Bank of Ghana Clears Air Over NDC Minority Accusation

Dr. Ernest Addison


In response to the Bank of Ghana’s 2022 published annual report and financial statements, there has been some concern among Minority group in Parliament and the National Democratic Congress (NDC) regarding the bank’s reported loss of GHC 60.8 billion.

The Bank of Ghana has explained that this large loss is due to the impairment of the holding of marketable Government stocks and non-marketable instruments of Government, as well as the bank’s exposure to COCOBOD.
The bank served as the loss absorber to the entire debt exchange program, which allowed the Government of Ghana to meet the threshold for the approval of the IMF program.

Despite the significant loss and negative equity position of GHC 55.1 billion, the Bank of Ghana assures the public that structures are in place to ensure that the bank remains policy solvent and well able to deliver on its primary mandate. Some central banks have operated with negative equity yet fully met their objectives, and the success of central bank interventions should always be judged on whether they fulfill their mandates of price and financial stability.

The Bank of Ghana also explains that the large jumps in key expenditure lines reflected the sharp increase in inflation and depreciation of the cedi, which impacted the bank’s operations as well as other entities in Ghana.
The bank’s expenditure lines were also affected by its core functions of distributing currency to every corner of the country and supervising regulated institutions.

Lastly, the Board and Management of the Bank of Ghana have considered a new Head Office building as the most important priority project to support the operational efficiency of the Bank and position Ghana as the financial hub of the subregion with prospects of hosting a future regional Central Bank.

Read the full response below

Response to Minority on Bank of Ghana’s 2022 Published Annual Report and Financial Statements

The Bank of Ghana reported a Loss of GHC 60.8 billion. What is driving this huge
loss: The main reason for this huge loss is the impairment of the holding of marketable Government stocks and non-marketable instruments of Government all being held in the books of the Bank of Ghana. This stock of Government instruments has been built over the years. In addition, the Bank of Ghana’s (BoG’s) exposure to COCOBOD, which has been built over the years, was also impaired. As we all know, the Government of Ghana embarked on both domestic and external debt restructuring. The holdings of Government instruments and COCOBOD exposures were all part of the perimeter of the debt exchange. Whereas all other stakeholders that participated in the Domestic Debt Exchange (DDEP) did not have principal haircuts, but rather had new instruments with new tenors and coupon structure, the BoG, served as the loss absorber to the entire debt exchange program, a key requirement that allowed the Government of Ghana to meet the threshold for the approval of the IMF program. As a result, the BoG had to take on a 50 percent principal haircut on the total principal (which stood at GHC 64.5 billion at the time of the exchange). Consequently, BoG had new instruments with extended tenor and significantly reduced coupon. By applying the full requirements of IFRS 9, this means that from the principal alone, a 50 percent haircut on the non-marketables amounted to a loss of GHC32.3 billion. Restructuring of marketable instruments amounted to a loss of GHC16.1 billion. The impairment from exposure to COCOBOD also amounted to GHC 4.7 billion. These three DDEP items (i.e., marketable, non-marketable and COCOBOD) accounted for GHC53.1 billion out of the total loss of GHC 60.8 billion for 2022. In addition to these three items, price and exchange rate valuation effects accounted for GHC 5.2 billion of the total loss, whereas interest expense on cost of monetary policy operation accounted for GH3.3 billion.

In the Financial Statements, we see a loss of GHC 60.8 billion and a negative equity position of GHC 55.1 billion. What is the difference between these two numbers. Normally when profits or losses of institutions are declared, they are posted to a General Reserve Fund Account. The equity (also known as shareholders funds) is defined to include the minimum stated capital and General Reserves. In this instance, the GHC 60.8 billion loss was posted to the general reserve account which had some positive balances. The loss, together with the positive balances in the General Reserve Account resulted in an overall negative equity of GHC 55.1 billion.

The stated capital of the Bank of Ghana is reported at GHC 10 million. Is this adequate
for an institution like the Bank of Ghana with such a huge responsibility. The Bank of Ghana, as we all know, is not a typical profit-making institution and the extent of its capitalization doesn’t necessarily determine its policy solvency—meaning its ability to deliver on its mandate of price stability, and in addition, promote financial stability. That said, every institution should be concerned about negative equity and at a point in time, capitalization of central banks is critical, otherwise a sustained period of negative equity could undermine its credibility. Based on the assessment of the external auditors, and the IMF, even though BoG would have a significant negative equity based on the huge impairment from 2022, structures are in place to ensure that the BoG remains policy solvent and well able to deliver on its primary mandate. Structures and actions have been identified (including where needed, recapitalization by Government) over the next 5 years to return the Bank to positive equity. During that period, it is assessed that the Bank will continue to remain policy solvent and discharge its mandate effectively.

