Puerto Rico’s Government Development Bank on Wednesday said that it is very likely the US territory’s government could be forced to shut down in the next three months because of a lack of funds.
The bank made the warning in a letter made public a day after it was sent to Puerto Rican Governor Alejandro Garcia Padilla and the presidents of the island’s Senate and House of Representatives.
“The island’s financial state is extremely uncertain,” the letter said. “A government shutdown would have a devastating impact on the economy, with salary and public service cuts, and a long and painful recovery.”
Bank officials wrote that the government’s fiscal problems will prevent it from selling more bonds in the capital market as planned, and they urged legislators to immediately implement measures to cut costs and balance the budget.
The government had been preparing to issue more than US$2 billion in bonds in the coming months in part to bolster debt-ridden agencies.
Bank officials said the government needs to approve a five-year plan to help reduce a US$73 billion public debt, as well as approve sweeping changes to the island’s troubled tax system.
Once the government does that and presents a balanced budget, then it can be in a better position to issue bonds, said David Chafey, president of the bank’s board of directors.
“Time is passing, and it is passing quickly,” he told reporters. “We need to provide investors with some kind of comfort.”
Economist Charles Blitzer, a former World Bank and IMF official, said he was not surprised by the bank’s assessment, adding that US investors overall have known that liquidity is very low.
“What is a surprise is typically one agency of the government does not write to the rest of the government in quite this way,” he said in a telephone interview.
The letter was issued as Garcia faces opposition from members of his party on a measure that would impose a 16 percent value-added tax that he says is needed to help generate more revenue.
Puerto Rican House of Representatives President Jaime Perello said a group of legislators had reached a tentative agreement to impose a 14 percent value-added tax, adding that he expected the House to vote on the measure soon.
Chafey said the measure is a key tax reform component.
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