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The Bank of Ghana (BoG) exposed itself too much to provide support when the government could not access the international capital market to borrow and was also facing financial challenges in the domestic market, a professor at the University of Ghana Business, Godfred Bokpin has said.
Prof Bokpin attributed the loss that the BoG incurred to the difficult decision it took to support the government.
Speaking on Ghana Tonight on TV3 in connection with the GHS60.8 billion loss incurred by the BoG, Prof Bopkin said “It is unfortunate, I am sure Bank of Ghana had to make some difficult decisions because has lost access to the international capital market.
“Again in the domestic market they were facing financing challenges and therefore BoG had to decide to sustain the government on its balance sheet and the results of that is what we are seeing. They excessively exposed themselves to the government.”
He further indicated that the Bank of Ghana which is supposed to be the lender of a last resort is in need of a bailout programme from a government that is running a programme with the International Monetary Fund (IMF).
He explained that if banks need liquidity support, they all fall on the central bank for that kind of assistance.
It is for this reason that all central banks across the world are structured in ways to have the kind of balance sheet required to support the banks.
The support that it gives to the banks and sometimes even the government puts severe strain on the BoG, he said.
“You should just understand that if the government is in difficulty, universal banks, whether local or regional or international, they will call on the central bank for liquidity support. Even central government and other quasi-government institutions.
“That is why the central bank of every country is structured in such a way that they will have the balance sheet to support or to be there. So under this circumstance, BoG will be limited in terms of how they can play their role adequately and sufficiently.
“There is a real risk so what it means is that if universal banks need help they will fall on the central bank but the central bank that they will fall on is also in need of help. So the summary of it is that the central bank which is supposed to be the bank of the last resort is in need of a bailout arrangement probably from a government that is already is in a bailout arrangement with the IMF,” he said.
Due to the impairment of the Government of Ghana’s securities holdings of ¢48.45 billion, impairment of loans and advances granted to quasi-government and financial institutions amounting to ¢6.12 billion and the depreciation of the local currency resulting in net exchange loss of ¢5.27 billion, the Bank of Ghana recorded GHS60.6billion loss in 2022.
The loss was occasioned by the Government of Ghana Domestic Debt Exchange Programme.
According to the BoG, its Board of Directors and Management assessed the policy solvency implications arising out of the negative net worth position and the group’s ability to continue to generate enough income to cover its monetary policy operations and other operational costs.
In the view of the directors, the Central Bank will continue to operate on a going concern basis due to a variety of factors underpinned by expectations of an improved macroeconomic situation and policy actions specifically targeted at improving its balance sheet.
In its Annual Report, the Central Bank, outlined these measures which it believed would help it recovery.
These include: Retention of profits to help rebuild capital until equity firmly returns to positive region.
Refraining from monetary financing of the Government of Ghana’s budget. In this respect, action has already been taken with a Memorandum of Understanding on zero financing of the budget signed between the Bank of Ghana and the Ministry of Finance on 26 April, 2023; Taking immediate steps to optimis the Bank of Ghana’s investment portfolio and operating cost mix to bolster efficiency and profits; and Assessing the potential need for recapitalisation support by the government in the medium-to-long term
It furthered that the Board of Directors and Management are of the view that “continued efforts at restoring macroeconomic stability and debt sustainability in addition to long-term efforts at building reserves, provide enough basis for continued operational policy efficiency existence for the foreseeable future”.
In a subsequent statement answering frequently asked questions, the BoG said The main reason for the Bank of Ghana’s GHS60.8 billion 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 central banks.
The BoG said 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, which 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 programme
“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).
It added “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.
“The impairment from exposure to COCOBOD also amounted to GHC 4.7 billion. These three DDEP items (ie 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.”
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