Greenland's Economy Spring 2020

Home , Economy of Greenland, University of Greenland

The coronavirus crisis Economic prospects Economic policy

1 0 The Economic Council of Greenland The Economic Council was appointed by the Government of Greenland in 2009. The Economic Council is led by an chairmanship of six people. The chairmanship consists of a Chair, Vice Chair and four other members, all appointed by the government.

Apart from the chairmanship, the Economic Council consists of members of stakeholder organisations, the government's administration service and scientific institutions. Members representing organisations and scientific institutions are appointed by the relevant organisations. Other members are appointed by the government. Council Members may comment on the content of the Report, but the chairmanship alone bears ultimate responsibility for compiling the report and for its final content.

The secretariat function for the Economic Council is provided by the Ministry of Finance. The Economic Council's duties consist of making regular appraisals of the state of the economy and the sustainability of the fiscal policies pursued.

The Economic Council's chairmanship:

Torben M. Andersen, PhD. Chair of the Economic Council. Professor of economics at Aarhus University and former chairman of the Taxes and Welfare Commission. He was chief economic adviser to the Danish Economic Council between 2001 and 2003, and is still active as a specialist expert.

Ulla Lynge Vice Chair of the Economic Council. MSc in Public Administration from the University of Greenland. Head of the Secretariat, CSR Greenland and has previously worked for the Greenland Government Authorities, the Municipality of Nuuk, Sermersooq Business Council and the pension fund SISA.

Anders Blaabjerg is Chief Statistician at Statistics Greenland and has an MSc-equivalent in Economics. He was formerly employed at what is now the Ministry of Finance and Taxes.

Mitdlarak Lennert is a PhD fellow, University of Greenland, and has worked in the Ministry of Finance and Taxes.

Najaaraq Christiansen, MSc-equivalent in Public Administration from the University of Greenland, works at Statistics Greenland and previously worked at Tele Greenland A/S.

Søren Bjerregaard, MSc-equivalent in Economics, Head of Securities and External Statistics at Danmarks Nationalbank. Previously a member of the Consultative Committee for Greenland's Economy from 2005 to 2009.

Other members of the Economic Council:

Brian Buus Pedersen, Director at Greenland Business Association (Grønlands Erhverv). Gitte Adler Reimar, Rector of the University of Greenland. Henrik Sandgreen, Chair of KNAPK. Jess Berthelsen, Chair of SIK. Jørgen Isak Olsen, Permanent Secretary at the Ministry of Fisheries, Hunting and Agriculture. Isak Nielsen Kleist, Permanent Secretary in the Ministry of Industry, Labour, Trade and Energy Ken Jensen, Chair of PK and appointed by IMAK, AK, NPK, ASG and PK. Klaus Nygaard, Director of the Greenland Institute of Natural Resources. Lars Geraae, Office Manager, Statistics Greenland. Laust Løgstrup, Project Manager at Qeqqata Municipality. Martin Kviesgaard, Director of Grønlandsbanken (Bank of Greenland) and appointed by the banks. Nikolai S. Christensen, Permanent Secretary at the Ministry of Finance and Taxes.

The report was finalised on 25 May 2020.

1 Table of contents

1. The coronavirus crisis ...... 3 2. Economic prospects ...... 6 3. Economic policy ...... 12

2 1. The coronavirus crisis

The COVID-19 pandemic has had major consequences. To reduce the spread of infection, most countries have introduced a range of restrictions. These restrictions have shut down many activities, meaning that a health crisis has also become an economic crisis. Uncertainty about health developments and the future economic outlook is affecting behaviour: households are holding back on consumption and businesses are doing the same with investment plans. The economic backlash is exacerbated by the fact that this is a global crisis, with many countries affected simultaneously. The coronavirus crisis has thus triggered a global economic recession. According to a recent IMF report, economic activity in 2020 is expected to fall by 3% globally, and by 7.5% in the eurozone. Economies are expected to recover in 2021, but there is great uncertainty about future economic developments, and many indicators appear to be negative.

The coronavirus crisis has also hit Greenland. A range of lockdown initiatives were implemented and travel was shut down. This largely succeeded in stopping the spread of infection through the country, and so it has been possible to begin the process of reopening internally. However, we face a dilemma as to whether to reopen fully to international traffic, as this will increase the risk of infection. People are very vulnerable if the infection should spread, and it would put massive pressure on the health service.

A plan is now in place to reopen to international traffic in three stages. The number of international travellers will gradually increase until traffic returns to normal, linked to the risk of infection from Denmark. A range of orders and recommendations must be complied with, and the strategy is associated with a variety of testing requirements. It is good that there is now clarity about the strategy for reopening to international traffic. However, the fact is that it may take some time before traffic is back to normal, and reopening may be rolled back if the risk of infection goes up.

