The United States International Development Finance Corporation (DFC) has reached an agreement with Ecuador for $3.5 billion in funding for economic reactivation, in exchange for Ecuador excluding China and its companies from a role in its telecommunications networks.

Adam Boehler, the Chief Executive of the US development bank, signed the deal in an event with Ecuadorean President Lenin Moreno and Economy Minister Mauricio Pozo Crespo last Thursday, calling it a “novel model” to eject China from the Latin American nation.

The purpose of the funds— which come with a term of 8 years at 2.48% interest (2.25% + libor)—according to the framework agreement, will be to prepay the expensive debt Ecuador has with China, and to promote asset monetization projects and reactivate the productive sector.

“It is a novel approach that strongly combines both missions of the DFC. The first is that we are going to impact development in Ecuador in a very positive way,” said Mr. Boehler.

“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.

This framework allows DFC to streamline support for projects that refinance predatory Chinese debt and help Ecuador improve the value of its strategic assets.

We are proud to collaborate with Ecuador to advance this critical and strategic project with an important ally of the United States in the Western hemisphere.”

The hope is 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 briefed US president-elect Joe Biden’s transition team and also Democratic and Republican Senators on the deal. Boehler said that 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,” said Boehler.

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.

Boehler has said in the past that the DFC does not take the lead on foreign policy, but it is cognizant of what China is doing around the world and the need for the US to be “playing offence.” He says that Chinese investment has become a “drug” for countries that created debt traps.

Conditions freeze China out of Ecuador high-speed networks

One of the main conditions of the deal with Ecuador is that Quito signs up to what the outgoing 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 mobile networks.

Under the deal, the DFC will coordinate with private financial institutions to help create a bidding vehicle that buys oil and infrastructure assets in Ecuador. The sales of these assets will provide Ecuador with liquidity to pay the debt with China ahead of schedule—$3.5 billion will be outstanding after an upcoming repayment is made to Beijing—and to inject investments in various development projects.

The DFC said the framework would help Ecuador get out “from under a debt trap cycle to the benefit of its economy and its people through new development and new jobs.” But it stressed that any money provided under the arrangement would require full due diligence and DFC approval.

Ecuador’s Finance Minister Mauricio Pozo said that the country will continue to have good relations with all countries. He added that these types of agreements are not being done with the US exclusively; he said that participation in these types of financial transactions is open to all countries in the world.

Ecuador’s debt history

Ecuador’s debt with China dates back to the mandate of former President Rafael Correa, whose sovereign debt went into ‘default’ or non-payment in 2008, after which he decided to turn his back on Washington and agree to a series of loans with China, which Ecuador continues to pay off.

Current Ecuadorian President, Lenín Moreno, has criticized the Chinese agreements as opaque and damaging to the country. His government has renegotiated the terms on some of the debt and last year secured $ 2 billion in new money from a Chinese bank.

Upcoming election may impact debt agreements

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

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

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

Arauz has threatened to renege on the $6.5 billion lending program that the Moreno government secured with the IMF last year.

“We don’t see any sense in continuing with the current program,” he said recently.

He and 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.

Funds may come before new government is installed

The signing of the agreement between will allow the country to access resources in advance, before several monetization or concessions are made by the sale of important assets of the country (Esmeraldas refinery, Sacha field, Termogas Machala, CNT antennas, among others).

According to an explanation given by the Pozo regarding the model, “Ecuador may have resources prior to the completion of a concession or delegation of asset management.”

However, when an extraordinary income is generated in the country’s accounts, as a result of the execution of any of these operations—in accordance with the loan contract—the mandatory prepayment of the loan will be made in an amount to be discussed and agreed upon by the parties.

The Minister clarified that of the $3.500 billion expected in financing from the DFC, 80% ($2.8 billion) will come from the DFC and the remaining 20% ($700 million) will be from various commercial banks.

Analyst’s view of deal

Economist Alberto Acosta Burneo, Director of Weekly Analysis, reacted on Twitter to news of the deal saying that Ecuador benefits from the economic war between the two world powers of the economy.

“The North American agency will grant Ecuador $3.5 billion at 2.48% interest to pay the expensive debt with China (up to 9% interest) and we can probably free up crude from term sales tied to financing,” said Acosta Burneo.

According to Burneo, Ecuador “gave China too much power by transforming it into its sole buyer of oil” and now, with the support of the United States, it must “take this opportunity to level the relationship, that we move from dependence to a relationship of mutual benefit.”

In 41 years of bilateral relations, China has become a key market for Ecuador’s exports and is the eighth country of origin for foreign investment.

China is also the third destination for Ecuador’s products, which has a trade agreement with the European Union and is moving towards signing another with the United States.