BoG says debts written off to cause loss accumulated from 1992

The Bank of Ghana (BoG) says debt government owes the Central Bank which has been written off leading to huge losses included all the legacy debts of the Government of Ghana dating back to 1992.

It included the accrued overdraft of 2022, overdraft to Ghana Cocoa Board (COCOBOD), the Covid-19 Bond, and BoG holdings of Telecom Malaysia (Ghana Telecom Bonds) and Tema Oil Refinery (TOR) bonds issued by government.

GH₵13bn debt as of 2015

Addressing a press conference in Accra, Dr Ernest Addison, Governor of BoG explained that as of 2015, the accumulated claims on government and COCOBOD amounted to GH₵13 billion.

He emphasized that it is not about recent debt alone saying almost all lending from the International monetary Fund (IMF), including the Extended Credit Facility and the Rapid Credit Facility during the COVID-19 pandemic, and all financial sector resolution bonds have all been added as BoG lending to government.

Haircut and IFRS 9 caused losses

He pointed out that the losses reported were technical losses arising from the haircut and the application of accounting standards in particular, International Financial Reporting Standards (IFRS 9) to estimate expected credit losses over the tenor of government debt held by BoG.

He therefore stated that the loss is not money lost by BoG through its operations in 2022.

Economic and social crisis costs over the years

Rather, he said it should be looked at as a reflection of the total cost of the economic and social crisis the country faced over the years and an attempt to resolve a major structural problem of the economy.

Dr Addison pointed out that this is not the first time that the Bank has gone into negative equity recalling that during the early years of structural adjustment, very large exchange rate depreciations led to revaluation losses that drove the Bank into negative Equity.

“Indeed, anytime the economy faces major challenges, BoG’s balance sheet suffers, and the equity position moves into negative territories,” he said.

The Central Bank Governor stated that in 2017 and 2018, BoG incurred similar negative equity from the impairment of legacy liquidity support loans granted in 2015 and 2016 to insolvent banks, which external auditors impaired due to the doubtful prospects of recovering from those insolvent banks.

BoG records profit in 3 years

However, he said BoG recovered and generated profits of GH₵1.6 billion in 2019, GH₵1.5 billion in 2020 and GH₵1.4 billion in 2021.

Dr Addison is optimistic that BoG’s current financial condition will not impact negatively on the operations of the Bank.

According to him, the International Monetary Fund (IMF) Technical Assistance mission validated this conclusion, before the necessary decisions were taken.

He said the opinion of the IMF team BoG was policy solvent and would remain so, as it has enough income to cover monetary policy operational costs.

15% capital of its total liabilities

The Central bank Governor assured that BoG had sufficient capital amounting to about 15% of its total liabilities.

He announced that the IMF recommended that the Bank retains all profits and a reassessment should be made in the year 2027.

He promised that the Bank will also manage to reduce its operational costs during this period.

Central Banks can operate effectively even with negative equity, as the central banks of Chile, the Czech Republic, Israel and Mexico have done over several years.

If losses persist, however, problems can emerge, as has been the case in some emerging and developing economies with weak governmental institutions.

In particular, sizable net liabilities denominated in foreign currency can disable a financially weak central bank.

Central bank losses are not an indication of a policy error and need not hamper the effectiveness of monetary and financial policies.

A central bank’s credibility depends on its ability to achieve its mandates.

Losses do not jeopardise that ability and are sometimes the price to pay for achieving those aims.

Stakeholders and the public should appreciate that central banks’ policy mandates come before profits.