By Ken Ofori-Atta, Minister for Finance
There is an anonymous quote that says “banks are to the economy what the heart is to the human body. They cycle necessary capital through the whole and they are barely noticed until pressure, necessity, or crises.”
In much the same way, our Central Bank these past almost seven years has been prudent, strong, resilient and functioning efficiently, and been barely noticed until the interruption of unprecedented global events. Our Central Bank’s assets have grown almost in tandem with the size of our financial sector and economy. From GHS53b in 2016, the Bank’s assets have grown by nearly one and half to GHS126b as at the end of 2022. The foundation has never been conspicuous – our revenue has more than doubled since 2016, with total revenue increasing from GHS32b in 2016 to GHS96.7 (end-December 2022). The size of our economy has also more than doubled from a GDP value of GHS219.6b in 2016 to an estimated GHS610.2b by the end of 2022; and more pragmatically the number of active contributors on the SSNIT register has increased from 1.3 million in 2016 to over 1.8 million in 2022.
We can all attest to the progress made in digitization, infrastructure, the armed forces and police, public spending on education, agriculture (cocoa and PFJ), health, and school feeding among others. Indeed, spending on the education sector including our universities, second-cycle institutions and basic schools collectively constitute about 20% of tax revenue – and includes compensation, goods and services, and GETFund spending on infrastructure, while the health sector consumes about 8-10% of tax revenue, among others.
However, the vision for and progress in social mobility and economic freedom is often in budget conflict with short-term macroeconomic volatility, where the activist roles of fiscal and monetary policy, and if blessed with a Keynesian benefactor or fiscal windfall, must be deployed to ensure that these gains are not eroded. This is especially the case in instances where the volatility is mainly induced by cataclysmic events such as pandemics and geo-politics – the controls are often outside the remits of small open economies with independent central banks like Ghana.
It is within this context that since 2017 and especially between November 2019 and now, both the Ministry of Finance and the Bank of Ghana have shown the strongest collaboration yet to reset the financial architecture and to keep the economy strong.
In managing its balance sheet, the Bank of Ghana issues currency, conducts foreign exchange operations, invests its own funds, engages in emergency liquidity assistance, conducts monetary policy operations, and liquidity management, last but not least, for a developing country, serves as a banker to Government which role may include bridge financing to support budget, in line with the applicable laws. In essence, this makes the central bank balance sheet, in the long run, central to its operations. However, as many central banks, including Bank of Ghana, moved away from pursuing quantitative targets of monetary policy towards price targets, dominance of the Central Bank’s balance sheet as the key metric has waned in many economies and in academic literature as well.
In practice, many central banks have incurred losses, and we can cite as examples, the Bank of Jamaica, the central banks of Argentina, Brazil, Chile, the Philippines, Singapore, Turkey, and UK. Historically, some central banks have operated with negative equity (as a result of losses) yet fully met their policy objectives, as long as they remain policy solvent. The pandemic and Russia-Ukraine war have reinforced and increased the number of Central banks that have moved into negative equity and have thrown light into this ‘new normal.’ Thus, the Central Banks of Chile, Czech Republic, Israel and Mexico have experienced years of negative equity. The Reserve Bank of Australia fell into negative equity in 2022 due to valuation losses on its bond holdings, and the bank stressed that it will not affect its mandate or operational efficiency. And unheard of in the modern financial setup, the German central bank, that citadel of fiscal purity, recorded a loss in 2022.
The US Federal Reserve Bank in April 2022 also declared a negative equity position, on account of the rapid rise in rates that began in 2022, renewed interest expenses on commercial bank reserves deposits, and low income on its security holdings, including US Government securities. In fact, as indicated by the Brookings Institution, “the Fed’s cumulative losses came to more than $52 billion as at the end of April 2022, exceeding its paid-in capital and surplus, and in effect, leaving it in negative equity.”
(I cite these examples just to make the point that hitherto unheard of things have been happening in central banks around the world recently.)
Accordingly, as the focus shifts from direct targets of money supply to interest rates as operational targets, the framework for analysing central bank balance sheets has shifted, enabling central banks
to play more interventionist roles in the economy than before. As seen during the 2007 global financial crisis and the COVID era, over $16 trillion of quantitative easing (QE) was reported to have been spent by the G7 countries.
The modern economic policy consensus is clear: central banks can and do run on negative equity and they can make losses to support economic recovery; and these losses will not be counted as failure as in commercial banks and enterprises. In fact, as some critics of the Central Bank in our country do observe, the primary objective of a central bank is not to make profit but to be managed as a financially sustainable institution. We must in these extraordinary times deploy all the instruments we have available and sail together through this odyssey. The call for us as Citizens, is not to be seen as punishing the Bank of Ghana for pitching up to support the greater public good!
It is probably a good time to recall the wise words of the late Professor P.A. V Ansah that even as we educate and inform, we must foster national cohesion because “…national cohesion is the foundation upon which any and everything is built.”
