China and the U.S. offer competing visions for Ecuador’s debt

With the arrival of Guillermo Lasso to Ecuador’s presidency in May, the South American country is seeking to open up the economy to attract investors, taking the red economic figures inherited from past governments and painting them black.

However, Ecuador’s public debt — which amounted to USD 62 billion last June, according to the Economy Ministry — is one of the main obstacles Mr. Lasso must overcome before delivering on his campaign promise to create 2 million jobs, raise the basic monthly wage from USD 400 to USD 500, and provide loans to farmers at low interest rates.

A portion of that debt is on Chinese letterhead. In recent years, several Chinese state-owned banks have granted loans totaling USD 8 billion. Some USD 5.2 billion is outstanding, according to the ministry’s records from June.

The debt to China began under the regime of former President Rafael Correa, who came to power in 2007 with a leftist model of government that sought new international allies. Yet, the negotiations around the borrowing and its rapid multiplication raised serious questions about debt sustainability.

The evolution of Ecuador’s debt with China

In 2008, the Correa government defaulted on a tranche of foreign debt and began to look for alternative sources of finance. At the same time, China was cultivating new relationships with Latin American countries as it sought to secure supply lines for the raw materials it needed for development, as well as outlets for its surplus industrial capacity.

China arrived in Ecuador with deep pockets, but opposition sectors complained that the terms of loans between the two countries were opaque. Part of the money was used to boost electricity generation, flood prevention, and agricultural irrigation works. Yet, several of these projects are now the subject of investigations, including the country’s massive Coca Codo Sinclair hydroelectric plant. An examination by the Comptroller’s Office found cracks in the plant’s distributors, jeopardizing the entire project.

Ecuador’s debt to China saw a dizzying increase between 2008 and 2016. In those eight years, total liabilities skyrocketed from USD 6 million to USD 8.1 billion. One year later, Lenín Moreno won the Ecuadorian presidential election and promised solutions. He managed to renegotiate USD...