Central Bank losses: BoG’s experience and its potential impact of the losses on the economy

The Bank of Ghana (BoG) has inaugurated an advanced command centre, the latest in its cybersecurity infrastructure, established to ensure the delivery of a safer digital financial industry.

The possibility of central bank losses may look like a “science fiction story” in most developed countries. It is indeed expected that a central bank carrying out traditional central banking functions in a stable macroeconomic environment will make profits. However, in the unstable macroeconomic environment of many developing countries like Ghana, central bank losses have emerged as a complex “real world drama: At times, central bank losses have created problems in the effective design and implementation of International Monetary Fund programs because of large and unexpected or unexplained movements in “other items net” in the balance sheet of central banks (Leone 1991).

Dalton and Dziobek (2005) opined that under normal circumstances, a central bank should be able to operate at a profit with a core level of earnings derived from seignorage. Losses have, however, arisen in several central banks from a range of activities including: open market operations; sterilization of foreign currency inflows; domestic and foreign investments, credit, and guarantees; costs associated with financial sector restructuring; direct or implicit interest subsidies; and non-core activities of a fiscal or quasi-fiscal nature.

Failure to address ongoing losses, or any ensuing negative net worth, will interfere with monetary management and may jeopardize a central bank’s independence and credibility. Transparency and accounting standards require net losses to be recorded as such in the income statement, charged against capital, and any resulting negative net worth to be properly disclosed in the equity section of the balance sheet. Net losses should not be presented in the balance sheet as assets unless they have been formally covered by the government. According to Honohan (2023) also opine that central banks running with negative equity does not matter but however economic logic compels that functioning of central bank to have positive equity. However, some central banks over the years that ran on negative capital were Central Bank of Israel, the Czech National Bank and the Central Bank of Chile. According to Honohon (2023) if the central banks’ losses persist with sizable net liabilities denominated foreign currency and restructured domestic debt could disable a financially weak central bank. Failure to address ongoing losses, or any ensuing negative net worth, will interfere with monetary management and may jeopardize a central bank’s independence and credibility.

Moreover, central banks are not subject to capital adequacy requirements or bankruptcy procedures and can operate effectively even with negative equity, as the central banks of Chile, the Czech Republic, Israel and Mexico have done over several years (Bell et al., 2023). However, losses or negative equity can pose communication challenges. For instance, some policy decisions, such as retaining rather than selling government bonds, could be misinterpreted as being motivated by a desire to contain losses rather than as actions to pursue specific policy mandates. This would reduce central bank credibility. Likewise, financial flows from government, including actions to strengthen central bank capital positions, could be perceived as being inconsistent with central bank independence. This underscores the importance of clear communication about the reasons for losses and of a transparent framework for financial flows between the central bank and the government.

Central bank losses are not an indication of a policy error and need not hamper the effectiveness of monetary and financial policies. The policy mandates of central banks include price stability and financial stability, but not profit maximization. Their current losses, as well as their earlier gains from QE, are a by-product of policy actions designed to help achieve their mandates. Moreover, central banks are not subject to capital adequacy requirements or bankruptcy procedures and can operate effectively even with negative equity, as the central banks of Chile, the Czech Republic, Israel and Mexico have done over several years (Bell et al., 2023). Central bank losses affect the public finances by reducing or ending central bank payments to the Treasury in the form of income taxes or remittances.  Moreover, reverse cash flows (i.e., payments from the Treasury) may occur if central banks are entitled to be compensated by the government for certain losses, such as Quantitative Easing-related losses. For instance, in the United Kingdom, the Bank of England Asset Purchase Facility (APF), through which QE asset purchases were conducted, is fully indemnified by the Treasury.

2.Literature Review on Central Bank Losses and Experiences in Selected Countries (Dalton and Dziobek, 2005)

i Brazil

Banco Central do Brazil’s (BCB) losses for the year ended December 31, 1997, largely reflected the effect of interest differentials between the cost of domestic liabilities (including securities issued by BCB for monetary policy purposes) and the relatively low return on the bank’s holdings of foreign currency assets. The losses were recognized subsequently in a balance sheet account “Result to be Offset, ”where they were held until such time as they could be offset by positive results in future fiscal years. The balance of the account (i.e., accumulated losses) at end-December 1997 was R$ 9.6 billion. Although the losses have not been securitized as a claim on the government, the balance of the Offset Account earns interest paid by the government at a rate based on the overnight interbank market rate. Since January 1997, this interest has been credited to a separate provision account that is used to offset the total of accumulated losses