The Government’s debt operations that commenced in 2022, and executed this year, has had a significant impact on Bank of Ghana’s balance sheet while reducing the amount of money spent on interest payment for the Government. As of 2022, the Central Bank held about GHS42.3b of Government’s domestic debt, out of the total (domestic) debt stock of GHS194.3b. This debt holding, in addition to others, resulted in a loss impairment provision of about GHS48b for the Bank in 2022. As indicated by the IMF, the BoG was the loss absorber for the debt exchange to ensure that in light of the concessions to other domestic bondholders, its burden share of the debt exchange will enable the economy to still achieve the overall objectives of the Exchange – the Domestic Debt Exchange Programme will ensure the NPV of the stock of public sector debt is halved from the then 105 percent of GDP (later recalculated as 89%) to 55 percent of GDP by 2028, thereby putting the country on a sustainable debt trajectory.
As indicated by the Board of Directors of the Bank in their 2022 annual reports, all efforts will be made to restore the balance sheet of the Bank in the medium term, continue to improve the efficiency of their operations, and resort to the Government for recapitalization over the medium to long term if necessary. There is, therefore, no need for a direct attack on the leadership of the Central Bank.
As the Minister for Finance, I do have opinions about the reforms needed to strengthen the governance of many financial institutions including the Bank of Ghana. But this requires a positive and sober national debate on the governance structure; should we, for example, revisit a separate chairmanship and governorship (such was the case prior to governor Dr. Agama’s years) and whether our democracy and institutional experience support Governors playing both board leadership and management roles as enshrined in our laws. We also need to have the discourse for policy clarity on what the operational independence of the central bank implies, especially in a Lower-Middle Income Country and transformational economies such as ours. I do personally believe that central banks must have independence in executing their monetary
policy mandate especially if it is based on a price target, where the Government sets the price targets, and Central Banks, in our case, BoG, independently uses its operational tools to achieve it.
Governor Addison, just like me, has faced major economic hurdles since 2017, inheriting a derailed IMF programme and a highly impaired and ethically strained financial industry from our predecessors, having to navigate the serious revenue shocks on the back of Covid-19 and distortions to our supply chain induced by both Covid-19 and international geopolitics. In resolving these, we have all had to make sacrifices, and the BoG balance sheet was significantly affected.
With respect to the BoG’s new headquarters, the evidence is clear that decisions to build had already been made long before these “losses” occurred. It is important for us to support such a critical institution to modernize its operations and have a befitting office space for a country that hosts the AfCFTA and has a vision to become the financial services hub of the continent.
Governor Addison is a competent professional of quiet courage. In these nearly seven years, we have worked together to ensure: the inviolability of the banking system; the establishment of the Consolidated Bank of Ghana (CBG) and the Development Bank of Ghana; the raising of over $10 billion in the Eurobond market and AfriExim bank. He brought inflation down to single digits of 7.9% for the first time; and managed an impressive period of currency stability in our country including the implementation of the Gold-for-Oil programme. It is either simply the height of irony or a sad reflection of the state of public discourse in our country that this man, steps up in a period of unprecedented global economic meltdown and domestic economic crises, and he is being pilloried for his good work.
The challenges that confront us are surmountable, as we can all bear witness to the fact that the economy is beginning to turn the corner, and we are confident that “He who began a good work in [us] will carry it on to completion” (Phil 1:6). Some developments appear expensive in the short term but will actually turn out to provide the right impetus for more innovation and reforms and a can-do spirit
for the long term. l will urge this mindset for us to address our common future. I therefore ask for restraint in our choices and actions as we pursue our democratic rights… for “’All things are lawful,’ but not all things are helpful. ‘All things are lawful,’ but not all things build up” (1 Cor 10:23). National cohesion should remain paramount for us all.
These are critical times when the two institutions, MoF and BoG, have synchronized their efforts to achieve expedited responses from the IMF, the World Bank, the Paris Club, and China to enable us to rebuild confidence and for our economy to turn the corner in record time as evidenced by a 4.2% growth in GDP, declining inflation, and a stabilized currency. We have in the past few weeks successfully completed the DDEP with over 90% tendering of cocoa bills, domestic dollar bonds, and pension fund investments while making the first DDEP coupon payments of GHS2.4 billion to honour the government’s obligation to domestic bondholders on 22nd August 2023 and about GHS2.3 billion on 5th September 2023 to pension funds bondholders. We are in like manner, looking forward to successful negotiations with the Paris Club and our Eurobond investors.
This should be a period to build hope and hitch all our wagons together in order to take our community across the Jordan. This is a period in which we must as a nation work with equanimity and dispel any cloud of nihilism. We cannot continue to contend with the old Promethean punishment which frustrates the steady regeneration of our economy. We must be mindful and deliberate in fighting with a fierce sense of urgency to guarantee economic freedom and social mobility for all and critically social cohesion. We must work together with a spirit to build up and not to tear down, as we progress our democracy.
I am confident that working together, this nation will not only prevail, but enjoy prosperity for “Behold, the people are one, and they have all one language… and now, nothing will be restrained from them which they have IMAGINED” (Genesis 11:6).