The coronavirus crisis initially hit businesses that rely on human contact, transport, and so on. This includes a large proportion of the service sector (cafés, restaurants, hotels, hairdressers, leisure activities, and so on) and the transport sector.

Relief measures were introduced in response to the lockdowns. These were absolutely necessary in the extraordinary situation that arose as a result of the coronavirus crisis. It is important to alleviate the financial consequences for households and businesses. This reduces the risk of a serious downturn, and helps to maintain production capacity, thus improving the possibility of restoring activity more quickly.

In terms of internal reopening, it is primarily transport and tourism that is affected. On the other hand, the effect of this is substantial, since the entire 2020 season will be heavily impacted. Fisheries are also affected, with global developments affecting commercial potential and thus prices. At the moment, it is unclear how long these price drops will last.

3 Due to the unique structure of Greenland's economy, it is affected differently by the current crisis compared with most other countries. The largest export industry is fisheries, and the biggest risk here is a fall in prices due to the global economic crisis, while volumes are determined by other factors. The spillover effects of a downturn, e.g. in tourism, on other industries are lower than in other countries where internal supplies play a larger role. Public revenue is also less vulnerable to fluctuations than in other countries due to the block grant. But the tourist industry, in particular, may be hit hard by the coronavirus crisis. This, coupled with prospecting activities being delayed or abandoned, is very important to the strategy of diversifying the structure of industry.

Restrictions and behavioural changes have the greatest direct impact in Q2 of 2020, when the lockdown, etc. could reduce economic activity by up to 8 per cent. Large parts of the activity within hotels, restaurants and air traffic have fallen drastically and can be expected to recover slowly and gradually during the second half of the year. Unemployment in the hotel and tourism industries can also be expected in 2021. Fisheries may be affected to a moderately negative extent by lower demand volumes in important export markets, e.g. food service, while the trend for declining fish prices is expected to continue during 2020.

Overall, the economic cycle indicates that activity (GDP) may fall by 1.5 per cent in 2020 as a whole. If there is no backlash in the form of new waves of infection that necessitate new restrictions, recovery may take place gradually in 2021, but even in this favourable outlook, production at the start of 2021 will be somewhat lower than anticipated before the coronavirus crisis. In particular, this is linked to substantially weaker global prospects. The coronavirus crisis therefore denotes a marked shift away from several good economic years with rising employment. A downturn in activity and a substantial impact on the Treasury are unavoidable. This will affect the framework and opportunities for economic policy in the coming years.

Relief measures have become necessary in the extraordinary situation that arose as a result of the lockdown restrictions. However, this kind of economic policy is very unusual, and in the longer term giving businesses support to cover fixed costs and support when employees are furloughed is problematic. The schemes should therefore be phased out as soon as possible. On the other hand, certain longer lasting measures are needed for the tourism sector due to this industry's unique situation and to prevent the industry from falling into a long-term crisis. These measures should be aimed at ensuring that the requisite capacity and infrastructure are maintained, and the measures must be temporary with a set end date.

This reversal in economic trends affects the Treasury. Before the coronavirus crisis, a small surplus was expected for 2020 with overall balance during the 2020–2023 period. We can now expect a deficit in 2020 and subsequent years, depending on the depth of the coronavirus crisis. Liquidity in the Treasury will be challenged, but given the many uncertainty factors, it is difficult to estimate the exact amount that will be needed. A proposal has been put forward for new loans in the region of DKK 2.5 billion. This should be viewed as a “cash reserve” of a size adequate to the handling of a more severe crisis, and thus not as a forecast for the need to draw on this reserve. Securing adequate liquidity will also send a clear signal that any crisis situation can be dealt with, which will increase confidence in regard to general economic policy.

4 Going forward, it will be necessary to restore the Treasury's finances – this will mean ensuring a surplus for a number of years to both pay down debt and build up buffers in order to prepare for any future crises.

As mentioned in previous reports from the Economic Council, the ageing population represents an unresolved sustainability problem for public finances. The implications of the coronavirus crisis add to this challenge, thus increasing the demands on economic policy. It will be necessary to consolidate public finances, requiring a surplus to be maintained for a period of time. The creation of a new long- term plan is sorely needed, as soon as it becomes possible to get a perspective on the immediate consequences of the coronavirus crisis. The crisis has increased the vulnerability of the economy, and so initiatives are necessary. The situation is worsened further by the setback to the strategy of developing a multi-faceted economy via tourism and mineral resources.