ii Chile

Losses recorded by the Banco Central de Chile (BCC) in 1997 reflected the mismatch between domestic and international interest rates from the use of BCC paper to sterilize foreign inflows, and an ongoing effect of reduced earnings stemming from BCC’s involvement in a scheme to recapitalize the banking system in the late 1980s. In the case of sterilization activities, losses came about because BCC’s earnings from foreign exchange assets were considerably below the cost of securities issued to absorb the liquidity impact of the foreign inflows. In the recapitalization exercise, the BCC injected cash into commercial banks through a take up of subordinated debt equivalent to the face value of banks’ nonperforming loans. Subsequently, a debt for equity swap also saw the BCC hold equity positions in banks, in preparation for a privatization of the banks concerned.

The low level of earnings attached to the subordinated debt and equity holdings has affected the ability of BCC operating income to absorb the costs of sterilization and since 1992, the BCC has recorded successive net losses. In addition, BCC was also accumulating unrealized losses on changes in the value of its equity positions in commercial banks. BCC net losses have been charged against its equity. In 1997, these losses resulted in negative net worth, which was disclosed in the bank’s 1997 annual report. The low level of earnings attached to the subordinated debt and equity holdings has affected the ability of BCC operating income to absorb the costs of sterilization and since 1992, the BCC has recorded successive net losses. In addition, BCC was also accumulating unrealized losses on changes in the value of its equity positions in commercial banks. BCC net losses have been charged against its equity. In 1997, these losses resulted in negative net worth, which was disclosed in the bank’s 1997 annual report.

iii Czech Republic

Czech National Bank’s (CNB) losses for the year ended December 31, 1996, reflected losses on financial transactions undertaken as part of the bank’s monetary operations to sterilize the effects of foreign capital inflows, during a period in which a fixed exchange rate regime operated in the Czech Republic. (This regime was replaced, in 1997, by a floating regime as part of a range of measures adopted by the Czech Government to restore the pace of economic reform.) The losses were included as a negative item against CNB capital and reserves, but did not result in negative net worth for the bank. (The Central Bank Law does not contain any provisions for the government to cover CNB losses.) In 1997, CNB profits were in excess of CZK 10.7 billion, and these were allocated to cover the 1996 losses and also to increase the bank’s reserve funds.

It should also be noted that the 1997 result was determined after the Czech National Bank charged some CZK 30.4 million (equivalent to almost three times the resulting net profit of CZK 10.7 million) against income to fund specific and general loan loss provisions for losses recognized during 1997. Details of the 1996 net loss and 1997 loan loss allowances were reported in the CNB’s Annual Reports, and more recent figures are also available from its Internet site.

iv Hungary

The National Bank of Hungary’s (NBH) losses in 1996 reflected two contributing factors. The first was associated with increased forint expenses associated with domestic liabilities and repurchase operations used to sterilize foreign currency inflows. During 1996, the NBH continuously bought foreign exchange, thereby increasing the forint issue of the bank. The second factor derives from the NBH’s role as the foreign borrowing agent for Hungary. In this role, the NBH accumulated significant foreign exchange valuation losses on its net foreign currency liabilities that were recorded as a non-interest-bearing claim on the government in the NBH balance sheet. Although there was a process for gradual securitization of this claim into an interest-bearing claim on the government, the non-interest-bearing component accounted for almost 30 percent of total assets at end-December 1996 which correspondingly limited the scope for NBH revenues to cover increases in domestic interest expenses, particularly those associated with sterilization operations. The losses of 1996 were covered by a budgetary allocation from the government which resulted in a small net profit available for distribution and payment of taxes.

During 1997, legislative changes were introduced which saw the transformation of the remaining non-interest-bearing claim into an interest-bearing foreign exchange claim recognized by the government. This transformation also had the effect of covering the NBH’s previous net foreign exchange liability position, thereby reducing the possibility of further foreign exchange valuation losses. The losses and their remedies were fully disclosed in the NBH’s 1996 and 1997 Annual Reports, which can also be accessed through the bank’s Internet site.

