Banking Consultant and Expert Dr Richmond Atuahene has advised the government to prioritise the recapitalisation of the Bank of Ghana (BoG) as soon as the country’s fiscal condition improves.
He said this must be done within a year or two to avert any potential negative impact of the central bank’s capital impairment on its operations.
The BoG has recently come under public scrutiny after it recorded losses of over GH¢60 billion for the 2022 financial year.
The central bank has, over the last couple of weeks, explained that the losses were a result of its decision to take a hit for the country by taking a 50 per cent hair during the domestic debt exchange programme.
It will be recalled that the country’s economy has been faced with some challenges which the government has blamed on the COVID-19 pandemic and the Russia-Ukraine conflict.
The country formally approached the International Monetary Fund (IMF) for support in July last year.
However, one of the key prior actions that was required to get board approval for the US$ 3 billion programme was for the country to restructure both its domestic and external debt, which had reached unsustainable levels.
The government announced a Domestic Debt Exchange Programme (DDEP) which saw the government swap old bonds valued at GH¢82 billion for 12 new ones at reduced coupon rates and longer tenors, paving the way for the country to get the approval of the IMF Board in May this year.
It has, however, emerged that the central bank stepped in to act as the last absorber, taking a 50 per cent haircut to enable the country to get a deal.
This is what contributed to the central bank recoding the losses in 2022, a situation which has affected the capital of the institution which acts as the lender of last resort.
The IMF in its programme report also hinted that the BoG’s balance sheet would be affected by the debt restructuring and, therefore urged the government and the BoG to assess the impact and develop plans for recapitalisation with fund technical assistance support.
Potential impact
Speaking on the Graphic Business Twitter (now X) dialogue series, Dr Atuahene said although the impairment to the BoG’s balance sheet may not have any immediate impact on its operations, there could be a potential impact in the next year or two, reason why the government should act fast and recapitalise it.
The losses themselves may not directly affect you today but have consequences over the period if it is not well managed.
“Today, banks are looking for capital and if the central bank cannot perform its role of the lender of last resort, what will be the situation?” he asked.
“There are certain specific roles that the central bank can continue to play effectively. However, if the situation is not well managed, in the next year or two, the reality can hit us hard,” he stated.
He noted that looking at the current fiscal space, it would be difficult for the government to raise money to recapitalise the central bank but once the situation improves, this must be prioritised.
“If we say we want to improve the situation by retaining profit to put the BoG in a good position, this may take a lot of years.
“If you look at the losses divided by the profits they usually make, it’s going to take more than 25 years. Therefore, the government needs to quickly help recapitalise the central bank,” he explained.
Correspondent banks
Dr Atuahene said the need to recapitalise the central bank was also critical, due to the correspondent bank relationship.
He said it should be noted that the BoG was not keeping its foreign reserves in Ghana, but with other international correspondent banks.
“What will be the perception from your counterparts, those you keep your money with? If your capital is not enough, it will affect how they deal with you because even when you have enough capital, it’s sometimes difficult to deal with them.
“Recently, one company in Ghana wanted to do letters of credit. Normally, when the DDEP had not set in, the confirmation charge was 2.5 per cent.
However, today, the foreign banks are saying they will confirm the letter of credit at seven per cent and this is all because the Ghanaian banks have capital challenges,” he explained.
Breach of law
Commenting on the BoG’s decision to exceed its limit of financing to the government, Atuahene said steps must be put in place to ensure this does not happen again.
The BoG has argued over the last weeks that it did not breach any law by extending financing to the government, a position which has been backed by the Finance Minister in a recent article published in the Daily Graphic.
The central bank has maintained that although the law allows for a limit of five per cent of a previous year’s tax revenue financing to the government, it had consistently practised zero financing until 2020 when COVID-19 hit hard at the country and 2022 when the international capital market was closed to the country.
Responding to the issue, Dr Atuahene said “We have a law to deal with, and if there is an emergency, the law specifically states what should be done. The law states that the Governor, the Minister of Finance and the Accountant General should get this to parliament within seven days.
“So it is not about what you did in an emergency, but what the implication is to the economy. If you want to exceed the limit, there are rules to be followed,” he said.
He said just like the COVID-19 period when the Minister went to Parliament to ask for the suspension of the Fiscal Responsibility Act, the Minister should have done the same by going to Parliament to get approval for the central bank financing beyond the five per cent threshold.
To help avert this situation going forward, the IMF has noted that the BoG Act would be revised to strengthen central bank independence and mitigate fiscal dominance.
The amendment is expected to feature a stricter limit for monetary financing, mechanisms to monitor and enforce compliance and a clear definition of emergencies under which the limit can be temporarily lifted.
Pending the legislative changes, the BoG and the MoF have signed a memorandum of Understanding to eliminate monetary financing during the programme.