5 2. Economic prospects The global coronavirus crisis will result in economic losses in every country, including Greenland. The pandemic has meant that people have been forced or have chosen to limit their activities to avoid infection, and extensive measures have been brought in to stop the infection spreading. The virus outbreak has caused general uncertainty, which will result in substantial reticence on the part of both consumers and businesses.

Greenland's economy was doing well when it was hit by the coronavirus crisis in March. Growth has been strong since 2015, partly as a result of success in fisheries and the building and construction sector. The number of registered job-seekers fell each month since 2015, taking seasonal fluctuations into account. Public finances were more or less balanced, and both public and private debt were moderate.

The coronavirus crisis is expected to clearly put the brakes on the Greenland economy, but not cause a strong downturn in 2020 as in most other countries. This is due to a number of factors. Firstly, the spread of infection was quickly stopped and prevented in Greenland. Large parts of the economy have already reopened, and work is underway to gradually return crucial air traffic into and out of the country to normal. Secondly, the unique production and industrial structure reduces dependency on global prospects. Fish volumes are less dependent on economic trends, whereas fish prices are much more vulnerable to fluctuations in global market conditions. Added to this are the extensive public sector and the fact that the block grant helps to reduce the dependence of revenues on economic trends. Finally, the self-reinforcing economic mechanisms are weaker in Greenland than in many other countries, since the import level in consumption and investments is relatively high.

On the whole, Greenland is thus better shielded from the economic consequences of the coronavirus crisis than many other countries. However, there are substantial differences in the impact on different parts of the economy. Tourism, transport, restaurants, entertainment and other service businesses are affected very directly by consumer behaviour and restrictions aimed at avoiding the spread of infection. Other industries such as fisheries and construction are affected more indirectly, e.g. due to falls in demand for certain products or lack of deliveries or staff. For most businesses, however, uncertainty has increased and reticence among consumers can be expected. This is helping to suppress the desire for investment in businesses going forward.

The assessment of the economic prospects is based on a few provisional indicators for economic development, supplemented by an assessment of sector-related consequences of restrictions and changes in demand factors, cf. Box 2.1.

Activities related to tourism – transport, hotels, restaurants and associated service businesses – have been hit particularly hard by the outbreak of the virus. It is likely that most of the 2020 season has been lost for a large proportion of the tourism industry. Even if the restrictions regarding air traffic can gradually be relaxed in 2020, negative effects on tourism must be expected for a longer subsequent period. Partly this is about practical matters relating to planning and booking of holidays, and partly about uncertainty and fear relating to tourism, which may last for a longer period. Aversion to activities that mean close contact with others, the risk of a second wave of infection, and so on, may mean a long recovery period for the industry. The need for long-term support for the tourism industry is amplified by the fact that the coronavirus crisis coincides with the relatively short high season for the tourism industry.

6 Box 2.1. Data underlying the assessment of the economic situation

As yet there are few economic indicators on which an economic assessment can be based. The data-related basis for an economic forecast is therefore more uncertain than normal, and must be supplemented by assessments of industry-related consequences of declines in demand and production, and by assumptions as to when activity will recover.

The provisional real economic indicators for Q1 show a very limited impact of the lockdown, since only the decline in activity in March is included in the indicators. Most noticeable in is the fall in hotel-bed nights, for which provisional figures are also available for April. To supplement the published statistics, data have been obtained from Nukissiorfiit (the utility company) on energy and water consumption in March and April 2020 compared with 2019. These data show that the restrictions had a limited effect during those months. Information from Polaroil about fuel consumption also does not indicate an appreciable effect in March and April. Information has also been obtained from organisations such as Grønlandsbanken (Bank of Greenland), Greenland Business Association (Grønlands Erhverv) and SIK about the current economic situation. The economic assessment therefore outlines a possible outlook for economic developments, in which the initiatives that were set in motion are adequate to prevent a new wave of infection, and in which demand and production gradually return to normal in 2021. This is supplemented with a risk scenario in which new restrictions are required in connection with a global second wave of infection. This will delay the economy's recovery until after 2021.

The provisional figures for hotel-bed nights show a decline in both international and Greenlandic visitors in Q1, cf. Figure 2.1. The downturn is in line with the number of overnight stays in March 2020 being half that in March 2019. Provisional figures for April show that the numbers of both stays and visitors were about 90 per cent below April 2019, with international stays falling more than domestic stays. Increased uncertainty surrounding the tourism industry may also have an impact on the plans to build additional hotel capacity for the airport projects in Nuuk and Ilulissat.

