Omar Marrero. (GFR Media)

The government seeks to suspend, for two years, the cuts and reform program it had previously adopted with the Oversight Board, said yesterday Omar Marrero, the Fiscal Agency & Financial Advisory Authority (FAFAA) executive director.

Similarly, according to Marrero, in light of the new macroeconomic projections, the fiscal plan establishes that Puerto Rico will no longer have the surpluses previously estimated to pay bondholders, figures that gave way to the agreement with the Lawful Constitutional Debt Coalition (LCDC) and the adjustment plan of the central government, which now would not be discussed until next July.

These two premises are the spearhead of the most recent revised fiscal plan that the FAFAA has developed and presented last night to the Board to meet the agreed deadline, according to Marrero.

The turnaround in the government's proposal comes just three years after Puerto Rico filed the bankruptcy petition under PROMESA Title III.

Also, this change in government policy comes as the island - which is the most heavily indebted territory in the United States per capita - just begins rebuilding from the 2017 hurricanes, this year's earthquakes on the southwestern region - with a new one just two days ago - and the coronavirus pandemic.

Above all, this is the formal position of Governor Wanda Vázquez Garced - the successor of Ricardo Roselló Nevares - and whose public management vision was quite similar to that promoted by the Board.

The pandemic and the fiscal plan

"Now, that austerity rhetoric does no longer hold up in the face of what is, it must be said, a grim projection," said Marrero, also government representative to the Board.

Marrero said that in the first version of this year's fiscal plan, the government incorporated COVID-19 as a risk to be considered and anticipated that fiscal reforms could be postponed.

That version stated that the fiscal reforms, including the consolidation of agencies, would imply adjustments totaling $2.243 billion between fiscal years 2020 and 2025, and the surplus to pay bondholders in those five years would total around $5.3 billion.

Now, not only public spending cuts would be frozen, but health, safety, and education budgets would see increases, Marrero said.

Given the lack of certainty surrounding COVID-19 evolution on the island, the fiscal plan is based on the premise that Puerto Rico will remain under a curfew at least soon and on an economic reopening plan that is far from a return to normal life, Marrero said.

"We remain committed to ending the bankruptcy process because it is the most important decision that has to be taken, but that will have to be done according to this new reality," he added.

According to the official, when examining the drastic fall in the active workforce since the start of the lockdown, the curb on multiple business activities and the pressure to deal with a new pandemic, the government anticipates that economic engines will not have enough power to generate wealth - and therefore the tax revenues - that were previously estimated.

Data compiled by the St. Louis Federal Reserve show that between March 21 and April 18, with the lockdown paralyzing about two-thirds of the economy, unemployment claims filed totaled 200,652.

According to the new projections in the fiscal plan, during the current fiscal year, the gross national product (GNP) would fall 3.6 percent compared to the initial forecast of 0.2 percent the FAFAA estimated before the pandemic led Puerto Rico to one of the strictest isolation and social distancing measures ever imposed in the United States and other countries.

In the following fiscal year, which is considered transitional due to the election process, the GNP would contract by 7.8 percent, compared to a drop of -1.5 percent.

Part of the projected economic collapse responds to the fall in employment, but also the disruption of certain economic sectors such as tourism. In this case, Marrero explained that projections indicate this activity could show a drop of up to 50 percent in fiscal year 2021.

The economic forecasts, Marrero said, contemplate the injection of federal funds that Puerto Rico would see as a result of the coronavirus emergency: some $12.7 billion.

New ground with the Board

Although the Board proposed that preventing the spread of COVID-19 in Puerto Rico should be the priority, the FAFAA proposal would have - from the beginning - multiple effects on the decisions of the fiscal entity.

So far and despite the hurricanes and earthquakes, the Board insisted on continuing the fiscal reforms. Last March, in contrast, the Board´s executive director Natalie Jaresko told El Nuevo Día that the pandemic forced a review of the entire fiscal plan, which would mean re-examining the agreements reached with the different groups of creditors.

Last Friday, the Board asked Laura Taylor Swain, the federal judge presiding over Title III cases, to postpone the disclosure statement hearing until mid-July.

However, at the same time, postponing fiscal reforms and uncertainty about the future of the government's coffers would also postpone the Board's exit, according to the period stipulated in PROMESA.

"We have to rethink the restructuring route," said Marrero.

Without providing a copy of the document, as they were still working on it, Marrero said that - after the court declared Law 29 null and void- the fiscal plan contemplates allocating funds to finance municipalities for two years, to cover the contributions to pensions under the "PayGo" system and the health reform.

Besides, the fiscal plan includes the $1 billion reserve to finance post-María reconstruction projects and the parametric insurance program required by the federal government in case of future natural disasters.

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