  1. Korea

The Bank of Korea (BOK) incurred relatively small net losses in 1993 and 1994, largely as a result of negative interest margins between central bank securities issued and counterpart foreign currency assets. The losses were recorded as a negative item against BOK capital and reserves in 1993 and 1994, but did not result in negative net worth for the bank. Profitable operations returned in 1995 and 1996, and in the latter year, the bank allocated around two- thirds of net profits to the government. Summary data on BOK assets, liabilities, capital, and profits and losses can be obtained from the bank’s Internet site.

vi Thailand

During 1997, the Bank of Thailand’s (BOT) General Department incurred substantial foreign exchange losses of around B 170 billion through both market operations and end-year revaluation of foreign currency liabilities and assets. The market losses arose as the General Department engaged in foreign currency spot and swap transactions and in its market interventions in the period leading up to the floating of the baht. A valuation loss ensued when the Department’s net foreign currency liability position was revalued at end-December 1997 exchange rates, which were considerably below the rates prevailing at the beginning of the year. Of the total losses of B 170 billion, some B 104 billion was recognized in the Profit and Loss account, and B 66 billion was recorded as deferred unrealized losses in other assets on the balance sheet. The B 104 billion losses charged against income resulted in a net loss of B 68 billion. This was subsequently charged against the capital and reserves of the General Department, producing a negative net worth equivalent to about 3 percent of the total assets of the General Department. The remaining deferred unrealized losses recorded on the balance sheet were to be amortized over a four-year period.

Legislative provisions of the Currency Act and the Bank of Thailand Act at the time required BOT to maintain entirely separate accounts for its General Department and the Issue Department. Consequently, the bank was not able to offset General Department losses against profits of the Issue Department for 1997. The bank did, however, disclose in its 1997 Annual Report that Issue Department profits would have been adequate to cover the losses but for the legislative requirements. Subsequently, the government issued the Emergency Decree in 2002, allowing a one-time transfer of assets from a Special Reserve Account, which is part of the Issue Department’s Account, to eliminate accumulated losses.

vii USA

The US Federal Reserve does not mark its bond portfolio to market, but the interest rate jump means that its baseline expectation is to make net losses for several years. The Fed has been operating with very small equity (about 0.5 percent of its total assets). When any of the regional Reserve Banks incurs losses, as has just been reported for 2022, the Fed assigns them to what it calls a “deferred asset.” Until subsequent surpluses accumulate to the point of wiping out this deferred asset, remittances to the Treasury are suspended. Projections suggest that this deferred asset will soon exceed the equity in the system.

 viii. GERMANY

The Deutsche Bundesbank (DNB) were among the first of the euro area central banks to forecast sizable annual losses. They will not be transferring remittances to their governments, and the DNB warns that it too may move into a negative equity position (though when it speaks of negative equity, the DNB is not counting most of the current market value of its gold reserves).


The Bank of England has a British government indemnity for losses related to Quantitative Easing (QE). This will result in payments from the UK Treasury to the Bank over the coming decade projected to total almost £230 billion (10 percent of GDP)—a figure that could double if interest rates are even 100 basis points higher than in the base projection. These losses come after years in which QE lowered borrowing costs for governments and increased profit distributions to governments from central banks. Since central banks nowadays tend to pay market-related interest rates on most of their liabilities, the flow of profits was likely to fall whenever interest rates started to rise.

The developed economies’ central banks operating in a relatively stable macro- economic environment usually have relatively wide scope to issue non -interest bearing debt (currency and unremunerated bank reserves) and use the proceeds (seignorage) to make profitable investments. As a consequence, income usually exceeds expenditure and changes in net worth are usually positive.

However, in several developing countries central banks have been involved in quasi-fiscal activities. They have become a “hidden treasury” performing a variety of typical functions and operations. When these quasi-fiscal activities demand financial resources in amounts that exceed a central bank’s capacity to collect seignorage at acceptable inflation rates, they need to appeal to costly indebtedness.

As a result, an unfavorable structure of assets and liabilities may develop over time. The main features of this structure usually are (1) a negative net foreign asset position, (2) a large proportion of non per forming and low-yielding domestic assets in their portfolio, and (3) relatively expensive domestic and foreign debt. Structures of this kind in conjunction with generally poorly managed foreign investments and high administrative and operating expenses can generate large losses. (4) Losses resulting from these quasi-fiscal operations may occur unexpectedly, but generally are present from the outset of the operation (for example, when a central bank grants subsidized credits). Among these activities, some deserve close analysis because they have created losses of substantial magnitude in several central banks (Leone, 1993).