Does negative equity affect positive policy solvency?: A central bank policy solvency is
the ongoing ability of the central bank to fund and implement operations in line with the policy aims for which it has independent responsibility without recourse to the government. Policy solvency requires sufficient realized revenues to cover costs and to build longer-term capital reserves allowing for independent and appropriate policy decisions. Inability to cover costs and build sufficient buffers over the long term may require capital injection from the government which can undermine its independence and credibility of monetary policy and also affect public confidence in the central bank’s operations. Therefore, although the financial position of the central bank has no immediate impact on its ability to pursue the policies it deems appropriate, its equity and its earning capacity should be high enough in the long-run to ensure that it is sufficiently financially independent of the government.


Are there Central Banks operating with negative equity?: Historically, some central banks
have operated with negative equity yet fully met their objectives. For example, the Central Banks of Chile, Czech Republic, Israel, Germany and Mexico experienced years of negative
capital. Here are a few facts:
The Czech National Bank reported negative equity from 2002 through 2013 due to valuation write-downs on its sizable foreign currency reserves.
German Bundesbank was technically overleveraged in the early 1970s because its losses exceeded its equity.
Between 2002 and 2021, some 10 out of 32 Emerging Market Economies and Small Open Economies (EME/SOE) central banks had negative equity, only briefly in many cases, but for more than 30 percent of the time for three of them.

But throughout these periods of negative equity positions, price and financial stability were maintained.

What is the difference between insolvency and negative equity. In general, insolvency means inability to pay one’s debts. It may take the form of Cash flow insolvency or Lack of liquidity, in which the central bank cannot pay its debt as they fall due. In the case of negative equity, what it basically means is that Central Bank’s Liabilities exceeds its Assets.

Are there Central Banks that made loses in 2022 comparable to what Ghana
experienced in 2022: In 2022, several central banks run losses and, in some cases, the
losses pushed them into negative equity. A few of them have been highlighted below:

The Reserve Bank of Australia (RBA) recorded a 2022 book loss of 37 billion Australian dollars, which more than wiped out the central bank’s equity.

The UK Government faces £150 billion bill to cover Bank of England’s losses (According to the Financial Times of July 25, 2023).

The Swiss National Bank (SNB) in early January reported a record preliminary loss of 132 billion francs for 2022.

In September 2022, the central bank of the Netherlands notified the country’s government in a letter that it projects net interest losses amounting to a potential EUR 9 billion for the years 2023 through 2026.

The US Federal Reserve has no longer been able to remit weekly billion-dollar transfers to the US Treasury since autumn 2022. Instead, a debt obligation to the US Treasury (a liability that the Fed recognizes as a deferred asset) has been growing on the Fed’s balance sheet since then. The Fed eventually will have to pay this liability sometime in the future (when it resumes generating profits).

For the financial year ended 31 March 2023, the Monetary Authority of Singapore recorded a net loss of $30.8 billion.

Why Central Banks are reporting losses in 2022: Central banks exist to fulfil their policy mandates, including price and financial stability. The attainment of this mandate involves the central bank taking on financial risks such as credit risk and interest rate risks, through loans to commercial banks/government or currency risk, through the holding of foreign exchange reserves. Some of these risks may materialize leading to losses. Making losses may therefore be perfectly compatible with a central bank’s remit of ensuring the smooth functioning of the economy. It contributes to a well-functioning economy by maintaining confidence in the financial system and by stabilizing inflation and economic activity. Therefore, the success of central bank interventions should always be judged on whether they fulfil these mandates. Over the course of 2022, Central Banks around the world aggressively hiked interest rates in an attempt to tackle record-high inflation and re-anchor inflation expectations. These decisive actions have led to losses and in some cases negative equities (i.e., assets < liabilities), raising concerns about the ability of such central banks to fulfil their mandates of price and financial stability. In Table 1, information on central banks reporting negative equity compiled for 2021is reported.

