The Bank of Ghana recently reported a significant loss of GHC 60.8 billion. What drove this huge loss?
The main reason behind it was the impairment of the holding of marketable Government stocks and non-marketable instruments of the Government, all held in the books of the Bank of Ghana. Additionally, the Bank’s exposure to COCOBOD, accumulated over the years, was also impaired. These impairments were part of the debt exchange program (DDEP) initiated by the Government of Ghana, affecting the Bank’s equity position.
The total loss of GHC 60.8 billion in 2022 can be broken down as follows: GHC 32.3 billion loss from the 50 percent haircut on non-marketable instruments, GHC 4.7 billion impairment from exposure to COCOBOD, and GHC 16.1 billion due to price and exchange rate valuation effects. Furthermore, interest expense on the cost of monetary policy operation accounted for GHC 3.3 billion.
In the financial statements, there’s a loss of GHC 60.8 billion and a negative equity position of GHC 55.1 billion. What’s the difference between these two numbers?
Normally, when profits or losses are declared, they are posted to a General Reserve Fund Account. In this case, the GHC 60.8 billion loss was posted to the general reserve account, which had some positive balances. The loss, combined with the positive balances, resulted in an overall negative equity of GHC 55.1 billion.
Given the significant negative equity, some may question if the stated capital of GHC 10 million is adequate for an institution like the Bank of Ghana with such a huge responsibility. However, the Bank of Ghana is not a typical profit-making institution, and its capitalization doesn’t solely determine its policy solvency. The Bank’s ability to deliver on its mandate of price stability and promote financial stability is crucial. Nevertheless, concerns about negative equity remain, and structures and actions have been identified to restore the Bank to positive equity over the next five years.
Does negative equity affect positive policy solvency?
While the financial position of the central bank doesn’t have an immediate impact on its ability to pursue appropriate policies, a high equity and earning capacity in the long run are essential for financial independence and credibility. Inability to cover costs and build sufficient buffers may require government capital injection, potentially affecting public confidence in the central bank’s operations.
Are there Central Banks operating with negative equity?
Historically, some central banks, including those of Chile, Czech Republic, Israel, Germany, and Mexico, have experienced periods of negative equity yet maintained price and financial stability. However, these periods were managed effectively, ensuring their objectives were met.
What’s the difference between insolvency and negative equity? In general, insolvency means the inability to pay debts, while negative equity means the central bank’s liabilities exceed its assets.
Are there Central Banks that experienced losses comparable to Ghana’s in 2022?
Yes, in 2022, several central banks worldwide recorded losses. For instance, the Reserve Bank of Australia reported a 2022 book loss of 37 billion Australian dollars, wiping out its equity. The Bank of England faced a £150 billion bill to cover its losses, and the Swiss National Bank reported a record preliminary loss of 132 billion francs for 2022.
Why are Central Banks reporting losses in 2022?
Central banks take on financial risks to fulfill their policy mandates, contributing to a well-functioning economy. Aggressive interest rate hikes in 2022 were attempted to tackle record-high inflation and re-anchor inflation expectations. These actions led to losses and negative equities, raising concerns about fulfilling their mandates of price and financial stability.
Table 1 provides information on central banks reporting negative equity in 2021. The impact of these losses on the effectiveness of central banks remains a topic of interest and concern.
