Danish central bank advises Faroese public spending cuts

The National Bank of Denmark has advised the Faroe Islands to reduce public spending, as strong growth and low unemployment risk overheating the economy.

“The Faroese economy is booming, driven by high export revenue from farmed salmon,” the central bank says in an analysis published today (September 25). But being a “small, open economy with a concentrated business structure that is heavily dependent on fisheries and aquaculture” makes it prone to sharp fluctuations, the bank adds.

GDP expanded by 6.8% in 2016, the Economic Council for the Faroe Islands (ECFI) states. It forecasts growth rates of 6% and 4.1% in 2017 and 2018 respectively.

“In earlier boom periods, Faroese fiscal policy has been procyclical, which has not helped to stabilise the economy,” the central bank says. “This pattern seems to be repeating itself, with a resultant risk that the economy will overheat”.

Earlier this month, the ECFI assessed that public consumption at the national and local government levels rose by 9.1% in 2016, and is expected to rise by 2.1% in 2017 and 3.3% in 2018. “This is a considerable increase in real public spending, given the low increase in consumer prices,” the central bank says. “That is not expedient in the current cyclical situation.”