BoG vows commitment to policy solvency amidst debt exchange challenges
The Bank of Ghana (BoG) remains steadfast in its unwavering commitment to policy solvency, diligently managing inflation and ensuring financial stability despite facing challenges emanating from the Domestic Debt Exchange Programme (DDEP). Dr. Philip Abradu-Otoo, Director of Research at BoG, assured stakeholders that a comprehensive plan is in place to gradually restore the central bank to positive territory, notwithstanding the DDEP’s role in contributing to negative equity and recording losses amounting to GH¢60 billion, as highlighted in its 2022 annual report.
During a media briefing held in Accra to discuss the BoG’s 2022 annual report, Dr. Abradu-Otoo highlighted the bank’s ongoing discussions with the International Monetary Fund (IMF) regarding the necessity for recapitalizing the institution. In light of the current capitalization level of GH¢10 million, deemed insufficient compared to the GH¢400 million minimum required for commercial banks, the IMF has put forth recommendations for a capitalization exercise, envisaged to be pursued after Ghana’s successful completion of the IMF program and attainment of a robust primary balance.
Notwithstanding the negative equity attributable to the DDEP, the Bank of Ghana, functioning as a non-profit public policy institution, stands resolute in preserving policy solvency, independently insulated from its capitalization level. Dr. Abradu-Otoo, however, underscored the criticality of addressing negative equity in central banks to preserve their credibility. With robust structures in place to ensure policy solvency, assessments conducted by external auditors and the IMF have corroborated the bank’s steadfast commitment to fulfilling its primary mandate with utmost resilience.
Revealing a comprehensive strategy, Dr. Abradu-Otoo unveiled specific structures and measures aimed at restoring the bank to positive equity over the next five years, including the prospect of potential government recapitalization, all poised to strengthen the bank’s capacity to effectively execute its mandate.
Addressing the losses incurred, Dr. Abradu-Otoo clarified that the core mandate of the Bank of Ghana is not profit-making; instead, generated profits are redirected to the government. However, the legislation lacks explicit provisions on managing losses, prompting a reference to the Bank of England’s analogous situation, wherein the institution promptly sought governmental support to safeguard its operations.
The losses sustained by the Bank of Ghana are partially attributed to the domestic debt exchange, compounded by losses incurred from the quantitative easing program and interest rate fluctuations. In addressing these exigencies, the question of approaching the government for assistance to cover these losses arises; however, the available fiscal space is circumscribed by the ongoing IMF program.
Based on the bank’s 2022 annual report, as of December 31, 2022, the total liabilities of the Bank of Ghana and its subsidiaries surpassed total assets by GH¢54.52 billion. The decline in the group’s net worth position predominantly resulted from the impact of the DDEP and impairment of select assets, comprising government securities holdings, loans, advances granted to quasi-government entities and financial institutions, as well as currency exchange losses.
To facilitate recovery and instill positive equity, a well-defined roadmap has been delineated, encompassing strategies such as profit retention, refraining from monetary financing of government budgets, optimization of investment portfolios and operating costs, alongside assessing potential government recapitalization assistance in the medium-to-long term.
Stephen Opata, Advisor to the Governor of the Bank of Ghana, asserted that the losses were a consequence of a prudent government debt restructuring exercise, engineered to mitigate default risks and restore investor confidence in the national economy. While acknowledging certain payment delays, concerted endeavors are underway to address these issues and rebuild confidence within the financial system.
Looking ahead, the central bank is resolutely focused on restoring confidence, targeting a sustainable trajectory through the issuance of longer-term debt instruments and judiciously managing inflationary pressures. While acknowledging that rebuilding confidence may require a measured pace, the Bank of Ghana remains sanguine, exuding optimism that its steadfast efforts will engender heightened confidence in due course.