Figure 2.1 Hotel-bed nights, 2016–2020

No. of bed nights 70.000

60.000

50.000

40.000

30.000

20.000

10.000

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Living in Greenland Living abroad

2016 2017 2018 2019 2020

Note: Last observation made in Q1, 2020. Source: Statistics Greenland.

7 Retail sales in the three largest retail chains stagnated in Q1 of 2020, after excellent progress in 2019, cf. Figure 2.2. A large proportion of consumer goods are imported, and the stagnation in retail sales therefore has less impact on economic activity than in other countries, while investments and exports have greater impact on economic prospects. Investments rose last year as a result of the acquisition of new trawlers for fisheries and the commencement of construction works for the Nuuk and Ilulissat airports. Building and construction and investment linked to the airports and other building projects will support activity in 2020. On the other hand, no more new trawlers are expected to be acquired, which is one of the reasons why imports are expected to decline this year, and why overall investment is only expected to increase moderately, despite the large number of building and construction projects. The mineral resources sector has also been affected directly by the lockdown, which has delayed prospecting activities. There is also the impact of the global economic crisis on mineral prices, and a long-term global economic crisis could have major consequences for the opportunities to develop the mineral resources sector.

Figure 2.2 Retail sales, seasonally adjusted, 2010–2020

Index, 2010 = 100

135

130

125

120

115

110

105

100

90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Note: Last observation made in March 2020. Source: Statistics Greenland.

Exports are closely linked to fisheries, with fish products representing 95 per cent of goods exports. Fisheries have had a few strong years of high prices and an increase in volume. Companies in the sector have thus had opportunities to modernise the fleet and consolidate. The coronavirus crisis brings with it a certain amount of volume risk for the industry, linked to a fall in global demand for some fish products. More probable is a fall in the price of fish products as the result of a major international economic downturn. A fall in prices in the region of 10–20 per cent for 2020 compared with 2019 is not unlikely, and should be viewed in the light of downward pressure on fish prices in 2019, which seems set to continue this year. Fish prices have also fluctuated substantially in earlier years – in both positive and negative directions, cf. Figure 2.3.

A fall in prices will affect incomes – and obviously public finances via resource rent taxes. The economy's vulnerability in relation to developments in fisheries was analysed in the Economic Council's report for 2019, and most recently in the Political and Economic Report for 2020, in which a 20 per cent fall in prices was estimated to reduce resource rent taxation by approximately DKK 150 million. Revenues from resource rent taxes are therefore extremely sensitive to falls in the price of fish.

8 Added to this is the derived fall in income and corporate taxes, which is judged to be around the same size as the fall in resource rent taxes. In addition, this figure only includes direct budgeted effects, and does not take into account any derivative effects.

Figure 2.3 Trends in fish prices with two price fall scenarios in 2020

Index 2012 = 100 150 140 130 120 110 100 90 80 2012 2013 2014 2015 2016 2017 2018 2019 2020

Fish prices, total Price fall of 10% in 2020 Price fall of 20% in 2020

Note: The dashed lines illustrate the fall in prices through the year 2020 of 10 and 20 per cent respectively, and are less than the fall in the yearly price level in 2020 of 10 and 20 per cent. Source: Statistics Greenland and the Economic Council's own estimates.

Impact on production and employment Restrictions and behavioural changes have the greatest direct impact in Q2 of 2020, when the lockdown, etc. could reduce economic activity by up to 8 per cent. Large parts of the activity within hotels, restaurants and air traffic have fallen drastically and can be expected to recover slowly and gradually during the second half of the year. Unemployment in the hotel and tourism industries can also be expected in 2021. Fisheries may be affected to a moderately negative extent by lower demand volumes in important export markets, e.g. food service, while the trend for declining fish prices is expected to continue during 2020.

Overall, the economic cycle indicates that GDP may fall by 1.5 per cent in 2020 as a whole, see Figure 2.4. If there is no backlash in the form of new waves of infection that necessitate new restrictions, recovery may take place gradually in 2021, but even in this favourable outlook production at the start of 2021 will be somewhat lower than anticipated before the coronavirus crisis. In particular, this is linked to substantially weaker global prospects.

The risk primarily relates to a more noticeably negative impact on the economy, e.g. in the form of more negative spillover effects from abroad or behavioural changes in consumers and businesses, which may mean recovery is slow. This could also happen in the form of a second global wave of infection in the second half of the year, necessitating new restrictions and delaying the recovery of economic activity. Figure 2.3 outlines this kind of risk scenario, in which GDP falls by 3–4 per cent in 2020. There are also other possible scenarios, and the risk scenario is not an outer limit for potential negative economic developments.

