NY Fed: Puerto Rico should seek economic reforms

New York's Federal Reserve Bank today warned that Puerto Rico needs to improve its financial health soon or face what it called a "painful adjustment."
The report came as the island's power company once again reached an agreement with lenders to extend a deadline to make payments on USD 671 million it owes to banks.
The 30-page report makes several recommendations that the New York Fed believes are needed to help push the US territory out of a nearly decade-long economic slump.
"The island appears to face two alternatives: either manage its own economic adjustment and put the Commonwealth on a secure fiscal basis, or wait for outmigration and the discipline of the market to force an even more painful adjustment, particularly for those unable or unwilling to leave the island," the report said.

William Dudley, president of the New York Fed, questioned whether Puerto Rico's level of debt can be sustained and said the government's challenge will be to revive the economy without accumulating more debt.
The island is struggling with nearly USD 73 billion in public debt after having sold a record USD 3.5 billion in general obligation bonds in March despite having its credit rating downgraded to junk status.

After a brief uptick in 2012, Puerto Rico's economy has stagnated since 2013, the report said. It said the island of 3.65 million people has a 45 per cent labor force participation rate and has seen a significant drop in population. Puerto Rico also struggles with a largely uneducated working-age population, although the number of people with a college degree increased from about 25 percent to nearly 28 percent between 2010 and 2012.

"Economic activity in Puerto Rico remains generally flat at a depressed level and there are no strong signs that a meaningful recovery is taking hold," according to the report, which updates a 2012 report.
Analysts also found that the economy suffers because of bureaucracy, limited credit availability and a low tax-collection rate coupled with a thriving underground economy.
They recommended that Puerto Rico shrink its underground economy, broaden its tax base and reduce rates, and strengthen and possibly privatize some public corporations, which account for nearly 40 per cent of the island's debt.