Evidence from literature have shown that while central bank losses will affect the consolidated public finances, serving as a source of revenue for governments is not the purpose of a central bank: they exist to fulfil their policy mandates, including price and financial stability. Thus, the success of their interventions should always be judged on whether they fulfil these mandates. Unlike commercial banks, central banks do not seek profits, cannot be insolvent in the conventional sense as they can, in principle, issue more currency to meet domestic currency obligations, and face no regulatory capital minima precisely because of their unique purpose. Accordingly, central banks are protected from court-ordered bankruptcy and are backed (indirectly) by taxpayers. These provisions allow central banks to successfully operate without capital and withstand extended periods of losses and negative equity. History clearly illustrates this. Several central banks had negative equity yet fully met their objectives – for example, the central banks of Chile, Czech, Israel and Mexico experienced years of negative capital. Between 2002 and 2021, some 10 out of 32 EME/SOE central banks had negative equity, only briefly in many cases, but for more than 30% of the time for three of them. But throughout, financial and price stability were maintained (Bell et al, 2023).

There can be, however, exceptional situations where perceptions and political economy dynamics can interact with losses to compromise the central bank’s standing like in the case of Bank of Ghana.  If there is macroeconomic mismanagement and the state lacks credibility, losses may erode the central bank’s standing, which may jeopardize its independence and could even lead to the currency’s collapse. The Bank of Ghana’s credibility could also be at risk if it lacks sufficient resources to fund its operating needs, such as future earning capacity or government recapitalization without conditional political influence (Bell et al, 2023).

(Culled from IMF Working paper WP/05/72: Central Bank Losses and Experiences in Selected Countries: John Dalton and Claudia Dziobek. 2005)

  1. 3. Bank of Ghana Losses’, Experience in 2022 and its potential impact and implications for the economy.

The Bank of Ghana’s losses in 2022 is not the first in the past decade, because in 2017 Bank of Ghana recorded loss of (US$ 347 million) GHC1.64 billion, according to its annual report announcing a pre-tax profit of (US$ 150 million) that was GHC 709.5 million However, the report showed an impairment loss of US$ 85.5 million in 2016 and rebound of 208% to US$275 million in 2017. The analysis of the dismal financial performance showed that the situation was attributable to the regulator’s support to the insolvent local banks that operated between 2013-2016 as the biggest contributor to the central bank loss position. However, the magnitude of Bank of Ghana posted losses totaling GHC 60.81 billion (US$5.3 billion) for the 2022 financial year compared to a profit of GHC 1.21 billion for 2021 was very huge and unusual for the central banking business. According to IMF Country report (23/168) opined that the Bank of Ghana’s balance sheet could be affected by the debt restructuring, and requested that the Government and the Bank of Ghana would be required to assess the impact and develop plans for its recapitalization with technical assistance support from IMF. Bank of Ghana engaging in quasi-fiscal activities has been responsible for most such losses because it increased the Bank of Ghana’s expenditures. The Bank of Ghana reported a loss of GHC 60.8 billion as reported in the audited financial statement of the year end 2022.  The main reason for this 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 Bank of Ghana. In addition, the Bank of Ghana’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 Bank of Ghana, 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 program. As a result, the Bank of Ghana had to take on a 50 percent principal haircut on the total principal (which stood at GHC 64.6 billion at the time of the exchange). Consequently, Bank of Ghana 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-marketable (government accommodation finance of GHC 64.6 billion by Bank of Ghana) amounted to a loss of GHC32.3 billion. Restructuring of marketable instruments amounted to a loss of GHC16.1 billion. The impairment from exposure to COCOBOD also amounted to GHC 4.7 billion. These three DDEP items (i.e. 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.

Bank of Ghana losses occurred for three main reasons. First, market securities valued GHC 16.1 billion held by the central bank are sold at a value inferior to the one they were bought (DDEP). Second, losses occurred because of 50% haircut of non-market debt of GHC 64.5 billion in the form of accommodating finance of government in 2022. Third, there was a revaluation of foreign exchange holdings, i.e. that the domestic currency devalued against reserve currencies, this can lead to a loss. The central bank’s holdings of government debt were restructured. Non-marketable holdings of government of Ghana instruments including long-term stocks, a COVID-19 Bond and overdraft were subjected to a 50 per cent haircut. Bank of Ghana’s other claims (holdings of marketable instruments) were exchanged under similar terms as other financial institutions under the DDEP. This led to an impairment of GH¢48.40 billion in 2022. At the same time, the Bank incurred revaluation losses on its foreign assets and liabilities due to exchange rate depreciation. The impairments and revaluation losses led to a negative equity position of GH¢55.12 billion for 2022,”

