An Ill Wind of Stark Economic Reality Sweeps Over Debt-Ridden Faroe Islands

COPENHAGEN — The tiny Faroe Islands, once a flourishing North Atlantic fishing center, are mired in a debt and trade crisis usually associated with the Third World.

A recent Danish government report said the Faroes, a self-governing part of Denmark about 200 miles north of Scotland, were grappling with foreign debt approaching $980 million and a balance-of-payments deficit of $135 million in 1988.

So grave is the situation that Denmark has set stiff limits on loans to the islands’ local authorities, and a leading Danish bank has stopped lending money to the Faroes’ 47,650 private citizens.

“After years of optimism, the stark reality of the islands’ economic predicament is now getting through to the Faroese,” said Arni Olafsson, councilor on Faroe Island affairs in the Danish Foreign Ministry.

A broad-based coalition government is gearing up to implement a tough 1990 budget, pledging to slash public spending, raise taxes and customs duties, and impose a compulsory savings scheme. The budget was unveiled after the coalition took office in the 18-island archipelago last June, after weeks of deadlock over the dire state of the economy.

The government, which pulls together the rightist People’s Party, the Unionist Party and the left-wing Republicans, aims to wipe out foreign debt by the end of next year.

The budget orders investments to be halved from last year’s $140 million from 1990 onwards, and the balance of payments and trade shortfalls also to be halved.

Other austerity measures include the suspension of automatic index-linked pay increases and tighter credit.

At the root of the crisis is the Faroes’ ailing fishing and fish-processing industry, which accounts for virtually all exports and employs nearly a quarter of the work force on the rugged islands.

“The basis of the economy is fishing, which was hit hard by the oil crises of the 1970s,” Olafsson said.

The 1977 extension of offshore fishing limits to 200 miles forced the Faroe Islanders to step up fishing in home waters, reducing their traditional catch off Greenland and Britain.

“Before 1977, the Faroes, the biggest per-capita fishing nation in the world, fished only 14% of its total catch in its own offshore waters. Today the figure is 50%,” Olafsson said.

“The change cost the fisheries sector dearly in investment in fishing vessels, onshore filleting and processing factories and improved port facilities, with considerably reduced profits from fishing in domestic waters.”

Attempts to extend the fishing fleet in the 1980s overheated the economy and were a financial flop.

The government now plans drastic cuts in the size of the fleet. It will compensate owners of scrapped vessels and cut back subsidies to the industry, now running at an annual $70 million.

It will also curb economic aid to the bloated building sector, promote tourism more actively and intensify the search for offshore oil and gas.

Public investment schemes have been postponed--notably an ambitious project for a tunnel between the main island of Stroemoe and the international airport on the island of Vaagoe.

Under home rule, the Faroes send two members of Parliament to the Danish Assembly in Copenhagen, which handles defense and foreign policy.