9 Figure 2.4 GDP level distributed by quarter

17.000

16.500

16.000

15.500

15.000

14.500

14.000

2019.1 2019.2 2019.3 2019.4 2020.1 2020.2 2020.3 2020.4 2021.1 2021.2 2021.3 2021.4

Risk scenario: Recovery with backlash

Economic assessment, June 2020: Recovery without backlash

Economic assessment: February 2020

Note: GDP level set out in chain-linked values (2010 prices). GDP is divided into quarters on the assumption of uniform quarterly growth and set out by year. The economic assessment is based on a recovery without a backlash, in which the decline in activity in Q2 is between 50 and 90 per cent for vulnerable service industries, including the hotel, restaurant, air traffic and associated service industries. Fisheries are affected moderately in terms of volume. Activity gradually returns to normal in 2021. In the risk scenario, there is a backlash in Q3 of 2020 and the vulnerable industries are hit again, resulting in a longer period of recovery.

Table 2.1 shows the key figures for the supply balance in an economic cycle without a backlash. Changes in the individual demand components, i.e. private consumption, investment, export and import, are extremely uncertain. The substantial decline in exports is strongly linked to the decline in hotel and tourism activity, since far fewer foreigners will visit the country this year. Added to this is a small decline in exports from a moderate volume adjustment in fisheries. Consumption declines moderately, partly as a result of lower fishery incomes, and partly as a consequence of a period of lockdown and restrictions to consumer behaviour. Investments are relatively unchanged and high, supported by the building and construction investments in the new airports, among other things. Growth in 2021 is characterised by recovery, in which a gradual return to normal in tourism, hotel and service, in particular, will strengthen international consumption in Greenland (exports in the national accounts) and private consumption. Overall, in this favourable situation growth may be just under 5 per cent next year. The substantial international downturn, however, means that activity at the end of 2021 will be lower than anticipated before the coronavirus crisis.

A decline of 1.5 per cent in GDP would mean a reduction in the number of employed people. However, as this situation began to evolve, there were widespread labour shortages and a correspondingly large need for foreign labour. An economic slowdown will reduce this need, and the impact on unemployment in 2020 may therefore be somewhat lower than the common correlations between growth and unemployment. Relief measures for industry and the labour market are also helping to minimise the impact of the coronavirus crisis on the labour market, see next section.

10 Table 2.1 Supply balance, annual real growth in %.

2015 2016 2017 2018 2019 2020 2021 Forecast Private consumption 0,2 1,5 1,3 1,1 2,7 -3,3 6,3 Public consumption -0,6 1,8 2,3 1,8 0,7 0,4 0,7 Gross investment 10,2 10,9 -0,7 12,3 34,3 0,6 2,1 Exports of goods and services -9,9 15,2 -5,4 4,2 4,8 -7,1 8,7 Total final consumption -0,6 5,9 -1,0 4,0 9,2 -2,2 4,0 Imports of goods and services 1,7 11,0 -3,1 5,7 20,4 -3,2 3,0 Gross Domestic Product -2,5 4,7 0,5 3,2 1,8 -1,5 4,8

Note: 2015–2016 are final figures; 2017–18 are provisional figures; 2019–21 are Economic Council estimates. Source: Statistics Greenland and the Economic Council's own estimates.

Current labour market assessments rely on the number of registered job-seekers. This number has fallen steeply since 2016, see Figure 2.5. The fall in unemployed people is most noticeable in cities and particularly applies to people already ready for employment. In April 2020, however, the number of registered job-seekers rose by over 200 people for the first time in many months, taking seasonal fluctuations into account. It must be noted that the statistics show the total number of people who have contacted the municipality in a single month because of unemployment. The statistics are therefore influenced by the administrative practice of each of the municipalities and fluctuations in a single month should be interpreted with caution. Changes to the number of job-seekers in the coming months will therefore be a key indicator regarding the impact of the coronavirus crisis on the economy.

Figure 2.5 Registered job-seekers, 2016–2020 Total

5.000

4.500

4.000

3.500

3.000

2.500

2.000

1.500

1.000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 2017 2018 2019 2020 Note: Latest observation in April 2020. Source: Statistics Greenland.

11 3. Economic policy In a short time, the coronavirus crisis has substantially changed the conditions of economic policy. As infection spread and lockdowns were imposed in other countries, it also became necessary to impose a range of restrictions and shut down certain activities entirely or partially in Greenland. Relief measures were also introduced to alleviate the economic consequences of the lockdowns. As the economy reopens, the focus will move to economic decline and the impact on public finances. The short-term measures necessitated by the coronavirus crisis and the resulting economic slowdown have a significant effect on the economic policy latitude and requirement for reforms.

