Our Igbos of Nigeria have a saying: even if you don’t like pounded yams, give them a try for the sake of the soup that accompanies them. For the past month or so, there has been a spirited debate over the published financial reports of our republic's central bank, the Bank of Ghana (BoG). Some schools of thought emerged from the angle of accounting, others from political and economic viewpoints. Very relevant points have been raised on the financial statements, especially with respect to the bottom line- operating loss and losses attributable to Other Comprehensive Income (OCI).

In our part of the world, it has become difficult for professionals to contribute to a discussion once it takes on a political tone. In all of these, the Bank of Ghana is almost absent from the discussion.

The discussion has taken a “you-do-me-I-do-you” turn, in which the opposition thinks members of the current government criticised the same institution in the past and that it is now time to pay back. But the Gonjas have a saying that the anus is better than a mouth that cannot change. Even if similar criticisms were levelled against BOG by some persons in government today, they were not right then and will not be right now or tomorrow. Besides, those arguing for the inclusion of other comprehensive income today did not agree that it was right to do so in the past.

The bone of contention.

The multimillion-dollar question we should be asking ourselves is whether the central bank should be assessed using operating profit, other comprehensive income, or other indicators? Before I begin, let me indicate that assessing the beauty of a lady is subjective. As some admire a lady from behind, others judge her beauty from her face. There is no straightforward answer to the question of beauty.

Judging the performance of a central bank based solely on operating profitability is completely misleading. Similarly, judging its performance using other comprehensive income is like judging a person's gait to determine whether they drink.

There is a saying that when a hunter returns home with a goat, he is a thief. His hunting prowess must be assessed using bush meat and not domestic animals. In the same vein, institutions should be assessed using indicators appropriate to their strategic mandates, not parameters determined by political convenience.

In Ghana, the use of irrelevant indicators to judge the performance of entities is not new. Some are driven by mischievous motives, while others are born of misinformation or ignorance. Retaliatory politics in Ghana have made it difficult to know who is telling the truth and who is just trying to score political points.

As most accountants and non-accountants are aware, in a typical generic company, operating profit is used as the main yardstick in measuring the performance of its core operations, while the other comprehensive income is a supplementary risk/equity adjustment measure rather than a main performance indicator. In most cases, the outcome of this is driven by exogenous variables outside the entity's control.

The central bank is completely different from any other company, and both sides of the political divide know this.

The performance of any central bank in the world is often judged using indicators such as.

1. Price stability
2. Financial stability
3. Currency stability
4. Employment and economic support
5. Credibility of the monetary policy.

Inasmuch as the financial statement matters for the sake of transparency and accountability, it’s mostly considered a secondary indicator in policy outcomes.

Operating profit of the central bank

The operating profit of the central bank, just like other companies, is essential but regarded as a weak measure of the bank’s performance. A private company or bank exists to maximise shareholders’ value through profitability. The central bank, on the other hand, exists to achieve macroeconomic objectives.

It is normal and permissible worldwide for a central bank to intentionally incur losses, hold low-yield assets or, at the extreme, absorb market shocks, if doing so will support the economy. For instance, during a crisis, central banks buy government bonds, lend cheaply to commercial banks, intervene in FX markets, or raise interest rates on reserves to curtail the money supply.

Following the 2008 financial crisis, the Bank of England's Quantitative Easing (QE) program, while stabilising the financial system, had long-term negative effects, resulting in substantial losses for the bank when bond prices later fell. The bank estimated the eventual losses under the Asset Purchase Facility (APF), as predicted by the Office for Budget Responsibility, at around Sixty-Three Billion Dollars ($63m) as gilt prices fell during the tightening.

The Swiss National Bank intervened heavily in the economy by purchasing large amounts of foreign currency to deliberately weaken the Franc and defend export competitiveness. This led to huge valuation losses when the markets moved against its foreign reserves in 2022.

In September 2016, the Bank of Japan introduced the Yield Curve Control Policy (YCC) through the purchase of large-scale bonds and exchange-traded fund (ETF), which resulted in an increase in unrealised losses as rates rose and bond values fell

The U.S. Federal Reserve, during the financial crisis and COVID-19 in 2008 and 2020, respectively, implemented quantitative easing through large-scale asset purchases. For instance, on March 15, 2020, it announced the purchase of $700 billion in assets so as to support market liquidity.

In a desperate move, the Federal Reserve on March 23, 2020, again announced unlimited quantitative easing across all kinds of securities, in whatever amounts were needed to stabilise the financial system and keep credit flowing. The Federal Reserve incurred operating losses due to rapid rate hikes, thereby increasing interest expenses.

The Bank of Ghana's Domestic Debt Exchange Program (DDEP) in 2022 led to an operating loss of 60 billion cedis, driven by massive impairments of about 54 billion cedis on its holdings of government securities and COCOBOD exposures. This resulted in negative equity of 55 billion cedis. Even with this negative equity, one could not have said that the bank was badly managed, as the DDEP was an inevitable blow meant to be taken either in the morning or in the evening.