Background to large jumps in key expenditure lines in 2022.
Comparing 2022 financial performance with 2021, without taking cognizance of the economic situation the country, is misleading. The year 2022 was the peak of economic and social crisis in Ghana. A culmination of fiscal overruns and debt distress resulted in Ghana losing access to both international and domestic markets. The Rating agencies downgraded Ghana to the junk category with huge macroeconomic imbalances. The cedi depreciated sharply from GHC6 to the dollar at the end of 2021 to GHC14.x to the dollar at the end of November 2022 until it came down to about GHC8.57 to the dollar at the end of December 2022 (resulting in about 30 percent on a year-on-year basis and averaged 31.13%). Similarly, inflation rose from an average of 12.62 percent at the end of December 2021 to 54.14 percent at the end of December 2022. These developments had a significant impact on the operations of the Bank and every other entity in the country. A year-on-year comparison of the financial statement of all entities in Ghana would reveal this sharp jumps.
See below some specific examples and how these developments impacted
Vehicle maintenance expenses: – First, the vehicle maintenance expenses line is a generic name for expense covering fuel cost for all BoG operations, insurance of all BoG fleet of vehicles, car parts replacements, and other maintenance cost. Historically, fuel cost has accounted for about 90 percent of this vehicle maintenance expenses expenditure line. For 2022, the fuel cost increased by 123.3 percent compared to 28.9 percent in 2021. This was on the back of petrol and diesel prices increasing from GHC6.6618 per liter petrol, and GHC6.665 per liter diesel at the end of 2021 to GHC 16.5811 per litre petrol and GHC19.6053 per liter diesel at the end of 2022. This implies increases of 149% (Avg. 87%) and 194% (Avg. 122%).
Given the scale of the Banks operations, ensuring the currency is distributed to every corner of the country to ensure seamless medium of exchange for our legal tender, the cedi, such a cost is a major line in our operations and any such changes would lead to a huge jump.
Also, car parts etc are all linked to the dollar and converting these to Ghana cedis at the exchange rate in 2022 would also lead to a huge jump in expenses under vehicle maintenance. We also had significant increases in insurance costs etc for all our fleet of vehicles and bullion vans across the country.
Communication expenses: the major item under the communication is electronic data transmission charges including the Reuters and Bloomberg platforms which supports our reserve management and management of petroleum funds as well as currency and exchange rate constituted about 57.4% of the total communications cost. This was followed by the publications and Gazettes (15%), Advertisement (10%), Newspapers local (0.75%) and Newspapers foreign (0.46%).
The computer expenses: The jump in computer expenses is mainly the result of the Bank’s asset replacement policy which was implemented in 2022 where most of the Desktop computers were replaced with laptops. This is in line with the Bank’s Business Continuity Policy following lessons learnt from the covid-19 pandemic to allow for flexible working arrangements. In addition, all these hardware and software license purchases were in US dollars and the exchange rate depreciation and the inflation both domestically and globally impacted the cedi equivalent on the books of the central bank.
Foreign and domestic travel expenses: Like other expenditure lines, the foreign and domestic travel reflect sharply the exchange rate and inflation effects, and not necessarily increased number of travels. The supervision staff would have to travel to visit every single regulated institution and their branches, spread all over the country, at least once a year. This is a huge operation and a core function of the Bank, which constitutes a significant expenditure line of the Bank’s operations. In addition, the Bank of Ghana takes continuous professional development seriously to maintain the standards required of a modern central bank.
External Directors Expenses: This expenditure line is made up of logistics to run the Board secretariat, Board training, and external Director fees. They were all heavily affected by the inflation and exchange rate movements during the year.
On the issue of waiver or write offs without recourse to Parliament as per section 53(1) (2) of the PFM Act,
First, the BoG’s understanding is that the Minister for Finance in his 2023 budget statement, which was approved by Parliament, had the policy of debt restructuring as a key policy initiative. Any further discussion on parliamentary approvals beyond what was approved in the 2023 budget would be handled by the Ministry of Finance.
Second, beyond the parliamentary approval, the IFRS accounting standard, which requires the full implementation of the expected credit loss (ECL), meant that the mere announcement by the government of a debt restructuring would trigger ECL applications and impairment charged. On this score, the issue of parliamentary approval or not would not stop an ECL application and impairments on the books of BoG.
And lastly, on this point, the Minister has followed up on his intentions and has submitted a letter to the Bank of Ghana detailing out the terms of the exchange. All conditions precedent (seeking parliamentary approval) to allow for the exchange of the BoG’s non-marketable instruments under the Domestic Debt Exchange have been satisfied.

The New Bank of Ghana Headquarters
A structural integrity assessment conducted by the BoG revealed that the current BoG Head Office building is no longer fit for purpose and could not stand any major earth tremors. The outcome of the structural integrity work was that the main building does not satisfy the full complement of excess strength required for a building to be considered safe for usage. This means that in the case of a worst case gravity and wind loading scenario, for example unusually strong wind, the building may be significantly affected. The building also does not have the required strength to withstand the expected imposed significant earthquake loads that would be expected to occur in the Accra area. Based on the above, and looking at the strategic objective of position Ghana as the financial hub of the subregion with prospects of a potential Head Quarters for a future regional Central Bank, The Board and Management of the Bank considered a new Head Office building as the most important priority project to support the operational efficiency of the Bank, and also position the Bank of Ghana in a very good position to be the host of the regional Central Bank as we currently host the West African Monetary Institute (WAMI) of the Sub region.

By Vincent Kubi