The Faroes is facing economic challenges that may necessitate structural change in order to diversify industry and increase productive domestic and foreign investments.

There is a saying from the ancient wisdom of the Viking Hávamál that would seem to capture the current economic reality of the Faroe Islands: ‘A lone fir in an open field withers away.’ As if proving the point, nary a lone pine grows upon the wind-swept mountainous slopes of the Faroe Islands. What trees do abound, lie in sheltered valleys and behind stonewalls close to the nurturing eye of the watchful gardener.

The majestic lone fir tree of the Faroe Islands is its fishing industry. Yielding some 65 percent of the total income from abroad, fish and fish-related products account for more than 95 percent of the registered export of goods. Like the solitary fir of the Hávamál, the industry remains vulnerable to the vagaries of international commerce, or perhaps more accurately, to the shifting winds of European tastes.

In 2004, for example, 80 percent of the Faroese export was to EU countries. At the same time, the favorable dollar-euro exchange has fostered increased sales of Alaska Pollock in Germany and France with a corresponding 17 percent decrease in groundfish prices.

Like the ever-watchful gardener, the Faroese Government strives to protect and nurture the industry with a variety of initiatives. Given the international market reality, it is a formidable task. Its efforts have, nonetheless, captured the interest and imagination of many nearby fishing nations, especially with regard to its fishing-days regulatory scheme.

Although the Faroe Islands is an extremely modern community and enjoys a well-developed transport and telecommunications infrastructure, the overall business environment remains compromised by dependency on a single, lone industry. Keenly aware of the economic potential of diversification, the Faroese Government has endeavoured for a number of years to construct the regulatory framework necessary to foster the growth of new industries and has welcomed foreign direct investment (FDI). The government drafted a comprehensive industrial policy that was adopted by the Faroese Parliament and endorsed by both labour and industry. Subsequently, regulatory guidelines for the IT and tourism industries, among others, were crafted. Currently, the Faroese Government is updating its industrial policy to enhance the flexibility of labour and capital as well as the innovative capacity of the economy. Thus, hopefully a few more economic trees will be planted, thereby creating a thriving forest of new industrial initiatives spread throughout the country.

Urgent privatization: To foster an economic environment that would promote innovative FDI and the creation of new and innovative businesses, the Faroese Parliament, several years ago, adopted a 20 percent corporate income tax and revised the corporate accounting requirements as well as the tax regulations regarding investments. Moreover, after diligent strategic planning, the Faroese Securities Market, the VMF (Virðisbrævamarknaður Føroya) was established in collaboration with ICEX (Icelandic Stock Exchange). The Faroese government bonds expiring in 2004, 2006 and 2008 were listed on the exchange in 2003. At the close of 2004, the predominantly Faroese-owned oil company, Atlantic Petroleum (Atlants Kolvetni), elected to be listed on the Faroese Securities Market in March 2005. Other companies are sure to follow.

The VMF is a facilitation market, as stocks are actually listed on the ICEX. The legal and financial requirements generally associated with listing a company are not as burdensome as with the major international exchanges and hence the options available to local Faroese companies to gain access to needed investment capital are greatly enhanced. Another important aspect regarding the formation of a securities market in the Faroe Islands is the added benefit of keeping investment in the Faroes. Historically, excess funds were maintained in passive savings accounts or placed into a variety of financial instruments abroad, often Danish government bonds. The existence of a local securities market with local companies registered will ensure a ready source of funds for capital intensive industries, as well as innovative companies that wish to develop ideas with elevated risk, but with greater potential for exceptional return.

The establishment of the securities market, moreover, is a precursor to the privatisation of the several government-owned companies. Liberalisation has been effected by the government, yet privatisation, while much debated, remains elusive. A clear strategic path that would unleash the potential of the many government-owned enterprises has yet to be finalized. The management of the incumbent telco, Faroese Telecom, has long stated that it operates at a disadvantage in a liberalized telecommunications market because the government has taken no steps to effect its privatisation, which would enable it to gain access to capital and to implement innovative international initiatives. The same holds true for United Seafood, a major fisheries concern, effectively owned by the government through its investment fund, as well as the national air carrier, Atlantic Airways, and the major bank, Føroya Banki, all directly owned by the Faroese Government.

