Last week the US International Development Finance Corporation (DFC) announced that it signed a framework agreement with the government of Ecuador to refinance up to $3.5 billion of the country’s external debt to China. In exchange, according to reporting by the Financial Times (FT), the Ecuadorian government will commit to exclude Chinese companies from its telecom networks. According to the FT report, under this agreement DFC and a private financial institution will jointly launch a special purpose vehicle that will purchase oil and infrastructure assets from the government of Ecuador. Ecuador will use the proceeds from these sales to repay the United States and pursue unspecified projects that “reactivate the economy.”
How much of this loan will go toward Ecuador’s development vs. repaying China and whether the telecom commitments can hold are both highly uncertain, especially in the absence of public scrutiny of the framework agreement itself.
The framework arrangement described by the FT is confounding. Rather than offering a “novel model” to “eject China” the deal appears poised to help Chinese creditors recuperate their investment early and in full. The economic benefits of this program for the people of Ecuador are unknown and uncertain. Nor is it clear how the program advances US economic interests in the region. Instead, based on the limited information available, it seems to be a no-strings attached bailout for China. In short, the deal appears as a clumsy attempt to use economic diplomacy in a highly vulnerable country, risking the reputation of the US government to the inevitably fraught politics of a large-scale privatization of public assets, while holding Chinese lenders harmless in the process. DFC would be well-advised to release the framework agreement publicly to clarify the vaguely worded statement it issued last week, and the incoming Biden administration would do well to scrutinize the agreement carefully before offering its support.
Ecuador completed a restructuring of its external debt last summer. The deal included a restructuring of $17.4 billion in debt to bondholders who accepted a 9 percent haircut on their repayments. In parallel, the Chinese Development Bank (CDB) agreed to provide a yearlong moratorium on its debt to the country in conjunction with $2 billion in fresh money from China. All of this paved the way for a $6.5 billion IMF program for Ecuador that was approved last September. Whether the DFC’s framework agreement reinforces the IMF’s program—which is focused on restoring fiscal sustainability and transparency and expanding social assistance programs—or undermines it is unclear.
There are many pressing questions that US taxpayers ought to have for the agency and Ecuadoran citizens ought to have for their government:
Why should US taxpayers bail out Chinese creditors? Should there not instead be guardrails preventing use of any DFC lending for repaying Chinese creditors? Should the DFC help Chinese creditors avoid a haircut, as other creditors have accepted in Ecuador’s debt restructuring?
Much of Chinese bank lending to Ecuador is linked to long-term oil sale agreements (“flow collateral”). This linkage and China have been heavily criticized in a number of developing countries for tying up future public revenues and assets in financial arrangements with highly uncertain benefits for the people of resource-rich developing countries. Is DFC now undertaking the same kind of arrangement?
Is large-scale lending to help a government repay its debts to another government the right use of DFC resources?
Has DFC coordinated with the IMF or the US Treasury Department on this program? How does it fit into Ecuador’s IMF program? Does this violate any terms agreed in Ecuador’s August restructuring agreement?
What are the terms of privatization? How will DFC ensure that the proceeds of the privatization benefit the people of Ecuador, or do not otherwise unduly favor private investors over the interests of the Ecuadoran people? Did DFC consider other arrangements, like using the proceeds to set up an investment vehicle for development projects or a cash transfer program? Why is early payment of loans to China the best use of funds?
How will DFC guarantee that the government’s commitments under this agreement are binding? With elections in Ecuador around the corner and days before a turnover in the US administration, how will such an arrangement hold, particularly political commitments pertaining to future transactions with Chinese lenders and investors.
Ecuador is one of the countries in the region that has suffered the most from the health and economic effects of the coronavirus. There is no doubt that DFC could play a role in the country’s economic recovery. A $3.5 billion DFC investment in Ecuador could go a long way in lifting people out of poverty by helping small and medium enterprises survive and recover, investing in green and poverty-reducing infrastructure, and creating jobs. That would be a better use of US taxpayer dollars than putting the money in the pockets of Ecuador’s Chinese creditors or facilitating an opaque and ill-framed privatization of public assets.