Do these losses really matter? Yes, they matter a bit, though not as much as suggested by the headlines and critics of over financing the government above the limit set of 5% of the previous fiscal year’s total revenue Section (16) of the Bank of Ghana Act 2002 Act 612 (Amended Act Bank of Ghana Act 2016 Act 918) and Fiscal Responsibility Act 2018 Act 982 which requires the deficit to be kept at a maximum of 5% of GDP. In any tightening of monetary policy, the finances of central banks are often squeezed as they do their job of restoring price stability. Still, recent losses are on a much bigger scale than seen before. These losses result from the expansion in central bank balance sheets as they struggled to revive their economies and prevent deflation after the banking financial crisis of 2017–2019.

The Bank of Ghana’s losses should not be too breezily dismissed, given their impact on the public finances and the fact that, in extreme cases, such losses could even weaken the independence of a central bank.  Fry (1990, p.8) defines a central bank to be insolvent “when it can continue to service its liabilities only through accelerating inflation.” This implies that as long as the central bank can service its debt through accumulation of additional debt, thereby avoiding an acceleration of inflation, it cannot be considered insolvent. However, the public will only be willing to hold a growing volume of central bank debt at increasingly higher interest rates, entailing adverse implications for economic growth. A central bank should therefore be considered insolvent if it can only continue to service its debt through accelerating inflation or decelerating growth.

The Bank of Ghana’s audited financial statement for 2022, revealed that the total liabilities of the central bank and its subsidiaries exceeded its total assets by GHC 54.42 billion. According to the Bank of Ghana audited financial statement for the year 2022, the losses were attributed to the government’s domestic debt restructuring activities and the depreciation of the local currency, among other factors. The coupon reductions and maturity extensions in the recently completed DDE mean that the value of these assets will decline to about 70 percent of the par value. This revaluation represents a significant shock to the balance sheets of these financial institutions.

Some proponents such as some of the Bank of Ghana’s officials have argued that a central bank does not need adequate capital. These critics have cited multiple reasons for that: (a) a central bank can always meet its liabilities by printing money, (b) the government offers (implicit) support to the central bank, and (c) seignorage acts as a buffer for the central bank but below are the arguments that the Bank of Ghana requires the stable and strong balance sheet.

  • The Bank of Ghana can always meet its liabilities by printing money. Although, it is true that a central bank technically cannot go bankrupt in its domestic currency, the practice of printing money to cover costs or losses is unsustainable. It will jeopardize public confidence in the central bank and drive up inflation as a result, in an extreme case leading to hyperinflation. A strong balance sheet with adequate capital of the Bank of Ghana on the other hand, supports public confidence as it implies that fiat money as a central bank liability is covered by the central bank’s assets. In a way, adequate capital is therefore the successor to the gold standard, ensuring sufficient assets to cover the monetary base. Trust in money is the precondition for the legitimacy of the central bank like Bank of Ghana, which in turn is the foundation for central bank independence, as argued by for instance Braun (2016).

(b) The government offers (implicit) support to the central bank. Some central banks such Bank of Ghana with negative capital seemingly operate without problems. This primarily works, however, because stakeholders such as financial markets and the public have trust in the government and the strength of the national economy. From a public finance perspective, the central bank’s balance sheet can be considered part of the consolidated government’s balance sheet. If this consolidated balance sheet is strong, a weak central bank balance sheet may appear to be non- problematic for the role and effectiveness of the central bank. This is because the central bank implicitly relies on the strength of the government. Without the support from the government, stakeholders would perceive a central bank with negative capital as one whose main tool (the balance sheet) is weak and whose liabilities (fiat money) are only partly covered by the central bank’s asset values. In a crisis, financial markets will factor in the financial strength of the government, which may be deteriorating at that point as well. In such a situation, there may be limits to what the central bank can achieve on its own in pursuing its objectives. Therefore, Bank of Ghana with a negative capital position may not be independent enough and may experience lower credibility.

