Accra, Ghana – A vigorous debate has erupted over the past month concerning the financial reports of the Bank of Ghana (BoG), with experts from accounting, political, and economic spheres scrutinizing its operating losses and losses attributed to Other Comprehensive Income (OCI). The discussion highlights a critical question: by which metrics should a central bank’s performance truly be assessed?
The Crux of the Debate
The debate has become entangled in political discourse, with some viewing criticisms of the BoG’s financials as a partisan response to past critiques of the institution. However, the core issue transcends political maneuvering, focusing on the appropriate standards for evaluating a central bank’s effectiveness.
Assessing a central bank solely on its operating profit is widely considered misleading. Similarly, relying on Other Comprehensive Income (OCI) alone provides an incomplete picture. The article draws an analogy: judging a hunter by domestic animals is inappropriate; their prowess should be measured by bush meat. Likewise, institutions must be evaluated by indicators aligned with their strategic mandates, not by politically convenient parameters.
Central Banks vs. Commercial Entities
Unlike commercial companies that aim to maximize shareholder value through profitability, central banks exist to achieve broader macroeconomic objectives. This fundamental difference means their financial outcomes may not directly reflect their success.
It is normal and often necessary for central banks to incur losses, hold low-yield assets, or absorb market shocks to support the economy. Examples abound globally: the Bank of England’s quantitative easing program post-2008 led to substantial losses as bond prices fell. The Swiss National Bank’s intervention to weaken the Franc resulted in significant valuation losses on its foreign reserves.
Similarly, the Bank of Japan’s Yield Curve Control Policy and the U.S. Federal Reserve’s extensive asset purchases during financial crises and the COVID-19 pandemic, while stabilizing markets, incurred significant financial costs and operating losses.
Ghana’s Domestic Debt Exchange Program
The Bank of Ghana’s involvement in the 2022 Domestic Debt Exchange Program (DDEP) led to an operating loss of 60 billion cedis, primarily due to impairments on government securities. This resulted in negative equity of 55 billion cedis.
Despite these figures, the article argues that the DDEP was an unavoidable measure to provide fiscal space for the government, lower debt-servicing costs, and pave the way for an IMF bailout. The author posits that the central bank, in this instance, acted to save the economy, even at the cost of accounting losses, akin to a father figure making sacrifices for his family.
The Significance of Other Comprehensive Income (OCI)
While not the primary performance indicator, OCI holds significant importance for central banks. These institutions manage vast national assets, including foreign reserves, gold, and derivatives. Fluctuations in exchange rates, interest rates, and market values can create substantial unrealized gains or losses recorded in OCI or reserve accounts.
OCI can thus reveal insights into valuation risk, reserve strength, exposure to currency movements, and overall balance sheet resilience. These unrealized gains or losses, though not part of operating profit, are economically significant.
What Ghanaians Should Focus On
The article urges a shift in focus from accounting figures to policy effectiveness and balance sheet strength. Key questions include:
- Did the central bank’s actions contribute to price stability (low inflation)?
- Did the banking system remain functional and stable, particularly after significant programs like the DDEP?
- Has the national currency achieved sustained stability?
- Does the central bank possess a resilient balance sheet with adequate reserves to absorb economic shocks and boost investor confidence?
- Is the bank’s capital solvency sound for long-term operational longevity?
- Does the bank generate sufficient recurring income for operational sustainability without fiscal dependence?
The article suggests that while operating profit indicates recurring financial sustainability and prudent resource use, and OCI reflects valuation risk, neither should be the primary yardstick for assessing an institution like the Bank of Ghana.
Future Outlook
Ultimately, the performance of the Bank of Ghana, like any central bank, should be judged by its success in achieving macroeconomic stability and maintaining confidence in the monetary and financial systems. The author concludes with a powerful analogy: choosing between a profitable central bank amidst a struggling economy versus a central bank that makes sacrifices for national economic well-being. The latter, like a responsible father, prioritizes the family’s welfare over personal wealth, suggesting that a flourishing central bank in a struggling economy signifies a failure in its fundamental role.
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