Economist and Professor of Finance at the University of Ghana, Legon, Prof. Godfred Alufar Bokpin, has attributed the Bank of Ghana’s (BoG) mounting losses to what he describes as overly aggressive stabilisation measures pursued partly to satisfy political expectations for quick economic results.
According to him, while the objective of restoring macroeconomic stability is justified, the pace and strategy adopted have imposed excessive costs on the central bank and created distortions within the financial system.
Prof. Bokpin argued that crisis management should not only focus on outcomes but also on the cost, available alternatives, and the speed of implementation.
“When designing a strategy to resolve a crisis, it is not only about achieving the end result. It is also about the cost of doing so, the available alternatives, and the pace at which the strategy is implemented,” he explained.
Cost versus speed of stabilisation
He questioned whether policymakers sufficiently explored lower-cost alternatives or whether the adjustment could have been spread over a longer period—such as two to three years—to reduce financial strain while maintaining market confidence.
Instead, he noted, authorities appeared to favour a rapid, 12-month adjustment path aimed at delivering quick results, a choice he believes was influenced by political considerations.
“That approach may deliver faster results, but it often comes at a significantly higher cost,” he cautioned.
Inflation targets and policy choices
Speaking on JoyNews’ Newsfile Prof. Bokpin pointed out that under the International Monetary Fund (IMF) programme, Ghana’s medium-term inflation target was around 8%, within a band of plus or minus two percentage points.
However, the government set a higher target of about 11.6% for 2025 in its budget, forming the basis of the macroeconomic framework.
Inflation, he acknowledged, was a major concern, but the policy response focused heavily on demand-side measures—specifically reducing excess liquidity in the system—rather than addressing structural supply constraints.
Demand-side focus over structural reforms
He explained that inflation in Ghana is largely supply-driven, rooted in structural challenges such as limited productive capacity, infrastructure deficits, and import dependence.
Addressing these constraints, he said, requires long-term investment and patience—qualities often in short supply in politically driven environments.
“As a result, policymakers opted for what could be described as the low-hanging fruit—demand-side interventions that yield quicker results,” he noted.
These interventions included aggressive liquidity mop-up operations and sterilisation measures, which came at a cost of GH¢16.7 billion in 2025.
Central bank absorbs economic shock
Prof. Bokpin stressed that the consequence of this strategy has been a heavy reliance on the central bank’s balance sheet as the primary shock absorber.
“The central bank’s balance sheet is being used as the main buffer,” he said.
He pointed to a sharp deterioration in the Bank’s equity position—from about GH¢58.6 billion in negative equity to approximately GH¢93.8 billion—representing an absorption of about GH¢35.2 billion in a single year.
This, he emphasised, far exceeds the headline loss figure of around GH¢15 billion and becomes even more significant when other comprehensive losses are included.
Overshooting inflation targets
Despite the high cost, inflation declined sharply to about 5.4% by December 2025—well below both the government’s target of 11.6% and the IMF-aligned medium-term range of 6% to 10%.
This, Prof. Bokpin argued, raises critical questions about whether such an aggressive policy stance was necessary.
“If the target was around 11.6%, why incur such significant costs to overshoot it?” he asked.
He suggested that a more gradual approach could have achieved similar outcomes at a lower financial cost to the central bank.
Sustainability concerns ahead
Looking ahead, he warned that inflation could fall further to around 3.2% in 2026 but may not be sustainable, given Ghana’s structural economic constraints.
Over time, he expects inflation to revert to the medium-term range of 6% to 10%, raising concerns about the durability of the current stabilisation gains.
Fiscal and monetary tightening combined
Prof. Bokpin also highlighted the role of fiscal policy in amplifying the impact of monetary tightening.
In 2025, the government targeted a primary surplus of 1.5% of GDP but exceeded this, achieving 2.6% by year-end.
This meant that both fiscal and monetary policies were tightened simultaneously—government spending was reduced, while the central bank aggressively absorbed liquidity.
“The combined effect of these policies contributed to the rapid decline in inflation, but at a very high cost,” he noted.
Policy misalignment and market distortions
Another area of concern, he said, is the apparent misalignment in monetary policy.
Despite the sharp fall in inflation, the Bank of Ghana’s policy rate remains around 14%, creating a wide gap between interest rates and inflation.
This, he warned, has led to distortions in the financial market, including misalignments between the policy rate, the Ghana Reference Rate, and core inflation.
“You begin to see dislocations in the market,” he said, adding that such inconsistencies can undermine policy efficiency and investor confidence.
Communication and transparency gaps
Prof. Bokpin further pointed to issues of transparency and communication in managing the economy.
He recalled that the IMF had earlier indicated that the Bank of Ghana was booking losses linked to domestic operations.
There were also conflicting signals regarding foreign exchange interventions, with the central bank initially denying such actions before the President later confirmed them.
“These issues come down to transparency, honesty, and communication,” he stressed, noting that clear and consistent messaging is essential for managing market expectations.
Balancing stability with cost
While acknowledging that Ghana has made progress in restoring macroeconomic stability, Prof. Bokpin maintained that the cost of achieving this stability has been excessively high.
“The key issue is not whether stability has been achieved, but the price at which it has come,” he said.
He concluded that future policy must adopt a more balanced approach—one that carefully considers cost, pace, and sustainability, while ensuring that markets are properly informed and carried along.
“Stabilisation requires sacrifice,” he added, “but it must be managed in a way that does not unduly weaken the very institutions responsible for maintaining that stability.”
