The U.S. and the Faroe Islands enjoy good longlasting relations. Especially within trade and culture. Over the years, U.S. ambassadors to the Kingdom of Denmark and embassy staff have made numerous visits to the Faroe Islands.
Considering doing business in the Faroe Islands? Learn more about the economy and business sector.
The Faroe Islands
During the last two centuries, the Faroese economy has relied on fisheries and related industries. Fisheries remain the key sector, accounting for about 95 percent of exports. The Faroe Islands are a small open economy which, combined with a non-diversified economy, makes it highly vulnerable to changes in international markets. The Faroe Islands have full powers to set tax rates and fees, and to set levels of spending on the services they provide.
The Faroes were less affected by the economic crisis in 2008/09 than the rest of Europe, in part due to increasing world prices for fish. In 2013, the Faroese economy took off on a strong recovery, after a few years of stagnation. The Economic Council for the Faroe Islands estimates that nominal GDP rose 5.1 percent to DKK 14.34 billion (USD 2.13 billion), followed by estimated growth of 5.9% in current year prices in 2014 and upwards of 6.4% in current year prices for 2015. Growth in nominal GDP in 2014 was mainly export driven while growth in 2015 and 2016 is primarily driven by domestic demand. The Council estimates nominal growth of 2.8% in 2016. Fish exports, with increased catches of mackerel and herring as well as higher prices for salmon globally, contributed significantly to growth. Private demand is also improving after a few years of lower household spending. Unemployment is low and falling at 2.3 percent in November 2015, down from 8 percent in 2011. The fall in oil prices acted as a stimulus by improving the terms of trade considerably.
Looking ahead, the Faroe Islands face a demographic challenge. Currently there are 4.5 people in the working age group aged 16 – 66, for every person aged 67 or older. By 2050, the number will have decreased to 2.1 persons for every dependent elder. The Economic Council for the Faroe Islands estimates that a permanent fiscal improvement of 5 percent of GDP will be required in order to stabilize government debt, which is currently at a low level.
The outlook for the Faroese economy is highly dependent on the amount and price of seafood, both catches and farmed, which can be highly volatile. The Faroe Islands have in recent years engaged in several disputes with the EU over fishing quotas. The disagreements escalated in September 2012, when the EU adopted measures which allowed it to impose sanctions on the Faroe Islands. In March 2013, the Faroe Islands unilaterally increased their quota for herring and mackerel. EU member states responded by voting in favor of imposing sanctions which went into force in August 2013. Sanctions were lifted a year later after a political understanding between the two parties was reached on herring catches. Subsequently a five year agreement with the other coastal states in the North Atlantic was signed on mackerel quotas, reducing uncertainty for fisheries and improving profitability, since the agreement allows for better capacity utilization. Fisheries account for close to one-sixth of the total gross value added in the Faroe Islands and about 95 percent of goods exports, excluding ships and aircraft. As a non-EU member, the Faroe Islands continue to have open access to the Russian market despite Russia’s retaliatory trade embargo on certain food imports from the EU. This has allowed the Faroese to sell increased quantities of salmon to the Russian market at higher than normal prices, even while prices have dropped significantly in the European market.
In August 2015, credit agency Moody’s rated the Faroe Islands Aa3, high quality and very low credit risk, with a stable outlook, reflecting its fiscal autonomy and revenue and expense flexibility with a track record of prudent budgeting. The stable and historical relationship with Denmark is deemed an additional strength.
The Faroe Islands retain control over most of their internal affairs, including the conservation and management of living marine resources within the 200 nautical mile fisheries zone, natural resources, financial regulation and supervision and transport. Denmark continues to exercise control over foreign affairs, security, and defense, in consultation with the Faroese Government.
The labor force comprised about 25,180 people in December 2015. In many areas, the Faroese labor market model resembles that of the other Nordic countries, with high standards of living, well-established welfare schemes and independent labor unions. A majority of people in the Faroe Islands are bilingual or multilingual, with Danish and English being most widely spoken after Faroese. The Islands boast well-developed physical and telecommunications infrastructure and have well-established political, legal, and social structures. The standard of living for the total population (about 49,000) is high by world standards, and Gross National Disposable Income per capita eclipsed that of Denmark in 2014. The Faroe Islands opened their own securities exchange in 2000; active trading of shares followed in 2005. The exchange is collaboration with the VMF Icelandic exchange on the Nasdaq OMX Nordic Exchange Iceland.
The Islands exported approximately DKK 6.852 billion (USD 1.02 billion) worth of goods in 2015, 97 percent of which were fish products, with the remainder being marine vessels and aircraft. In recent years, construction, transportation, banking, and other financial services sectors have grown, and offshore oil and gas exploration is developing, though commercially viable finds have not been made. In 2014, the majority of exports went to Russia (16.7 percent), the UK (10.4 percent), followed by the U.S. (10.4 percent), Germany (10.1 percent), and Denmark (6.7 percent). Goods imports totaled DKK 6.095 billion (USD 907 million) in 2015. The vast majority of imports came from Europe; 1.08 percent originated in the United States. Denmark provided 27.21 percent of imports, Norway 19.73 percent, Germany 9.17 percent, Sweden 7.75 percent, China 4.85 percent, and Poland 4.11 percent. Imports consist of items for household consumption (22 percent), e.g. food, tobacco and beverages (10.1 percent); fuels (13.2 percent); input to industry (23 percent) and machinery (9.9 percent).
The most recent figures available show Foreign Direct Investment into the Faroe Islands totaled DKK 1.6 billion (USD 238 million) in 2012, about half of which originated from Denmark. The Faroese government has indicated interest in attracting further foreign investment. “Invest in the Faroes” is the Faroese government unit promoting Faroese trade. The website is http://www.government.fo/ . The Faroe Islands is working to sign a Foreign Accounts Tax Compliance Act (FATCA) agreement with the United States.