The Bank of Ghana (BoG) has explained that GH¢53.1 billion out of the GH¢60 billion losses it posted in its 2022 financial results were a direct result of the government’s domestic debt restructuring exercise, both the first and second phases.
A statement from the BoG made available to the Daily Graphic yesterday said domestic debt exchange (DDE), which was a major plank of the corrective action required for the International Monetary Fund (IMF) programme, did not achieve the required target.
The target was for the stock of government debt to be halved from 105 per cent of Gross Domestic Product (GDP) to 55 per cent of GDP by 2028.
“Despite the losses inflicted on households and banks, the threshold of 55 per cent of GDP was not met”.
“The Bank of Ghana was used to close the gap to enable Ghana to meet the debt threshold that qualified Ghana for the IMF programme.
The Bank of Ghana, therefore, acted as a loss absorber,” the statement added.
That meant the BoG had to absorb a 50 per cent haircut on its non-marketable holdings of government debt instruments, it added.
“This singular act led to significant impairment losses of GH¢32.3 billion to the bank’s accounts.
Impairments of marketable instruments also accounted for another GH¢16.1 billion, bringing the total impairments of government holdings to GH¢48.4 billion.
This was after many events had resulted in sovereign spreads on Ghana bonds widening, signalling investor dissatisfaction with the stance of fiscal policy, the statement said.
Coupled with below target performance of projected revenue to support expenditure, the credit rating agencies further downgraded Ghana’s sovereign debt rating, which blocked the country’s access to international capital market borrowing, the statement noted.
Contextualising the GH¢60 billion loss in its financial results for last year, the BoG said the losses emanated from challenges the country had faced since 2019.
The statement further said there was a clear mismatch between revenue inflows and expenditure financed in 2020 by exceptional support from the IMF and the World Bank resources.
In addition, the expenditure was also financed from the BoG through the issuance of the GH¢10 billion COVID-19 bond.
As a result, sovereign spreads on Ghana bonds widened, signalling investor dissatisfaction with the stance of fiscal policy, the statement said.
Budget fiscal gaps
The BoG further explained that last year’s budget, which was read in 2021, failed to address fiscal concerns.
“The budget was even more expansionary by about 23 per cent with a raft of revenue measures to raise financing,” it added.
The result was the downgrades, which blocked the country’s access to international capital market borrowing, the statement noted.
“This triggered a liquidity crisis, spilling over into a balance of payments crisis.
External and domestic payments needed to be made, the domestic auction was failing, and the Bank of Ghana had to step in to arrest a major economic and social crisis,” the bank explained.
In two months, the BoG said it lost $500 million in reserves and built significant overdraft with the government as a result of the auction failures.
It became clear that Ghana was on a path that was unsustainable, and the government had to approach the IMF for support in July 2022.
The IMF process included putting into place a credible programme of reform, which included restructuring of the total government debt to sustainable levels.
“Until Staff Level Agreement with the IMF was reached in December 2022, the Bank of Ghana had to continue to provide the necessary support to keep the economy running,” the central bank stated.
In line with the provisions of the Bank of Ghana Act (Act 612), as amended, the central bank informed the Minister of Finance of the developments in its finances.
The Minister, subsequently, reported that to Parliament as part of his briefing on the IMF programme and the DDE.
The statement said a major plank of the corrective action required for the IMF programme was the DDE.
The holders of government debt had their debt instruments exchanged for new ones with lower interest payments and longer terms.
Despite the losses inflicted on households and banks, the threshold of 55 per cent of GDP was not met, it said, adding that eventually the BoG was used to close the gap to enable Ghana to meet the debt threshold to qualify Ghana for the IMF programme.
The central bank said price and exchange rate movements experienced globally led to a loss of GH¢5.2 billion, while impairments of COCOBOD loans amounted to GH¢4.7 billion, adding to the reason the BoG reported a loss of GH¢60 billion for last year.
The statement explained that central banks were not commercial banks and as such the financial outcome had very little implication for its operations as supported by evidence from other central banks, stressing that “technically, central banks cannot be insolvent or bankrupt”.
The BoG assured key stakeholders and the public that it was committed to the highest standards of prudent management, governance, and transparent accounting and audit practices.