Editorial: Lessons from and for Puerto Rico
It is surprising that the biggest news out of one of Jamaica's relatively close neighbours, which is having significant reverberations in Washington and ought to be relevant to this country's economic debate, has received so little attention here.
After months of signalling the crisis, the Puerto Rican government, in early August, defaulted on a chunk of the country's US$72-billion debt, which is more than four times what Jamaica owes. More specifically, Puerto Rico, whose population is 3.5 million, should have made a payment of US$58 million on its Public Finance Corporation (PFC) bonds. It could muster only US$628,000. Other payments, by various agencies, due in the coming months, appear in jeopardy.
"The government cannot pay its debt," said Governor Alejandro GarcÌa Padilla.
With a federal court having struck down legislation by Puerto Rican lawmakers that would have afforded the US territory cover similar to Chapter 9 bankruptcy protection available to mainland municipalities, bills to that effect are floating around the US House of Representatives and the Senate, but, thus far, without much traction. Republicans say it would be tantamount to rewarding bad behaviour and bailing out Puerto Rico, which President Obama has said his administration will not do.
Chapter 9 provision
This week, William Dudley, the president of the New York Federal Reserve, urged Congress to extend Chapter 9 provision to Puerto Rico, which would "facilitate an orderly restructuring of their debt, which is probably going to turn out to be necessary".
There are similarities between Jamaica and Puerto Rico in how they arrived at their problem of debt, and lessons to be learnt by the authorities in San Juan from how Jamaica has tackled its own problem. There are lessons for us, too. The most obvious one is that Jamaica, especially in the context of dealing with external lenders, will hardly ever be able to resort to anything like Chapter 9 protection while it restructures its debt.
The route to Puerto Rico's crisis is Jamaica's writ large. For the better part of three decades, the Puerto Rican government has gourmandised on debt, as it put a face on structural deformities in its economy and papered over huge holes in its fiscal accounts as the economy lost manufacturing plants and jobs over the past two decades. Indeed, the economy has not recovered from the Great Recession of 2008. A "death spiral", Gov Garcia Padilla called it.
Further, the Puerto Rican authorities have failed to undertake bold reforms. One report suggests that public-sector workers are off the job for more than two months a year, and the government collects only around 53 per cent of the taxes for which it sends levy notices. The government's pension scheme is 22 per cent underfunded; Jamaica's not at all. Tax collection also lags in Jamaica, and leave entitlement needs an overhaul. At least, though, Jamaica's administration is talking seriously about public-sector reform.
Under its programme with the International Monetary Fund, Jamaica has begun to be judicious in the management of its fiscal accounts and is close to balancing its books, which Puerto Rico has a way to go to accomplish. Jamaica has also been divesting state-owned entities, allowing the assets to be more efficiently utilised by the private sector. Puerto Rico needs to do the same. Its electricity company and those handling water and sewerage are prime candidates.