The Puerto Rican government is running perilously low on cash and may shut down within the next three month, finance officials have warned.
According to an April 21 letter from Puerto Rico’s Government Development Bank to Governor Alejandro Garcia Padilla and the commonwealth’s legislature, refinancing the government’s massive debts is unlikely to succeed.
That could mean laying off civil servants and trimming government services, the news agency Reuters reported.
“A government shutdown is very probable in the next three months due to the absence of liquidity to operate,” the letter stated. “The likelihood of completing a market transaction to finance the government’s operations and keep the government open is currently remote.”
Puerto Rico has amassed more than $70 billion in debt and needs to raise about $2.95 billion in order to finance its operations in the short term.
In recent decades the commonwealth’s economy and population have contracted significantly, reinforcing a downward spiral that has prompted many residents to relocate to the mainland United States.
During the first six months of the 2014/2015 fiscal year, the GDB reported that Puerto Rico’s gross domestic product shrank by 1.5 percent over the previous year. Additionally, unemployment remains high, at 13.7 percent.
Some economic observers view the GDB’s letter as an attempt to pressure the commonwealth’s legislature into adopting Mr. Padilla’s proposed tax reforms.
He wants to lower income tax rates and replace the existing sales and use taxes with a value added tax, which would raise government revenues based on what residents spend on goods and services instead of what they earn.
The measure aims to encourage more businesses to set up shop in the commonwealth.
However, Puerto Rico Senate President Eduardo Bhatia said the legislature will evaluate the tax reforms “cautiously,” according to the newspaper Caribbean Business.
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