The Bank of Ghana’s (BoG) sovereign default status and negative equity could potentially lead to a conflict with international financial sector regulations, particularly the Basel Core Principle recommendations on risk weights for different asset categories, according to a banking consultant, Dr. Richmond Atuahene.
Prior to the domestic debt exchange, BoG assigned a zero weight to the government’s domestic debt, signifying zero risk. This decision was made on the basis of the government’s good track record and commitment to debt repayment, as well as constitutional provisions. However, given Ghana’s present defaulting country status and the Bank of Ghana’s negative capital condition, re-issuing these zero-risk-rated bonds becomes difficult.
However, in a study co-authored with financial analyst K.B. Frimpong, the former banker warned that a probable downgrade of Ghana’s government debt and the central bank’s negative equity might lead to reissued domestic notes being classified as impaired and badly rated assets. This would immediately result in higher risk weighting and provisioning requirements, demanding considerable increases in the overall capital of the financial system.
“A rating downgrade of government debt and the Bank of Ghana negative equity would automatically place the reissued domestic bonds in the category of impaired and poorly rated assets, thus immediately triggering higher risk weighting and provisioning requirements applicable to such categories of assets. The risk weight normally applicable would be at least 100 percent and would thus require very significant increases in capital for the entire financial system,” a portion of the paper reads.
A strong balance sheet is crucial for the Bank of Ghana to effectively implement its monetary policy, the authors argue.
Adequate capital not only supports the central bank’s independence and credibility but also instills confidence in the public and financial markets. Sufficient capital enables the central bank to focus on the most appropriate monetary policy without being constrained by the strength of its balance sheet or the government’s short-term financial interests.
The paper points out that losses incurred by the apex bank should not be ignored, as they could undermine monetary management, impede financial market development, and hinder the achievement of economic objectives such as price stability and economic growth. These losses are akin to the monetization of growing fiscal deficits, which could exacerbate the already dwindling public finance situation.
To address these issues and preserve the BoG’s legitimacy and credibility, the authors propose certain measures. Firstly, the fiscal nature of the central bank’s losses should be recognised and incorporated into the government budget. The authors suggest amending the Bank of Ghana Act to ensure appropriate accountability and financial responsibility.
Additionally, the government and the central bank should work to remove non-earning assets from the central bank’s books, possibly through the transfer of earning assets from the government. This would rationalise the financial relationship between the government and the central bank, allowing the central bank to charge market-related interest rates on its loans, including those to the government. Taking exchange rate changes into account in setting lending rates would also be prudent, given monetary policy considerations.
Furthermore, achieving operational independence is vital for the central bank to fulfil its mandate effectively. Good governance plays a key role in this regard, and the composition of the central bank’s board should ensure a well-informed and balanced view while avoiding conflicts of interest. The paper suggests reducing direct government representation on the policy board and increasing the presence of non-executive, non-government directors.
“Achieving that independence has multiple dimensions, with a wide range of degrees and models across jurisdictions. Financial independence is when the central bank has sufficient operational and financial resources to fulfil its mandate without influence from the government of Ghana.”
In 2022, the Bank of Ghana reported a loss of GH¢60.8 billion, primarily due to impairments of marketable government stocks, non-marketable government instruments, and the Bank’s exposure to COCOBOD.
The audited financial statement for 2022 revealed that the Bank of Ghana’s total liabilities exceeded its total assets by GH¢54.42 billion. The losses were attributed to various factors, including the government’s domestic debt restructuring activities and the depreciation of the local currency.
In an explainer earlier this month, the regulator noted that while its immediate policy solvency might not be directly affected by its negative equity, ensuring a strong financial position and capitalization is essential for maintaining the institution’s long-term financial independence from the state, credibility, and ability to effectively carry out its crucial mandates.
It offered reassurances that measures are in place, including potential recapitalization by the government, to address the situation over the next five years and bring the BoG back to positive equity.
According to the central bank, during this period it will continue to be policy-solvent and able to fulfil its mandates effectively.