  • Seigniorage acts as a buffer for the central bank. Seigniorage can be seen as a form of taxation by a non-elected national authority. Whether the central bank’s balance sheet should be used as an effective tool to generate public sector income, is a broader question that also relates to optimal taxation policy. Central banks earn income through their conduct of monetary policy because the policy rate for lending is somewhat higher than the policy rate for deposits, generating an interest margin. More importantly, a central bank has a monopoly of the issuance of banknotes, which are liabilities that bear no interest rate. Against these liabilities the central bank invests in assets with positive expected returns. We refer to this collectively as the central bank seigniorage income and this explains why central banks generally make profits. present discounted value of future seigniorage income, assuming it is significant and extends far into the future (see, for example, Buiter, 2008). However, the amount of seigniorage income is uncertain and depends on the applicable monetary policy in place. In adverse scenarios – and if monetary policy demands it – seigniorage may be low for a long time or even negative for a number of years. Therefore, seigniorage does not help to ensure independence and credibility over the medium term. Even in a normal economic environment seignorage is notoriously hard to estimate because it requires assumptions about the interest rate margin. It is therefore prudent not to take future seignorage income into account as a loss-absorbing buffer. This is in line with commercial banks, which likewise do not include their future net income as a buffer. If financial risks were covered by seignorage only, this would place an additional constraint on monetary policy. The Bank of Ghana in this case would effectively have to restrict its monetary policy options to those that are profitable over the short to medium term. As a result, such a central bank would have lower credibility as a monetary authority to deploy whatever needs to be done
  1. Potential Impact of the Bank of Ghana Losses

The losses of the Bank of Ghana are likely to have an impact on its prestige and authority and may also influence macroeconomic developments. The perception that it may not be financially sound, however simplistic the view, could erode its authority to supervise the financial system and limit its ability to use moral suasion as an instrument of policy. Its independence in managing its internal affairs may be diluted by, for example, pressures to make the central bank’s administrative budget subject to approval by the government or the legislature, as a way to limit its losses. Except in such extreme cases, the erosion of the central bank’s authority would be difficult to measure. The losses would have a more tangible impact on economic aggregates and on monetary management. The macroeconomic effects could come about both directly-through the effects of the losses on monetary expansion-and indirectly-through their impact on the efficiency of monetary management.

Ii. Potential macroeconomic Impact of the Bank of Ghana’s losses

The expenditure of the central bank constitutes an injection of liquidity into the economy and its revenues, a withdrawal of liquidity. This statement holds for the central bank’s operations in both domestic and foreign currency, but the impact of foreign currency operations on domestic liquidity may take time to materialize. Whenever foreign exchange resources used for a particular transaction are obtained from, or flow to, the domestic economy, the impact of the transaction on domestic liquidity will occur immediately. If, however, the central bank uses foreign exchange resources from its own stock, or borrows abroad, for a transaction, the operation could not immediately generate a domestic currency counterpart, nor will the impact on domestic liquidity be felt at the time of transaction.

Nevertheless, even in this case, a monetary impact can occur over time if the use of foreign exchange for that transaction creates or widens excess demand for foreign exchange, forcing the public to hold more reserve money than desired, thereby putting pressure on the exchange rate and interest rates. From a macroeconomic point of view, losses of the central bank are a problem only if they endanger attainment of monetary targets. As the losses represent an injection of liquidity, the central bank may have to sterilize their impact partially or entirely in order to achieve money growth objectives. This would be the case if, in any period, losses lead to more rapid growth in the base money than desired, making it necessary for the central bank to issue interest-bearing liabilities, such as central bank certificates of deposit, to absorb the additional liquidity in the system.

This type of sterilization embodies a risk that future losses may grow exponentially. The vicious circle of rising losses and rising remunerated liabilities would be accompanied by increases in interest rates in each round. This would be necessary to reduce private demand and encourage the holding of certificates of deposit by the private sector. The prospect can be avoided as long as losses of the central bank are compensated by surpluses in other parts of the public sector. Surpluses may not be able to match the growing losses, however, and interest rates would have to rise, eventually leading to a reduction in profitability, investment, and growth.