Relief measures In response to the coronavirus crisis, relief measures have been introduced for businesses and employees. The objective of these measures was to support companies and employees in situations where the economic possibilities were impacted by the lockdowns imposed to limit the risk of spreading infection. Similar measures were introduced in many other countries.

Business relief measures include both “emergency relief” for private companies in the hotel, restaurant and certain service industries and a “general business relief” for companies in other sectors, including the fisheries sector, the construction sector and the transport sector, among others.

Companies whose turnover has dropped by at least 30 per cent can receive compensation for direct cancellations or for fixed overheads (overall maximum of DKK 1 million per company per month). The scheme runs from 1 March 2020 to 30 June 2020.

DKK 50 million has currently been set aside for emergency relief and DKK 100 million for the general business relief.

A loan option has also been set up for private companies. The Danish Government has proposed that small and medium-sized enterprises (SMEs) in Greenland be covered by Denmark's SME guarantee scheme, in the same way that Greenland is covered by the Danish Government's relief measures for large companies. Under this measure, the Danish State has established a guarantee scheme to cover 70 percent of bank loans to companies that can document loss of turnover in excess of 50 per cent as a result of COVID-19. Deadlines for payment of taxes and duties, etc. have also been extended to improve corporate liquidity.

The labour market relief covers measures to support workers. When companies furlough permanent employees, they can receive compensation for wages. This assumes that at least 30 per cent of the applicant's employees or 25 employees have been furloughed during the period of wage compensation. Compensation for 90 per cent of the salary can be paid, up to a maximum of DKK 20,190 per 30-day wage compensation period per employee. The employee must take five days of annual leave/time off in lieu for each 30-day wage compensation period.

DKK 107 million has been set aside for the scheme.

In mid-May, approval was given for full or partial support under the business relief measures in 262 cases, amounting to a total of DKK 18.2 million. 93 applications have been approved, fully or partly, for the labour market relief measures, amounting to a total of DKK 3.9 million; a number of applications are still being dealt with. In particular, businesses in the hotel, restaurant and tourism industries are making use of the schemes.

12 This means that the money withdrawn from the schemes is significantly lower than the established frameworks. However, we can expect more to be withdrawn as a result of the situation in the tourism industry over the summer. But the numbers also indicate that the need for support, and thus the depth of the crisis, has not been as large as was first assumed.

A questionnaire-based survey undertaken by Greenland Business Association (see footnote 1) shows that there have been certain running-in problems, but that the schemes are generally viewed positively. However, it is also noted that the relief measures are not relevant to many companies.

A proposal has been put forward to extend the period of the relief measures until 30 September 2020. This would extend the support period from 3 to 7 months. Compensation for overheads is switching to a linear model, so that compensation corresponding to the estimated loss of turnover and with an upper compensation limit. If a company's turnover declines by 50 per cent, 50 per cent of overheads will be compensated, and compensation cannot exceed 80 per cent. The transition to the linear model is a clear step forward, since it provides a better incentive structure. However, this is a long support period which involves a risk of locking up resources in unprofitable business activities and reducing adaptability in general. But for vulnerable businesses in tourism, etc., a longer support period may be relevant.

Relief measures have become necessary in the extraordinary situation that arose as a result of the lockdown restrictions. However, this is a very unusual type of economic policy, and there are problems associated with giving businesses support to cover overheads and support when employees are furloughed. Essentially, it puts the vital part of the market mechanism out of action.

The criteria for support are based either on a reduction in turnover or on furloughing of employees, and thus on a comparison between the situation now and before the start of the crisis. The longer the situation continues, the more problematic this calculation becomes, since there is a tendency to settle in a given situation. However, the economy is always changing, involving reversals and adaptations, and this dynamism becomes locked up when relief is maintained for a long time. The Government of Greenland cannot support companies indefinitely, and so general relief measures should not be extended to 7 months.

On the other hand, certain longer lasting measures are needed for the tourism sector due to this industry's unique situation and to prevent the industry from falling into a long-term crisis. These measures should be aimed at ensuring that the requisite capacity and infrastructure are maintained and the measures must be temporary with a set end date. For example, this could be via subsidies for demand in order to increase domestic tourism this year.

Tourism relief has been proposed for hotel bookings and tourist operators in order to boost domestic tourism. There is clearly a need for such a scheme, and it makes sense to link the grant to an activity. This will support dynamism and competition in the industry, while also offering assistance.

1 Greenland Business Association (Grønlands Erhverv), 2020, Erhvervshjælpepakker – Medlemsundersøgelse (Business relief measures – member survey), April 2020.