The urgency of privatisation is well understood, however, and no doubt further strides toward this goal will soon be realized. Johnny í Grótinum, a senior economist with Føroya Sparikassi, a leading privately-held bank in the Faroes, in an address before gathered dignitaries at the Faroe Islands annual oil conference, noted that the surest foundation for economic development in the Faroe Islands was the opening up of the investment market to unrestricted FDI in privatized government enterprises. “The Faroese economy is facing certain structural issues in the capital markets that need to be addressed forthrightly,” said Mr í Grótinum. “The occurrence of both a booming economy and large surpluses in the balance of payments in the 1990s could be a symptom of unhealthy conditions in the capital markets as these factors imply that capital was flowing overseas without attracting capital from abroad.”

“Productive investment in Faroese industry and innovation will ensure our future welfare,” Mr í Grótinum continued. “Investment stimulates a productive society, which in turn attracts more expansive investment thereby increasing the potential for even greater economic gain and social welfare. Historically, this potential only occurs, however, when passive public ownership is abandoned and companies are enabled to demonstrate and realize their inherent potential through capital provided by foreign investors.” The perverse economic winds that besieged the fisheries industry, most especially the aquaculture industry, over the last several years severely impacted the economy and triggered the Faroese Government to open up the industry to greater foreign investment.

Renewal by necessity: Just like most other countries in a world of economic interdependency, the Faroese economy is not self-sufficient, yet enjoys an essentially balanced current account. In 2001, the government enjoyed a budget surplus of DKK 697 (EUR 93.7 / USD 122) million, which spiralled down to DKK 191 million in 2002 and DKK 22 million in 2003. The 2004 budget registered a negative DKK 204 million and a similar amount is anticipated for the 2005 budget. The overall Faroese budget is augmented by the Danish block grant, which by agreement is fixed at a DKK 630 million until 2006, and direct payment by the Danish Government of some DKK 280 million to cover joint administration of such areas as the police and the judiciary.

As the Faroese Government takes over more and more of the governmental areas now administered by the Danish Government, the block grant will steadily diminish and, as a consequence, will require more business initiatives that yield increasing revenue for the country. This downward spiral of the budget will hopefully reverse itself once fisheries prices again stabilize and newly established enterprises begin to spin off profit, but this trend highlights the absolute necessity of expanding and diversifying the industrial and investment base.

The economic policy of the Faroese Government is considered “neutral”, a politic phrase adopted by the leadership of the Governmental Bank of the Faroe Islands (Landsbanki Føroya) to describe the current fiscal initiatives of the government.

Yet, “neutral” may very well be the best approach at the present. According to the economists of the Governmental Bank, the Faroese Government has elected to support expansion via tax cuts and domestic investment. The Governmental Bank, which issues an annual comprehensive report on the Faroese economy bearing the deceptively and elegantly simple title ‘Information Memorandum’, considers business in the Faroes generally to be “healthy” and “well-consolidated” (Information Memorandum 2004). “The economic soil of the Faroes seems robust enough to meet the current challenges of the recent slowdown in economic growth,” notes Jesper Engedal, an economist with the bank, “yet further liberalisation of foreign direct investment, privatisation and other progressive initiatives would be beneficial to the economy. As long as these initiatives foster competition and investment and are well regulated, they will support further growth and diversification.

“Yet, overly expansive policies that are not well regulated and carefully implemented can be damaging, so there is need for a measure of wisdom and patience at this stage in the economic development of the Faroes.”

The Faroe Islands has faced formidable economic challenges in the past and undoubtedly many more will sweep across the mountains and swirl in the valleys in the decades ahead. Tumultuous gales have been known to blow down many a pine in the Faroes, but many a seedling is planted anew, for the Faroese are keenly aware that to survive and prosper in the heart of the North Atlantic a forest of new initiatives must be planted and well nurtured.