon rates and an extension on time to maturity of 10 years.

Simply put if the BoG had not agreed to the huge haircut it has taken, government would have been unable to satisfy the IMF’s key debt sustainability requirement and without the Extended Credit Facility that has just begun, Ghana would have been faced with complete economic collapse.

To be sure, the price the BoG is paying is a steep one, with regards to its new financial circumstances and its public image. But not only has it be well worth the price; it has also ensured that last year’s central bank financing of government which has contributed to the current dire circumstances cannot be repeated since the BoG no longer has the financial wherewithal. This should be reassuring to critics of BoG’s 2022 financing of government, if they stop to consider it.

However, critics have also raised genuine concerns that the current situation may also curtail the BoG ‘s capacity to bail out commercial banks suffering liquidity shortfalls because of the effects of ongoing public debt restructuring. Already, impairment charges incurred from the first phase of the Domestic Debt Exchange Programme pushed them into a cumulative GHc3.76 billion loss for 2022 and the second phase, involving Cocoa Board’s issuances of short-term bills and debts owed to Independent Power Producers is now ongoing. After this, banks who have bought into government’s foreign debt such as Eurobond issuances will have to face yet another haircut.

However, the BoG assures that it still has the capacity to provide needy banks with short term liquidity in the form of Emergency Liquidity Assistance. Indeed, its wherewithal to do this is not dependent on its equity position nor its immediate profit or less position; rather it depends on the asset side of its balance sheet, not the liability side and here the BoG remains strong.

Even more importantly, the central bank’s negative equity position does not affect its ability to conduct monetary policy which is its most important role; it does not cost money to fight inflation through adjustments to its benchmark Monetary Policy Rate or the cash reserve ratios or capitalization levels of commercial banks and other financial intermediation institutions under its regulatory purview.

Indeed, it is instructive that the BoG’s current problems are shared by many other central banks around the world, and even more instructive that this is partly for the same reason; yet those banks have been able to continue designing and implementing effective monetary policy unfettered by their respective negative equity positions.

For example, for 20222 the Reserve Bank of Australia recorded a loss of 37 billion Australian dollars and the Swiss National Bank suffered a 132 billion francs loss, in both cases partly for the same reason as the BoG incurred its loss – the result of aggressive interest rate hikes to stem rising inflation and exchange rate fluctuations.
Instructively Germany’s central bank has been operating from a negative equity position but still remains the biggest lynchpin behind monetary stability in the Euro zone as a whole.

Nevertheless, the BoG will have to restore its equity and indeed has declared it will aim at doing so within the next five years. One way of doing this would be to seek recapitalization financing from government itself, like the British government’s financing of the Bank of England which suffered a 150 billion pounds loss for 2022.

However, the Government of Ghana is in no financial position to do this. But this may be a good thing in an economic jurisdiction where the central bank’s independence is more on paper than in reality and fiscal dominance prevails over monetary independence.

Consequently, the BoG will have to look elsewhere; to retained earnings (outside of the peculiar circumstances of 2022 the BoG regularly makes considerable profits) and external financing from development partners who will be empathetic to its situation because of similar trends globally rather than peculiar indiscretions on the part of the BoG itself.

The strategies to achieve this will be the BoG’s priority now, but it still faces distractions locally by critics who are leveraging on last year’s monumental loss and consequent descent into a negative equity position to rack up queries over its expenses during 2022.

To be sure there is reason for inquisition. For instance, the expenses incurred for vehicle maintenance more than doubled last year to some GHc132 million. Similarly, monies spent on foreign travels grew even faster. However, when the spike in fuel prices to record highs last year and the steep depreciation of the cedi are considered, most of the sharp increases in such expense items are largely explained.

With regards to the sharpest year on year increase in expenses – the cost of regulating the financial institutions under its purview – there is also a reasonable explanation. Having learnt its lessons from the issues leading up to the recent financial sector reforms and the accompanying widespread criticisms that the bank was not intense enough with its regulation and monitoring efforts, the BoG has stepped them up.

Explains Dr Addison: “The Bank of Ghana has also enhanced its supervisory surveillance systems with banks. Banks are required to report more frequently, such as daily submissions of balance sheet as well as liquidity reports including interbank market activities and cost of financing. Additional reporting requirements have been developed for banks to report on the performance of the new bonds. The enhanced monitoring mechanism is to ensure timely supervisory intervention, if needed.”

This inevitably costs much more money than hitherto put is well worth it when the alternative is considered. Indeed, the sharply increased cost of financial intermediation industry regulation pales beside the cost of the recent financial sector reforms which could have been avoided if the new, inevitably more costly, regulation policies had been introduced earlier. Proponents of the current BoG management point out that critics cannot have it both ways.

Expectedly though, the issue of the expenses churned up by the BoG in 2022 will recede from intense public scrutiny shortly as they are recognized for what they really are: a storm in a tea cup resulting primarily from a doubling of forex indexed costs and the increased effort at improving regulatory outcomes to forestall another financial sector crisis requiring hugely expensive reforms.

Unfortunately for the BoG itself, its acceptance to take a huge hit for the benefit of the Ghanaian economy has provided the foundation for inordinately intense criticism. Fortunately for the Ghanaian economy though the central bank is proving willing to take the undeserved aspects of such criticism along with the deserved for the greater good of the nation’s economy and the citizenry that live and work within it.