13 The due dates for payment of A-tax (tax deducted from income at source) and labour market contributions for April, May, June and July have been deferred for companies in sectors that have been hit particularly hard2. Payment is being pushed back three months to July, August, September and October. Public companies with activities in these sectors can apply for the payments to be delayed. It is possible that the scheme could be extended to other industries.

Deferring tax and duties is the equivalent of a loan, and is a useful way of ensuring better liquidity for the relevant companies. However, the payment deferments are relatively limited, and many companies can be expected to have difficulty making these payments in the latter part of the year alongside their normal tax and duties. It may be necessary to spread the payments over a longer period. In general, loans are preferable to direct support, since they do not distort the market mechanism to the same extent. The disadvantage of deferring tax and duties generally is that this occurs without credit-rating. This means there is also a risk of building up a tax debt which some companies would be unable to pay. The more wide-ranging the scheme is, the greater the problems that can arise from it. Guarantee schemes, e.g. a guarantee to cover 70 per cent of loans for SMEs, do not have this problem to the same extent, since a credit-rating occurs (other lenders bear the risk for 30 per cent of the loans).

It is necessary to detail a payment model for the deferred tax and duties, since many companies could have problems dealing with such payments over and above their normal tax and duties if economic activity is lower than usual.

The relief measures are a non-traditional form of economic policy which would not normally be used to support economic activity. They should therefore be phased out as quickly as possible, and any need to support activity must be effected via traditional fiscal instruments and labour market policies.

Public finances – the Treasury The reversal in economic trends affects the Treasury. Costs will increase, among other things for relief measures and any needs in the health service. Economic decline and rising unemployment will also increase the cost of social services. However, savings may be obtained in other areas due to lower activity.

In regard to income, a decline in revenues from taxes and duties is to be expected, including resource rent taxes, cf. the discussion in the previous section. The deferment scheme for taxes and duties also means there is a risk of increased arrears or deferments. Nevertheless, the income side is supported by the fact that the block grant and EU subsidies are not affected by the economic situation.

Before the coronavirus crisis, a small surplus was expected for 2020, with overall balance for the 2020–2023 period. We can now expect a deficit in 2020 and subsequent years, depending on the depth of the coronavirus crisis.

The Treasury's liquidity is affected by a range of additional matters, however. At the start of this situation, liquidity was fairly good (at the end of April 2020 the Government of Greenland's outstanding debt was about DKK 30 million and liquidity was about DKK 1.3 billion). Among other things, liquidity is affected by deferred tax and duty payments, the situations of the municipalities and developments in companies owned by the Government of Greenland.

2 This applies to i) hotels and accommodation, ii) restaurants, eateries and venues, iii) wholesale, retail and stores, iv) tourism and travel agencies, v) charter boats and tourism travel, v) air travel. From 22 April, it will also include vi) dentists, vii) the health service in general, such as chiropractors and physiotherapists, and so on, and viii) taxi-driving and taxi companies. It is a requirement that at least 40 per cent of the company's turnover comes from the relevant industries in order for the company to be covered. 14 The municipalities are expected to experience a decline in the tax base, which the Tax Agency estimates at a possible DKK 200 million, and an immediate adjustment of the costs of such a decline is neither realistic nor appropriate. To resolve the immediate problem, tax payments on account to the municipalities are to be maintained at the current level. These will then be offset later. Depending on how the crisis evolves, there may be a need for substantial offsetting, and there is a question about whether this can realistically be dealt with within a single year.

Added to this is the possibility of further liquidity needs. The need may increase depending on the state of the economy, and needs may arise in relation to companies owned by the Government of Greenland. The Political and Economic Report sets out a variety of scenarios for the liquidity requirement. In most of the scenarios, liquidity will be adequate, but not in the more drastic and long-lasting scenarios. A proposal has been put forward for entering into discussions with the Danish Government or other borrowers on taking out new loans in the region of DKK 2.5 billion. This should be viewed as a “cash reserve” of a size adequate to the handling of a more severe crisis, and thus not as a forecast for the need to draw on this reserve. Securing adequate liquidity will also send a clear signal that any crisis situation can be dealt with, which will increase confidence in regard to general economic policy. Borrowing should be viewed in the context of the considerable risk exposure of the Treasury via the companies owned by the Government of Greenland.

In the light of this situation as regards the Treasury, a so-called “cash audit” has been announced to identify potential savings, among other things, by deferring activities. This applies to the Construction and Renovation Fund, among others (much of the liquidity is technically bound up with this fund). Considerations regarding the Construction and Renovation Fund clearly illustrate the current dilemma in economic policy. Deferring projects will reduce the financial pressure on the Treasury, but also risks reducing employment. For this reason, the policy is primarily to defer projects that have extensive needs for foreign labour, but even these projects will have an impact on local labour. Alongside this deferment and review of projects in the Construction and Renovation Fund, according to the information there are various supplementary grants in the pipeline which prioritise the commencement of other construction projects for some of the funds that are released. One of the criteria is that these must have a positive effect on employment in the construction sector across Greenland as a whole.

