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Because it is not an independent nation, Puerto Rico is not an International Monetary Fund member country that can directly draw on that institution’s financial resources or its technical assistance. However, this has not stopped the island from facing economic and financial problems that are desperately in need of redressing through an IMF-style structural adjustment program.
Indeed, had the island been an IMF member country, the present state of the Puerto Rican economy would have been among the worst situations with which the IMF would have had to deal in its 70-year history.
Even before last September’s Hurricane Maria, the island was in a 10-year depression that had seen both its economic output and its population decline by 10 percent. After Hurricane Maria’s destruction of much of the island’s infrastructure, Puerto Rico has now come to resemble countries like Sri Lanka after the 2004 tsunami or Haiti after its 2010 earthquake. It is at real risk of entering an irreversible downward spiral and a mass migration of its economically active population to the U.S. mainland.
Puerto Rico’s desperate economic situation suggests that a piecemeal approach to its problems, centered on the sort of budget tightening being advocated by its Oversight Board, will not nearly be sufficient to turn the island’s fortunes around. This is particularly the case considering that, stuck in a dollar straitjacket, Puerto Rico does not have a currency of its own to devalue to offset the adverse economic effects of budget belt-tightening.
Rather, what the island needs is an IMF-style adjustment program that would require a commitment to serious structural reform from the Puerto Rican government to make the economy more competitive combined with congressional economic and financial support and major debt relief from the island’s creditors.
An impediment to any such program is that the Puerto Rican government is unlikely to commit to serious economic reform without assurances of substantial congressional support and major debt relief. Similarly, for their part, the Congress and the island’s creditors are unlikely to be prepared to commit large scale financial resources to the island in the absence of assurances that it will maintain disciplined budget policies and engage in serious economic reform.
To address this impediment, serious consideration should be given to the design of a structural reform program for Puerto Rico. Under such a program, financial support to the island would be phased and would be made strictly conditional upon Puerto Rico implementing serious economic reform and adhering to more disciplined budget policies.
Craft an economic rehabilitation plan for the island to prevent a prolonged humanitarian crisis.
While Puerto Rico might not have direct access to the IMF’s services, the United States as the IMF’s largest member country certainly does have such access. This opens up the option for Treasury Secretary Steven Mnuchin to request IMF technical assistance to help the U.S. design a conditions-based economic adjustment program for the island. Such a program might help restore investor confidence in the island’s economy and might provide the Congress with assurances that the financial and economic support that it might offer to the island would be properly utilized. Mnuchin might also think of tapping the IMF’s vast experience in debt restructuring to help the island rework its public debt mountain.
Were the United States to call upon the IMF to help it resolve the Puerto Rican economic crisis, it would not be acting very differently from the way in which Europe in general and Germany in particular has used the IMF in helping to resolve the European sovereign debt crisis. In principle, Europe did not need the IMF’s financial resources to deal with Greece. However, Germany did find it extremely helpful to have the IMF play a major role in both setting the conditions and monitoring the phased disbursement of the large amounts of money that the European Central Bank and the European Stabilization Mechanism provided to Greece.
In the two months since Hurricane Maria, an estimated 5 percent of the island’s population has moved to the mainland with many more planning to leave in the period immediately ahead. This would suggest that time cannot be lost in reinventing the wheel on how to design for Puerto Rico an IMF-style adjustment program. For which reason, one must hope that Treasury does not lose time in picking up the phone to IMF Managing Director Christine Lagarde to call for technical assistance to help resolve the Puerto Rican crisis.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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