SIKAKROM with Gideon Donkor: BoG: Losses aren’t the problem, policy solvency and credibility deficit are

There are two ways to read the Bank of Ghana’s latest financial statements: either as a sober account of policy insolvency, or as an enthusiastic exercise in creative writing. The numbers insist on the former; the commentary strains for the latter—demonstrating that when the balance sheet fails to align, the narrative must work overtime.

The real story here is not simply that the Bank of Ghana has posted losses once more, nor that its negative equity position has deepened. Rather, it is the issue of policy insolvency that stands out.

Central banks can operate with negative equity and still achieve their dual goals of supporting price and economic stability. For instance, the central banks of Israel and Chile have gone through decades of losses and negative equity without losing effectiveness.

However, it remains crucial that banks always maintain policy solvency. According to the Bank of Ghana’s financial statements, policy solvency is defined as “the capacity of a central bank to finance the full cost of its monetary policy operations, [..] from its own internally generated income, without resorting to monetary financing or extraordinary government support.” By this standard, the Bank of Ghana is currently falling short.

The bank generated a surplus of GH¢ 5.5 billion this year after deducting open-market operation costs from its operating income, a significant increase compared to last year’s figure of GH¢ 793 million. However, these figures include two one-off income items: a GH¢9.57 billion gain from sales of gold and GH¢2.15 billion fee recovery from the Ministry of Finance. Strip these out and you will find a deficit of GH¢6.22 billion, rather than a surplus.

This effectively means that going forward, the bank can continue its open market operations only by “printing money” to cover its expenses or surrender its independence by relying on the central government for budgetary support. Without sustained income streams or strategic reforms, reliance on monetary financing could undermine both inflation targets and public confidence.

Following their announcement of the gold sale at the end of last year, we noted in our article published on 2^nd of February, that: “…it is plausible that the sale was intentionally timed to transform mark-to-market gains into realized gains before year-end, possibly offsetting previous losses from open-market operations prior to annual financial reporting.” Subsequent events have validated this assessment, and it is generally regarded as a warning sign when central banking actions are motivated by objectives that obscure transparency rather than fulfilling established economic mandates.

Additionally, stretching accounting to offset the full impact of currency appreciation, just to reduce the headline loss from GH¢35 billion suggests manipulation of the financial statements. These actions and the pre-release public relations seem inappropriate for an institution where trust and transparency are paramount.

Several analysts cite the current low inflation and interest rates to justify the bank’s large open-market operations in the past year, viewing the resulting losses as a natural cost of pursuing macroeconomic stability. However, I respectfully disagree, as I believe the bank’s current approach to monetary policy may not be sustainable.

Drastically reducing the money supply while sharply lowering rates on government debt is a contradictory and highly unstable policy mix. Such measures are likely to trigger a severe financial crisis, sharp recession, and eventual currency devaluation.

This combination—known as quantitative tightening (QT) alongside suppressed borrowing costs—creates an “unstoppable debt” scenario where the government attempts to control inflation while simultaneously trying to manage its own interest payments.

A sharp decrease in the money supply or its growth can freeze credit markets, making it challenging for both businesses and consumers to borrow or refinance debt. As the money supply drops or grows slower compared to overall demand, deflationary pressure builds, lowering demand for goods because there is less money circulating.

This eventually leads to falling prices. When you hear news stories about market vendors saying that customers are not buying, even though prices have dropped over the past year, this is an example of these effects in action.

While implementing QT, the bank has also been simultaneously lowering T-bill rates through auction strategies—managing how much is offered, making strong central bank bids, and influencing market expectations about partial allotments.

They have managed to lower short-term government rates below 5%, a necessary move since higher rates increase budget pressure. However, this approach essentially transforms the bank into an arm of the Ministry of Finance, leading to fiscal dominance.

Lowering rates on debt while reducing money supply is highly uncommon and difficult. This is because when the government is forcing rates down, the central bank often acts as the “buyer of last resort,” creating money to purchase this debt, and therefore undermining the initial tightening. In essence, this is akin to applying the brakes by reducing the money supply while simultaneously pressing the accelerator by lowering borrowing costs. Most drivers would agree that doing both at once could lead to losing control.

While there are cases where central banks cut rates but M2 still shrinks due to factors like weak loan demand or capital outflows, such contractions are not intentional. The US Recession of 1937–1938 is the closest example where the Federal Reserve attempted to tighten the money supply to prevent what they feared was “excessive” inflation, while at the same time coordinated with the Treasury to keep short-term rates on government debt near zero.

This created a mismatch where the private sector faced a “credit crunch,” but the government’s borrowing costs remain suppressed. The net results were real GDP dropped by 10%, industrial production decreased by 32% and the stock market valuation fell by 50% within a year.

In short, the Bank of Ghana’s problem is not the optics of losses, but the reality of weakened policy solvency and a widening credibility gap.

One-off gains can postpone recognition of the strain, but they do not change the underlying arithmetic: a central bank cannot sustainably tighten money while administratively compressing government yields without inviting fiscal dominance, credit stress, and a disorderly adjustment.

Restoring trust requires transparent reporting, a clear separation of monetary and fiscal objectives, and rebuilding recurring income and capital buffers so monetary policy can be executed without hidden financing or improvised tactics. But what do I know?

Gideon is an avid reader, dog lover, foodie, closet sports genius but a non-financial expert