Significant demands on economic policy Going forward, it will be necessary to restore the Treasury's finances – this will mean ensuring a surplus for a number of years to both pay down debt and build up buffers in order to prepare for any future crises.

For several years now, financial policy has been subject to a requirement for overall balance for the upcoming four-year period (the budget year and the following three years). This requirement has been formally suspended (since 2018) until 2021, but the 2020 Budget Act complied with this budgetary requirement. Breaking with this budgetary requirement as a result of the coronavirus crisis is due to an extraordinary and very unexpected situation. During 2020 and until 2022/2023, a deficit, and thus an accumulation of debt, may be expected.

15 As analysed in previous reports from the Economic Council, the ageing population represents an unresolved sustainability problem for public finances. The implications of the coronavirus crisis add to this challenge, thus increasing the demands on economic policy. It will be necessary to consolidate public finances, requiring a surplus to be maintained for a period of time. The balance requirement for public finances must therefore be replaced by the aim of generating a surplus. At the same time, there is an even greater need to resolve the sustainability problems. The Sustainability and Growth Plan was a milestone in resolving this problem. Given the new situation, it is crucial to create a new, long-term plan, as soon as it becomes possible to get a perspective on the immediate consequences of the coronavirus crisis. The crisis has increased the vulnerability of the economy, and so initiatives are necessary.

There is thus little room for manoeuvre in order to pursue an active economic policy. Structural policy measures are generally not suitable as economic policy, and it is therefore not appropriate to take a zig-zag approach to structural measures. This applies to the mandatory pension scheme, for example. Changing schemes such as this, which have a long-term focus, is extremely expensive and creates further uncertainty.

The development also illustrates the considerable risk exposure of the Government of Greenland via government-owned companies. While public finances at the outset of this situation were fairly good, with low debt, developments in these companies have a substantial impact on the Treasury. In the light of the coronavirus crisis, it is necessary to clarify what is appropriate in more detail in the Government of Greenland's comprehensive involvement in trade and industry activities (both at home and abroad).

The situation is worsened further by the setback to the strategy of developing a multi-faceted economy via tourism and mineral resources. The shutdown of the Atlantic traffic has obvious effects on tourism. Even if these routes were to reopen, how tourism patterns would be affected is unclear. Among other things, it depends on whether effective forms of treatment or a vaccine are found. Otherwise, the risk of infection and quarantine may hold back demand.

The mineral resources sector has also been affected directly by the lockdown, as this has delayed prospecting activities. There is also the impact of the global economic crisis on mineral prices, and a long- term global economic crisis could have major consequences for the opportunities to develop the mineral resources sector.

16 The Economic Council

The Economic Council compiles independent analyses and appraisals of the economy of Greenland. The Council is appointed by the Government of Greenland and is led by an independent chairmanship. The Chairman of the Economic Council is Professor Torben M. Andersen.

The analyses serve as an independent contribution to decision-support for Greenland's economic policy. The assessment of economic trends and the sustainability of Greenland's economic policy are recurring topics in the Council's reports. The reports deal with current reform topics geared to making Greenland more economically self-sustaining. Such topics concern the education sector, fisheries management, taxation, the housing sector, labour market and welfare policy, the mineral resources sector and trade and industry policy.

The Economic Council's analyses are published in reports and concise policy-oriented briefings on the Council's website: http://naalakkersuisut.gl/da/Naalakkersuisut/Departementer/Finans/Oekonomisk-raad

The Council also hosts seminars and presentations on topical economic policy themes.

Editions since 2017

Reports:

The Economic Council's Report, 2017, Economic prospects, current economic policies, academic skills in primary and lower secondary schools, the fishing industry

The Economic Council's Report, 2018, Economic prospects, current economic policies, structural problems on the job market

The Economic Council's Report 2019, Economic outlook, current economic policies, health spending and financing Background materials:

Technical background report 2017-1: Course analyses within education Report

2018-1: Implications of the airport package for the national economy

Policy Briefs:

Policy Brief 2017:1 Economic trend forecasts 2016–18 – current considerations.

Policy Brief 2018:1 Harvest control rules in the fishing industry

Policy Brief 2018:2 The economic situation

Policy Brief 2019:1 The economic situation

Policy Brief 2020:1 The coronavirus crisis