iii. Potential Problems Posed for Monetary Management

Bank of Ghana’s losses are relatively large to the monetary base to erode the ability of the central bank to conduct monetary management efficiently, further compounding the current adverse macroeconomic conditions of higher monetary policy rate of 30%, annual inflation of 42.5%, and persistent devaluation of the local currency . Losses of the Bank of Ghana are relatively large to the monetary base, that could possibly erode the ability of the central bank to conduct monetary management efficiently, further compounding the adverse macroeconomic effects mentioned above. From the experience of countries such as Jamaica indicates that persistent losses of the central bank could lead to inconsistent use of monetary policy instruments.  Growing losses create an environment in which the central bank would face the continuous task of sterilizing the monetary impact of its losses by absorbing liquidity from the financial institutions in the country. If the recent Bank of Ghana losses are not managed well there is the that likely to complicate monetary management whether the central bank relies on market-oriented indirect instruments of monetary control or on direct instruments, such as bank specific credit ceilings and administratively fixed interest rates. Under the indirect approach, as the losses could lead to progressively higher interest rates and increase their volatility, interest rate management and financial programming become more complex. Interest rate volatility will also impede the development of the money market. These problems may eventually force the Bank of Ghana to depart from its indirect approach, at the cost of distorting interest rates and impeding efficient resource allocation.

As Bank of Ghana had relied primarily on direct instruments of monetary control, it can finance its losses through base money creation and then sterilize the impact by tightening the ceilings appropriately. The resulting excess reserve will lead to lower deposit rates, higher lending rates, or both, and pressures will intensify for evading the ceilings. To prevent this, the central bank may have to pay interest on the banking system deposits it holds, or to increase reserve requirements. The former will further increase its losses; the latter could have well-known undesirable effects on the financial system.

IV. Potential impact of Bank of Ghana’s losses on the Government Fiscal Pressure

Bank of Ghana’s losses may add to Government fiscal pressures. The Bank of Ghana’s balance sheet has been affected by the domestic debt restructuring. The Government and the Bank of Ghana would have to assess the impact and develop plans for its recapitalization with Fund technical assistance support (IMF Country, 23/168). Bank of Ghana losses on their balance sheets and continue to operate with a negative capital position. However, the IMF Country report (23/168), has recommended that government to strengthen central bank capital positions after the domestic debt exchange impairment of GHC 48.70 billion, thus putting additional strain on the already dwindling public finances. Restoring the Bank of Ghana’s equity position to positive territory, for example, would require capital worth around 1% to 2% of GDP and restoring capital buffers would greater investment.

V. Ghana’s default status and with the Bank of Ghana’s negative equity would have serious implication on the reissued domestic bonds maturing between 2023 -2038 as far Basle Core Principle on risk rating assets

With Ghana’s default status and the Bank of Ghana’s negative equity will be in conflict against the international financial sector regulation, as Basle Core Principle recommended on specific risk weights to various asset categories, including restructured bonds under the DDEP against which proportionate capital is required to be held.  Prior to the domestic debt exchange, Bank of Ghana applied a zero weight (implying zero risk) to Government of Ghana’s domestic debt on the basis of the Government’s strong track record and commitment to debt repayment and the supporting constitutional provisions in this regard with the defaulted country status and the Bank of Ghana’s negative capital status   could not reissue the zero risk -rated bonds. A rating downgrade of Ghana 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 100.0 per cent and would thus require very significant increases in capital of the entire financial system.

Vi. Bank of Ghana’s losses or negative equity could pose communication challenge

Bank of Ghana’s losses or negative equity can pose communication challenges. For instance, some policy decisions, such as retaining rather than selling government bonds, could be misinterpreted as being motivated by a desire to contain losses rather than as actions to pursue specific policy mandates. This would reduce central bank credibility. Likewise, financial flows from government, including actions to strengthen central bank capital positions, could be misperceived as being inconsistent with central bank independence. This underscores the importance of clear communication about the reasons for losses and of a transparent framework for financial flows between the Bank of Ghana and the government. One more perspective in favour of adequate capital comes from the public’s perception that the central bank performs banking services for the commercial banks and often manages part of the national reserves in the form of gold, foreign currency reserves with Bank of England UK, Fed Reserve Bank of USA, etc. and other investments. The public will perceive the central bank as a “bank” that needs to be adequately capitalized.

Therefore, from a communication perspective it makes sense to adequately capitalize a central bank, even if the central bank is considered to be a financial subsidiary of the government. As with any other financial subsidiary of a parent company, sufficient capital is needed having regard to the risks that the subsidiary runs. Even if the parent has given the subsidiary an explicit guarantee, supervisory authorities will still require the subsidiary to hold sufficient capital.

