US development bank strikes deal to help Ecuador pay Chinese loans

The US International Development Finance Corporation has struck a deal to help Ecuador repay billions of dollars in loans to China in exchange for excluding Chinese companies from its telecom networks.

Adam Boehler, the chief executive of the US development bank, signed the deal in an event with Ecuadorean president Lenín Moreno on Thursday, calling it a “novel model” to eject China from the Latin American nation.

“It is a novel approach that very strongly combines both missions of the DFC,” Mr Boehler said. “The first is that we are going to impact development in Ecuador in a very positive way. And the second reason that DFC was created was so that no single authoritarian country had undue influence over another country and we are addressing that factor with this agreement.”

The outgoing Trump administration hopes that the agreement will provide a template that will encourage other nations to wean themselves off Chinese debt and remove Chinese telecoms companies from their networks.

The DFC has briefed President-elect Joe Biden’s transition team and also Democratic and Republican senators. Mr Boehler said the Biden team viewed the new structure as an interesting, innovative approach.

“This is not a Democratic priority or a Republican priority. This is an American priority,” Mr Boehler told the Financial Times.

While DFC partners with private sector financial institutions on development projects around the world, Washington views it as a foreign policy tool since the bank can attach strings to its development financing.

In a previous interview with the FT, Mr Boehler said DFC did not take the lead on foreign policy but was cognisant of what China was doing around the world and the need for the US to be “playing offence”. He said Chinese investment had become a “drug” for countries that create debt traps.

One of the main conditions of the deal with Ecuador is that Quito signs up to what the Trump administration calls “The Clean Network” — a state department initiative designed to ensure that nations exclude Chinese telecoms services and equipment providers as they build out their high-speed 5G networks.

Under the agreement, the DFC will team up with private-sector financial institutions to help create a special purchase vehicle that will buy oil and infrastructure assets in Ecuador. The sale of the assets will provide Quito with cash to pay off the debt to China earlier than previously agreed — $3.5bn will be outstanding after an upcoming repayment is made to Beijing — and also provide money to pump into various development projects.

Ecuador’s debt to China dates from the decade-long rule of Rafael Correa, whose government defaulted on the country’s sovereign debt in 2008. It then turned its back on Washington’s lending institutions and agreed a series of oil-for-loans deals with China, which it is still paying off.

Mr Moreno has criticised the China deals as opaque and detrimental to the country. His government has renegotiated the terms of some of the debt and last year secured $2bn in new money from a Chinese bank.

The agreement with the US development bank comes just three weeks before Ecuador goes to the polls to choose a new president. 

Mr Moreno is not seeking re-election and Mr Correa is barred from running after being convicted of corruption in what he says was a politically motivated witch hunt. He is living in Belgium, but is still active in Ecuadorean politics and commands loyal support on the left.

Mr Correa has anointed a young economist, Andrés Arauz, as his preferred candidate for the February 7 vote. While Mr Arauz leads some polls, in others he is in second place behind Guillermo Lasso, a rightwing banker and former Coca-Cola executive.

Mr Arauz has threatened to renege on the $6.5bn lending programme that the Moreno government secured with the IMF last year. “We don’t see any sense in continuing with the current programme,” he told the FT recently.

Mr Arauz and Mr Correa are likely to take a similarly dim view of any plan to shift Ecuador closer to Washington and away from Beijing — particularly so close to the election and a change of government.

Follow Demetri Sevastopulo on Twitter

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