The Puerto Rico Fiscal and Economic Development Planner's Office have released a statement calling for the immediate release of funds. The release outlines several reasons as to why such a measure should be taken. One reason is that Puerto Rico is experiencing a large influx of immigrants, mainly from the Dominican Republic. For years, this nation has relied on the sale of goods to make up for shortages in other areas, and as a result, wages have been cut. As a result, the Puerto Rican economy is expected to contract over the next few years.
Currently, the government is trying to contain the fiscal situation by cutting expenses and raising taxes. Cutting expenditures include personnel costs and reducing the number of government agencies. Higher taxes, on the other hand, include things like vehicle registration fees and Puerto Rico's sales tax. Puerto Rico's sales tax is particularly high because it is considered one of the most expensive places to live in the world.
As such, cutting government spending and increasing taxes may be the best course of action for Puerto Rico in its efforts to increase its fiscal outlook. On top of that, the recent economic collapse in the United States has also had an adverse affect on Puerto Rico's economy. Many economic analysts believe the US economic situation will not improve anytime soon, and the government should start trying to pull itself out of the hole as quickly as possible. For that reason, Puerto Rico needs to look at ways to stimulate economic growth, and the debt restructuring plan discussed here could be exactly what the island needs.
Puerto Rico's problems are made even worse by the fact that most people know very little about the island's finances. Even people who have lived in the area for generations have no idea what the debt problem even is. The common belief is that Puerto Rico's fiscal problems are the result of large accumulated debts from past years, and that there has never been a serious shortage of debt in Puerto Rico. While this is true in some ways, the real problem is much deeper than that.
When the Puerto Rican economy was in the midst of recovery from the devastating hit of the September 11th terrorist attacks, there was no doubt that Puerto Rico would receive a large influx of tourist dollars. Millions of Puerto Rican Americans as well as foreigners would flock to the island in an effort to take advantage of the economic recovery. What few people were aware of was that in addition to the hordes of tourists, there would also be a large number of immigrants heading for better economic opportunities in the United States. Naturally, with so many people going to the U.S., it was going to be difficult to keep up with all of their debt payments, and a Puerto Rico-like fiscal crisis was sure to follow.
Fortunately, the US government was smart enough to see this coming and worked out a plan with the help of the Puerto Rican government to guarantee that creditors of Puerto Rico would receive their money. Essentially, this means that the debt of Puerto Rico will now be divided up between a number of foreign creditors according to their individual debt terms. One very specific aspect of the new plan is that any debt which is not repaid will be moved to a “bad” debt category, meaning that creditors of Puerto Rico will be more willing to negotiate with debtors as time goes on. Furthermore, the plan also includes restructuring the interest rates that creditors of Puerto Rico are charged, making it much more likely that Puerto Rico's debt can be repaid. As you can see, while this may be a positive plan for Puerto Rico's . . . . . . economic recovery, it also has some significant unintended consequences for its citizens if the economic growth plan is not done correctly.
For starters, one of the reasons that the US economy received a significant boost in the past few years was the fact that investors were more willing to buy into the federal debt or municipal debt. While Puerto Rico's economy depends on revenue from things such as tourism, the move by creditors could cause Puerto Rico's economy to suffer if they are unable to obtain their money from investors (i.e., wealthy individuals) that hold large balances in Puerto Rico debt. Additionally, without external financing to make up for the losses that creditors of Puerto Rico may incur in the event that the island's debt cannot be repaid, there will be a significant reduction in the amount of investment capital available to Puerto Rico, thereby potentially threatening the economic recovery plan with a lack of growth. Finally, the reduction of investment capital availability will likely affect small businesses in Puerto Rico because it limits the amount of money that they can borrow on commercial paper to expand their operations.
On the bright side, Puerto Rico's fiscal structure as well as the details of the economic growth plan (i.e., the restructuring of Puerto Rico's debt) does seem to be carefully designed to make sure that investors are not detoured in their efforts to obtain money in order to cover the principal of Puerto Rico's debt obligations. Furthermore, the economic growth plan seems to have been carefully designed to ensure that any short-term disruptions to Puerto Rico's economy are temporary. In other words, any measures or actions taken to stop the economic contraction in Puerto Rico will only be effective for six months to one year. By the end of this period, the effects of the measures should have had a positive impact on the overall economy of Puerto Rico, thus helping to resume growth.