The government is being urged to stop using monetary policy to cure economic challenges that emanate from the wrong implementation of its fiscal policies.

A Professor of Finance and Economics at the University of Ghana, Legon, Professor Godfred Bokpin, who gave the advice, said any attempt to use monetary policy to “clean up any serious mess caused by fiscal policy failures” can create more problems for the economy as it is presently being experienced.

He referenced the huge losses posted by the Bank of Ghana (BoG), which amounted to GH¢60.8 billion according to its annual report and financial statements, describing the phenomenon as unprecedented and one which should not be allowed to recur.  

Professor Bokpin, who was speaking during a Twitter forum hosted by the Graphic Business, said the government’s action was also a clear abuse of the bank’s position as the lender of last resort, adding that because it knew that the central bank would finance most of its liabilities, it forced the hands of the bank to do what was in clear violation of the laws.

The huge loss from the central bank has ignited a lot of debate, with many blaming the government for unduly taking advantage of the financial capacity of the bank to help with the implementation of the Domestic Debt Exchange Programme (DDEP), a precursor to accessing a $3 billion bailout support from the International Monetary Fund (IMF).

From a profit position of GH¢1.2 billion profit in 2021, the 2022 loss has also been largely described as not only damaging to the reputation of the central bank but a blatant breach of rules of engagement as far as the BoG is concerned.

According to the bank’s annual report and financial statement, the loss was a result of a decline in the Group’s net worth position due to the impact of the DDEP, and impairment of some assets.

Again, its total liabilities and subsidiaries exceeded its total assets by GH¢54.52 billion.

Other reasons adduced for the loss were the impairment of the Government of Ghana’s (GoG’s) securities holdings of GH¢48.45 billion, the impairment of loans and advances granted to quasi-government and financial institutions amounting to GH¢6.12 billion and the depreciation of the local currency resulting in a net exchange loss of GH¢5.27 billion, all of which was occasioned by the DDEP. 

Loss impact on operations

According to the BoG, its Board of Directors and Management assessed the policy solvency implications arising from the negative net worth position and the group’s ability to continue to generate enough income to cover its monetary policy operations and other operational costs.

In the view of the directors, the central bank will continue to operate on a going-concern basis due to a variety of factors underpinned by expectations of an improved macroeconomic situation and policy actions specifically targeted at improving its balance sheet.

Hit saved country

Early last week, the BoG explained after public agitations that, its 2022 financial losses were because it took a 50 per cent haircut during the first round of the DDEP.

It said the central bank decided to step in and take a hit for the country to enable it to secure the deal with the IMF.

As part of measures to secure the IMF deal, the government was expected to restructure both its domestic and external, a move which is aimed at bringing public debt to sustainable levels by 2028.

The bank said during the initial stages of the debt restructuring discussions, the plan was to have a 10 per cent haircut on principal, a 10 per cent reduction in coupon rates and 10 years extension of the tenor, and this was supposed to apply to everyone.

It noted that, as a country, it did not want the haircut on the principal so that was shelved and this meant that the bank needed to go back to the drawing board. 

Recovery

Professor Bokpin said the recovery will not be an easy task because, under normal circumstances, the government should be the one to bailout the bank, an obligation which is impossible now because of its dire and worsening financial position.

“How then can the central bank fix its problems,” he quizzed.

Meanwhile, the bank, in its annual report, outlined a number of measures that it believed would help in its recovery.

These include the Retention of profits to help rebuild capital until equity firmly returns to the positive region and refraining from monetary financing of the GoG’s budget.

In this respect, action has already been taken with a Memorandum of Understanding on zero financing of the budget signed between the BoG and the Ministry of Finance on April 26, 2023; and Taking immediate steps to optimise BoG’s investment portfolio and operating cost mix to bolster efficiency and profits, and Assessing the potential need for recapitalisation support by the government in the medium-to-long term.

Professor Bokpin expressed the hope that the measures outlined in the recovery plan will be pursued to their logical conclusion but also noted that the task ahead will not be an easy one.

Enforcement/sanction

The Finance and Economics Professor was also of the view that in the future, the laws governing the operations of monetary policy management must be duly enforced to prevent a recurrence of the position the bank finds itself in.

He also noted that sanctions must apply in accordance with the law to serve as a deterrent for any government that, through the implementation of bad fiscal policies, overly exposes the central bank in the same manner.

Source: GraphicOnline