This chapter examines Kenya's use of debt-based financial statecraft, revealing an uneven track record. It first describes how the Kenyan government diversified its portfolio of external finance with both international bonds and Chinese loans. Drawing on interviews with government and donor officials, the chapter then shows Kenya's mixed success in extracting bargaining leverage from its new sources of finance. While the Kenyan government achieved increased flexibility from donors on governance issues, it encountered greater resistance on financial management practices. The chapter highlights that donors' strategic interests in their relationship with Kenya encouraged them to be more flexible when Kenya diversified its portfolio of external finance, but that their concerns about accountability and use of funds led them to be more stringent on issues of financial management.

This chapter focuses on the Ethiopian government's successful use of debt-based financial statecraft. It examines Ethiopia's shift from heavy reliance on traditional donor aid to borrowing from Chinese lenders and issuing a debut international bond. Using interviews with government and donor officials, it highlights how this diversification of external finance allowed the Ethiopian government to obtain more favorable terms in aid agreements, including lenience from donors on governance issues, flexibility on economic monitoring, and donor support for the government's state-led approach to development. When Ethiopia's financing options later narrowed, the government's bargaining leverage with donors declined, further corroborating the role of alternative finance in aid negotiations. The chapter underscores the importance of donors' perceptions of Ethiopia's strategic value and donors' trust in the government for their willingness to accommodate the Ethiopian government's preferences.

This chapter outlines the theoretical framework of the financial statecraft of borrowers, drawing on bargaining frameworks to develop expectations for how a diversified portfolio of external finance enhances a country's leverage in aid negotiations with traditional donors. The chapter begins with donors' and recipients' preferences in negotiations, highlighting that donors have strategic and institutional reasons to provide development assistance, which leads them to compete in a marketplace for aid. When recipient countries diversify their portfolios of external finance, this diminishes their reliance on traditional donors and donors risk losing influence, in turn encouraging donors to provide more attractive aid. However, recipients vary in their ability to exploit this leverage, which depends on their strategic significance to donors and donor trust in their credibility.