This program gave the government fiscal space and subsequently lowered its debt-servicing costs. It also paved the way for the IMF bailout package, which subsequently restored macroeconomic stability. The entire financial sector was badly affected, but it was the first homegrown policy to correct a fiscal derailment.

The list is inexhaustible when it comes to central banks playing the role of Jesus, saving the economy and incurring losses as a result.

These are activities of the central bank that obviously reduce accounting profit and, by extension, operating profit, but that have the potential to stabilise the economy.

Even though Other Comprehensive Income (OCI) is not a main measure of the central bank’s performance, it is important to note that it matters more to the central bank than any other company. Given the central bank's strategic mandate, the importance of OCI cannot be overlooked. The bank holds enormous financial assets on behalf of the nation, including foreign reserves, government bonds, gold, derivatives, and FX assets. Changes in exchange rates, interest rates and market values often create large, unrealised gains or losses that flow through OCI or reserve accounts. This implies that Other Comprehensive Income can reveal shortcomings in valuation risk, reserve strength, exposure to currency movements, and balance sheet resilience. These unrealised gains are usually economically significant to the central bank, even if they are not operating items.

Operating Profit or Other Comprehensive Income?                                                                                                                                                                

The financial statement of a central bank can show significant operating losses because it directly intervenes in the Foreign Exchange Market (FX) or raises interest rates to fight inflation and stabilise aspects of the economy. In a similar fashion, gains in the Other Comprehensive Income can be because of appreciation in foreign reserves.

None of the above results automatically indicates the bank's performance as good or bad. The loss might have been a deliberate plan to achieve an economic objective. What shall it profit a central bank to make a huge profit when the local currency loses its value because of a high level of inflation or unstable FX? The gains in foreign reserves may have been influenced by factors not entirely under the central bank’s control.

What Ghanaians Should Focus on Instead

1. Policy effectiveness.

Our primary focus as a nation should be on the following questions:

1. Did inflation stabilise? As a result of the central bank’s losses, was the bank able to solve or achieve the economic indicator of a low inflation rate?
2. Did the entire banking system remain functional? Another relevant question we should ask is whether the central bank was able to stabilise the country's banking sector after the devastating DDEP. One can attest that most banks are back on track with GCB for the first time in over 12 years, becoming the market leader across most significant indicators. Both assets and profitability are rising as a result of these policies.
3. Was the currency stable? Unlike in the past, when we practised “Paracetamol Economics” by giving the economy painkillers every 24 hours without effect, the cedi has experienced sustained stability, becoming one of the most stable currencies in the world over the past 14 months. The importance of this to traders and foreign investors cannot be overemphasised.

1. Balance Sheet Strength
2. Another relevant question we should ask is whether the central bank has a resilient balance sheet capable of absorbing any internal and external shocks that may arise.
3. Are our reserves adequate? Do we have sufficient buffers to absorb economic shocks and boost investor confidence, thereby supporting currency stability?
4. Is the capital solvency of the bank in doubt? What is the long-term financial health of the bank with respect to meeting its debt obligations and commitments, thereby ensuring its operational longevity? This is where OCI becomes relevant.

1. Operational Sustainability
2. Does the central bank generate enough recurring income over time?
3. Can the bank continue to operate efficiently without fiscal dependence? Operating profit matters here, but again, it should not be an ultimate yardstick for measuring performance.

Worst-case scenario

In the worst-case scenario, a central bank can operate with negative equity, accounting losses, or weak operating profit, unlike other profit-oriented banks. This is because the central bank can create base money, hold assets to maturity and above all, be backed by sovereign authority (of course, this is not without economic repercussions).

It is, however, important to note that persistent losses can hurt the central bank's credibility, independence, public confidence, and going concern status. It is also possible for the central bank to achieve all the indicators mentioned above without incurring losses. It takes both fiscal and monetary discipline to achieve this.

Conclusion:

For a central bank:

• Operating profit is very useful for understanding the bank's recurring financial sustainability. It also shows that the bank's resources were used prudently during the year under review.
• Other Comprehensive Income is also useful in understanding the valuation reserve risk of the central bank
• But neither of them should be a main performance yardstick for assessing an institution like the Bank of Ghana

Rather, we should ask if the Bank of Ghana achieved macroeconomic stability and maintained confidence in the monetary and financial system. The answer to this question, to a large extent, depends on who is reading this article.

"E be Ghana we dey."

In this Bank of Ghana issue, we have to choose between having a responsible father or a rich father. What is the use of a rich father who owns many cattle and a fat bank balance, yet his children suffer from kwashiorkor, are sacked from school for non-payment of school fees, or have poor health care? There is a saying that whenever the leg becomes bigger than the thigh, there is likely to be sickness in it. Similarly, a flourishing central bank amid a struggling economy with high inflation, high unemployment, and an unstable currency will be baseless and economically unwise. If the central bank is comfortable (profitable) while the nation's economic temperature is uncontrollable, then it has failed to play a fatherly role.

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The writer, Alexander Agambila Awine, is a chartered accountant and chartered petroleum economist working with the ECOWAS Court of Justice.