Labour shortages increase the need for tight economic policy in Greenland

Greenland has come through the past three years with the pandemic, energy crisis and war in Europe surprisingly well. The economy has been growing since 2015, not least due to the boom in the fishing industry, which is the dominant private industry. Inflation remains moderate compared to the rest of the world, and considerable modernisation of the infrastructure is taking place in the form of new airports and new housing, utilities etc. At the same time, tourism has bounced back following the lifting of travel restrictions. The growth in the economy is clearly reflected in the labour market, where unemployment could be as low as 2 per cent this year, see chart 1. This is the lowest level ever and has led to an increasing need for foreign labour. The pressure on the economy increases the need for tight economic policy in the coming years. There is also a growing need for reforms. Government revenue cannot keep up with expenditure pressures in the long term, making fiscal policy unsustainable.

Greenland has experienced growth in production and employment since 2015, and the favourable economic development is closely linked to a number of boom years in the fishing industry. In recent years, the activity linked to the construction of new airports in Nuuk and Ilulissat and other infrastructure has also contributed to economic growth. According to the Greenland Economic Council’s report from September 2023, the boom is expected to continue in 2023 and 2024, where the economy is expected to grow by approximately 2 per cent and 1 per cent, respectively.

Inflation remains modest due to Greenland’s special energy infrastructure. In July 2023, consumer prices rose by 2.5 per cent compared to the previous year, with housing and food in particular contributing to the higher consumer prices. In 2020, price hedging agreements were concluded on oil products, which expire at the end of 2023. The agreements have largely shielded Greenlandic consumers from rising energy prices. A new oil price agreement effective from 2024 will lead to higher energy prices, and inflation is therefore expected to rise in 2024. With large imports, it is not possible to shield Greenland from the higher global prices of oil products and consumer goods in the long term.

Record high seafood exports

Goods exports consist predominantly of fish and shellfish with various degrees of processing. The main species exported are prawns, halibut and cod, but fish products made from crabs, capelin and mackerel are also exported. A favourable development in catches and fish prices has led to increasing exports, which reached kr. 5.2 billion in 2022. This represents the highest export value of seafood in a single year, and the favourable development continued into 2023, see chart 2.

The price of seafood has developed favourably. In Q1 2023, the average price per kilo for prawns and Greenland halibut was between 10 and 15 per cent higher than in the previous year. The price of cod surged in 2022, but large fluctuations in fish prices are not unusual. Favourable fish prices mean high export prices, which strengthen the terms of foreign trade and increase purchasing power in society.

Catches in Greenlandic waters have also increased for a number of years. Prawn catches have grown seven years in a row, and the quotas for this economically important species reflect biological advice, which has resulted in the fish being MSC-certified as sustainable. The same applies to the seagoing Greenland halibut fisheries.

The regulation of other parts of fishing is, however, problematic. This applies in particular to the inshore fishing for Greenland halibut and cod, where catches have far exceeded biological advice for a number of years. In 2021, the Fisheries Commission recommended a number of concrete initiatives aimed at ensuring more sustainable fishing and higher economic returns for society from this resource. In the management of fishing resources, the commission emphasised the importance of ensuring that each fisherman’s catch right is restricted to the quota, that the duration of the right is known, and that the fisherman is entitled to transfer or sell his right. A new fisheries law based on the recommendations is important for strengthening the industry in the long term.

High capital expenditure and increasing corporate lending

Kalaallit Airport A/S and its three new airports in Nuuk, Ilulissat and Qaqortoq are currently under construction. Some of the new runway in Nuuk was put into use this year, and the design of the terminal buildings is nearing completion to ensure that the airport can be completed in 2024. Construction of the airport in Ilulissat began in autumn 2020, but was delayed due to the pandemic, among other things, and is now expected to be completed in 2025. The regional airport in Qaqortoq is expected to be completed in 2026.

The three new airports bring the total investments in new infrastructure to almost kr. 5 billion. In addition, kr. 500 million are being invested in two modern waste incineration plants in Nuuk and Sisimiut, which are expected to be operational in 2024 and 2025. It has also been decided to expand hydroelectric power plants to supply Nuuk as well as Qasigiannguit and Aasiaat by investing a total of kr. 3.5 billion. The start date for these new construction projects has yet to be decided.

As a result, activity in the building and construction sector is very high and is further stimulated by large-scale housing and property projects, especially in Nuuk and the larger cities. This is reflected in strong growth in corporate lending, among other things, which also includes lending to new cooperative associations and other types of property, see chart 3. Housing financing via Danish mortgage credit institutions predominantly takes the form of fixed-rate loans with amortisation. The moderate growth in mortgage lending since 2022 may be related to homeowners choosing to reduce their outstanding debt by remortgaging their loans as mortgage rates rise, see chart 4.

The housing market in Greenland is highly regulated and characterised by substantial public funding, which helps to stimulate the demand for housing. Subject to certain conditions being met, municipalities can offer home financing loans for newly built homes which are interest and amortisation-free for the first 20 years. At the same time, there is a shortage of suitable building sites in the larger cities which taken together pushes up prices in the housing market. The scheme of public loans for newly built homes is being phased out in Nuuk, where the pressure on the housing market is immense.