4.0. Concluding Remarks

A strong balance sheet gives the Bank of Ghana sufficient fire power to implement its monetary policy in an effective way. Adequate capital is an important ingredient of a strong central bank balance sheet. It also supports the public’s and financial markets’ confidence in the independence and credibility of the central bank. With sufficient capital, Bank of Ghana can focus on the most appropriate monetary policy without having to consider the strength of its balance sheet or the short-term financial interests of the government. Finally, the public expects adequate capitalization would enhance the credibility and legitimacy of Bank of Ghana.  Central bank just as any other bank is supposed to make profits because of the seignorage involved in currency issue. However, many central banks make losses because the costs involved in trying to preserve the value of the currency, and in supporting government policy through quasi-fiscal activities, outweigh seignorage. This paper has argued that Bank of Ghana’s losses cannot be ignored:  as it could undermine monetary management, slow down financial market development, and set back the attainment of such economic objectives as price stability and economic growth. In these regards, the impact of Bank of Ghana’s losses is similar to that of the monetization of growing fiscal deficits. The Bank of Ghana’s losses could have an added dimension to the already dwindling public finance.

Therefore, their fiscal nature should be recognized and they should be incorporated into the government budget either directly, or-if this is not possible-by effectively assuring such an outcome through appropriate reform of the Bank of Ghana Act 2002 Act 612 as Amended Act 2016 Act 918. At the same time, and especially if amalgamation is not possible, steps should be taken to remove any non-earning assets from the books of the central bank through transfer of earning assets from the government, and to rationalize the financial relationship between the government and the central bank. The latter would imply allowing the central bank to charge market-related interest rates on all its loans, including those to the government.

This would mean that it should take the risk of exchange rate changes into account in setting its lending rates, to the extent allowed by monetary policy considerations. It should also rely on securities issued by the government in conducting monetary policy. If a central bank is indemnified for large losses or feels pressure to request recapitalization from the government, this could be perceived as increasing political pressure on it to undertake quasi-fiscal activities or possibly increasing its willingness to tolerate higher inflation to rebuild capital through seignorage, potentially influencing its policy credibility. To conclude, the Bank of Ghana’s credibility depends on its ability to achieve its mandates. Losses may not jeopardize that ability and are sometimes the price to pay for achieving those aims.

To maintain the public’s trust and to preserve Bank of Ghana’s legitimacy now and in the long run, the government should appreciate that central banks’ policy mandates come before financing of government and profit (BIS (2023). Bank of Ghana is a public institution, but there is broad consensus on the need for their operational independence to pursue price and financial stability mandates without interference from governments, whose priorities can conflict with those mandates. Achieving that independence has multiple dimensions, with a wide range of degrees and models across jurisdictions. Financial independence – when a central bank has sufficient operational and financial resources to fulfil its mandate without influence from the government of Ghana.

Lastly, good central bank governance means that the objectives and tasks delegated to an institution are performed effectively and efficiently, thus avoiding compromises and breaching of the Bank of Ghana Act 2002 Act 612 Amendment Act 2016 Act 918 by the allowing fiscal dominance by governments, misuse of resources, which is crucial for establishing a good track record and operational independence. While the concept of central bank autonomy has prevailed, the last decade has focused more on accountability and transparency, but recently the focus has moved toward good governance. Alleged infringements and compromises by non-executive directors and officers in a few countries like Ghana have also advanced this trend. Good governance will only be achieved if the non-executive directors and executive directors are persons of great integrity, ability, with independent minds and willingness to live up to their fiduciary responsibilities. (Lybek, 2005)

Composition of the board of the central bank should ensure a reasonably well-informed and balanced view, but avoid conflicts of interest. Precisely what is reasonable depends in part on the role of the board (decision-making, monitoring, or purely advisory), and whether it is a single or multiple board structure. The highest level board should include a majority of non-executive, non-government directors. Indeed, direct government representatives should be eliminated from a policy board and probably also from a monitoring board. If a government representative does participate in a policy board, it should at least be without the right to vote (though it might be with a limited, temporary veto power). As with the governor, nomination and appointment/confirmation should be by different bodies; terms should be longer than the election cycle of the main body in the appointment and should be staggered; and dismissal of board members should occur only for breaches of qualification requirements and misconduct, and on performance grounds only if clearly defined. The latter could be ruled upon according to a suitable and independent judicial procedure, and be with the other board members’ prior consent (Lybek, 2005).



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