Ecuador and China signed on Tuesday a $1 billion loan deal as the Asian giant is pushing ahead with the policy of securing energy resources in Latin America and Africa.
Ecuador's President Rafael Correa greets China's top political advisor Jia Qinglin at Carondelet Palace in Quito.
The fresh loan deal, which Ecuador's government signed in Beijing with the China Development Bank, comes just two months after Ecuador and the Export-Import Bank of China signed a $1.7 billion deal for financing a huge hydroelectric project in Ecuador.
China had given Ecuador an upfront payment of $1 billion last year in exchange for a promise that Ecuador would supply it with 96,000 barrels per day of crude for two years.
The new loan, which is supported by the sale of crude by PetroEcuador to PetroChina, will be disbursed in two tranches - $200 million will be spent on oil projects while the remaining $800 million will be used for investment in key sectors including infrastructure, mining and telecommunications.
The finance ministry has said the loan has a four year term with a six-month grace period and carries a 6 percent annual interest rate.
Oil is Ecuador's chief revenue earner, but the country has faced a paucity of investments in the energy sector, primarily because the leftist government alienated financial markets by defaulting on some government bonds in December 2008.
This led the country to rely more on non-traditional sources of finance in order to cover its budget deficit and pay for increased levels of social spending, according to a report by the International Oil Daily.
The report said Ecuador announced earlier this year it would take $165 million from the nation’s social security trust fund to pay for development of the Panacocha oil field in the Amazon, in a sign that the government was in desperate financial straits.
After signing the deal with China Development Bank in Beijing, Ecuador's Finance Minister Patricio Rivera said the deal was necessary to enable Ecuador to close this year’s budget gap, which tops $4.5 billion according to the ministry estimates.
However, Ecuador’s rising dependence on China has become a matter of concern for many Ecuadoreans, both in and outside the government, with some analysts suggesting that China is using its position of strength to force Ecuador to accept unfavorable terms.
However, Rivera has tried to allay concerns, stating on Tuesday that the deal does not give China any guaranteed access to Ecuador’s crude and that China would pay market prices for any Ecuadorean oil that it imports.
Ecuador's crude production fell to an average of 470,000 barrels per day this year from 486,000 bpd last year. The country is currently holding the rotating presidency of the Organization of the Petroleum Exporting Countries.
Ecuador's leftist government has had a series of conflicts with foreign oil companies in recent times. The government took over the local assets of U.S. oil firm Occidental Petroleum in 2006. Last year it took charge of the operations of two oil blocks of French oil company Perenco, citing tax disputes.