Labour shortages and increased immigration

The growth is felt throughout Greenland, but mostly in Nuuk and North Greenland, where the pressure on the labour market is also the greatest. The situation is slightly different in South and East Greenland. Here, the population is declining and business opportunities are more scarce, partly because fishing has moved further north due to climate change. Unemployment in South and East Greenland is somewhat higher than in the rest of the country, and in some places significantly higher. In Tasiilaq, the largest town on the east coast, unemployment was just under 15 per cent of the labour force in 2021, while in Nuuk it was 2.5 per cent and less than 2 per cent in Ilulissat.

The unemployment rate among the labour force stood at 3.7 per cent in 2021, which is the most recent year for which register-based labour market statistics are available. Every month, municipalities register the number of people affected by unemployment. Municipal censuses show that unemployment declined further in 2022 and 2023. From January to August 2023, an average of 1,357 people were registered as unemployed, which is about 150 people fewer than in the same period in 2022 and about 300 fewer than in 2021, see chart 5.

The increasing recruitment of foreign labour also reflects pressures on the labour market. From 2018 to 2023, approximately 1,000 foreign nationals of working age from mainly Asian countries moved to Greenland, see chart 6. This corresponds to an increase in the labour force and employment rate of 3.5 per cent to the extent that they have come to Greenland to work. The large-scale recruitment of mainly unskilled labour is a new phenomenon.

Labour market pressures should be seen in the context of labour market participation, which is relatively low compared to other countries. Around 80 per cent of the population aged between 25 and 65 participate in the labour market, which is slightly below the OECD average and well below the Nordic countries, see chart 7. This is due to a structural difference linked to education and qualifications. It is well known across countries that there is a close link between qualifications and employment opportunities. In Greenland, people with an education have the same high employment rate as in the Nordic countries and OECD countries. Persons with a primary and lower secondary school educational background have significantly lower labour market participation rates, see chart 8. The level of education is the main explanation for the lower employment rate in Greenland than in other countries. More than half of the population aged between 25 and 64 have primary and lower secondary school as their highest level of education. This is a significantly higher share than in the Nordic countries.

The favourable economic development is mirrored in the public economy, where a surplus in 2023, 2024 and beyond is expected in the Finance Bill for 2024. The Finance Bill reflects the Greenlandic Budget Act, which requires that income and expenditure must at least balance over a four-year period. At the same time, the Budget Act stipulates that expenditure may not grow in real terms by more than 1 per cent in one year and 2 per cent over a four-year period. The Budget Act thus imposes a limit on how much public expenditure is allowed to grow. In the Finance Bill, the surplus on the budget for current and capital spending is approximately 0.5 per cent of GDP in 2024 and around 1 per cent in 2025, which is modest in an economic boom. At the same time, public expenditure growth is close to the limit set out in the Budget Act. The current economic situation with widespread shortages of both skilled and unskilled labour supports the current tight economic policy. Monetary policy has tightened and higher interest rates may dampen private investment going forward. The focus on promoting local employment also speak against launching new major construction works before the major airports in Nuuk and Ilulissat have been completed. The airport in Nuuk is expected to be completed in 2024, while the airport in Ilulissat is expected to be completed in 2025.

Debt build-up and risk exposure

The Government of Greenland has net assets of just over kr. 1 billion, and virtually no gross debt. This is a result of budgetary policy, which, among other things, is guided by the aim of relatively high liquidity for the Greenland Treasury. However, for the Government of Greenland, municipalities and government-owned public limited companies as a whole, net interest-bearing debt has risen to kr. 4.4 billion in 2023 and is expected to grow to kr. 6.8 billion in 2026, see chart 9.

Debt build-up is mainly the result of infrastructure investments by the government-owned companies to build the new airports, and by the municipalities and their companies. Among other things, the Government of Greenland expects to take out new loans to be able to expand the Buksefjord Power Station which supplies Nuuk with energy and establish a new hydroelectric power plant to supply Aasiaat and Qasigiannguit.

The Government of Greenland owns several of the largest companies in the country. These companies include the fisheries group Royal Greenland, the trading and service group KNI, the airline Air Greenland, the shipping company Royal Arctic Line, the telecommunications company Tusass and the airport company Kalaallit Airports. Add to this government-controlled energy supply activities in Nukissiorfiit and NunaGreen, which are responsible for the planned expansion of hydroelectric power plants at a total cost of kr. 3.5 billion. Government-owned companies often have sole responsibility for socially critical activities, which cannot simply be shut down if a company gets into financial trouble. The Government of Greenland will have to keep the activities going, and as the companies’ debt increases and interest rates rise so does the risk exposure of the Greenland Treasury.

Backlog in the maintenance of public buildings and installations

The debt situation should be seen in the context of the fact that a considerable backlog has been built up over many years in the maintenance of public buildings and installations. This applies to housing, utilities and infrastructure, hospitals, ports etc., where there is also a growing demand for modernisation. