Harnessing the opportunity of sovereign ‘reclamation’ bonds for Ghana’s devastated farmlands

Introduction

Blessed with abundant natural resources, Ghana has been grappling with the destructive consequences of illegal mining activities, particularly in its farmlands. These illicit operations have left vast tracts of once-fertile land barren and unproductive, posing a grave threat to food security and the livelihoods of countless farmers. To address this pressing issue, it is essential to explore innovative financing mechanisms, and one promising solution lies in the issuance of sovereign reclamation bonds. This article proposes the utilization of such bonds as a means to fund the reclamation and restoration of Ghana’s destroyed farmlands, promoting sustainable development and environmental stewardship.

• The Challenge at Hand

Illegal mining, commonly called “galamsey,” has wreaked havoc on Ghana’s agricultural sector. Farmlands have been scarred by unregulated mining activities, resulting in polluted water bodies, degraded soil quality, and significant deforestation. As a country heavily dependent on agriculture for economic growth and employment, the impact of these activities is severe. Restoring these damaged lands requires substantial financial resources, which the government alone cannot bear. Sovereign reclamation bonds offer a viable avenue to mobilize capital for this crucial cause.

• Understanding Sovereign Reclamation Bonds

Sovereign reclamation bonds are debt instruments issued by a government to raise funds specifically for land reclamation and environmental restoration projects. These bonds serve a dual purpose by providing financial support to affected regions and incentivizing sustainable mining practices. By channelling funds towards reclaiming destroyed farmlands, these bonds contribute to environmental preservation, revitalization of agricultural productivity, and overall economic stability.

• Benefits of Sovereign Reclamation Bonds

• Financing Land Reclamation: Sovereign reclamation bonds provide a dedicated funding mechanism for reclaiming and rehabilitating damaged farmlands. The proceeds from bond issuances can be allocated towards implementing sustainable practices, such as reforestation, water conservation, and soil rehabilitation. These activities will help restore the ecological balance and productivity of the affected regions.
• Attracting Private Investment: Sovereign reclamation bonds have the potential to attract private investors seeking socially responsible investments. By promoting transparency and accountability, the bonds create a favourable investment environment where investors can contribute to the restoration of farmlands while earning a return on their investment. This partnership between the public and private sectors amplifies the financial resources available for reclamation efforts.
• Strengthening Environmental Regulations: Issuing sovereign reclamation bonds necessitates the establishment of stringent environmental regulations and monitoring mechanisms. This process helps regulate illegal mining activities and curb the long-term ecological damage caused by galamsey. Consequently, the bonds act as a catalyst for enforcing sustainable mining practices and responsible resource extraction.
• Fostering Sustainable Development: Reclaiming destroyed farmlands is critical to achieving sustainable development goals. The issuance of sovereign reclamation bonds aligns with Ghana’s commitment to environmental stewardship, social progress, and economic prosperity. The restored farmlands will revive agricultural productivity and promote employment opportunities, food security, and poverty reduction in affected communities.

• How will this work?

For a debt-distressed country still undergoing a once-in-a-generation painful debt restructuring for its domestic and foreign creditors, the default outlook should be zero tolerance for any sovereign debt issuance. Investors are rationally expected to have zero tolerance for Ghana risk trading. On the contrary, an evidence-based appetite for this sustainable financing tool creates a win-win situation for Ghana and the potential ESG-sensitive investors.

In June 2023, the Singapore-based Straits Times reported on an impact investment into a forest restoration project in Ghana (https://www.straitstimes.com/singapore/temasek-owned-firm-to-invest-in-forest-restoration-project-in-ghana). In a first, “the Temasek-owned investment platform GenZero will be investing in a forest restoration project in the African nation (Ghana) that can generate carbon credits, which businesses in Singapore can potentially use to offset part of their carbon tax. In collaboration with Singapore-based AJA Climate Solutions, GenZero will be investing “north of US$20 to US$30 million” (S$26 million to S$40 million) to restore about 100,000ha of degraded land in the Kwahu region of Ghana. This may not be a single case of an investor looking favourably on Ghana despite the unfavourable history of debt management. It provides one more evidence of how the country can leverage Carbon Credit Trading platforms as a funding source for Sovereign Reclamation Bonds to restore the galamsey inflicted degraded land and water bodies.

Carbon credit trading is a mechanism that incentivizes greenhouse gas emissions reduction. By harnessing the financial potential of carbon credit trading, countries like Ghana can fund critical initiatives such as sovereign reclamation bonds, which aim to restore and protect vital ecosystems. This market-based approach assigns a monetary value to greenhouse gas emissions. Ghana’s version of carbon trading can operate on the principle of “cap and trade,” wherein the government sets a limit or cap on emissions and issues tradable permits, known as carbon credits, to entities. The investor entities subscribe to the Ghana Reclamation Bonds in exchange for projected carbon credits, ensuring that no coupon or maturity payments are made to investors for holding these bonds. The entities can either reduce their emissions below the assigned cap or purchase excess credits from future carbon credits generated from the reclaimed galamsey devastated lands, creating future sustainable cash flows for Ghana. Through this mechanism, carbon credit trading encourages emission reduction and incentivizes sustainable practices.

The Taskforce on Scaling Voluntary Carbon Markets, with knowledge support from McKinsey, estimates the global market for carbon credits to be worth upward of $50 billion in 2030. Ghana`s Minister of Lands and Natural Resources in 2017 reported that about 954,000 hectares of the country`s lands, constituting 4% of the total surface area, had been degraded. He further revealed that an amount of GHS60, 000 (c. $5,500) was required to reclaim a hectare of the swaths of land destroyed by illegal mining or galamsey activities across the country. The Government of Ghana need to establish clear regulations and mechanisms for allocating carbon credit trading revenue to sovereign reclamation bonds. This requires effective governance, transparency, and robust monitoring and verification systems to be able to raise the required amount of impact funding, potentially in excess of $5 billion, required to fix the land degradation crisis created by illegal mining activities, also known as galamsey in Ghana.

• Conclusion

The devastating effects of illegal mining on Ghana’s farmlands demand immediate attention and robust action. Sovereign reclamation bonds present an innovative and sustainable financing solution to reclaim and restore these degraded areas. By mobilizing capital from both public and private sectors, these bonds can enable the implementation of comprehensive land reclamation projects, protecting the environment, supporting local farmers, creating youth employment and fostering sustainable development. Ghana may seize the opportunity to test investor appetite for potential sovereign reclamation bonds and embark on a transformative journey towards reclaiming its destroyed farmlands, safeguarding its natural heritage, and securing a prosperous future for its citizens.

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The author – E.B. Oppong is a sustainable finance enthusiast and has more than 15 years capital market experience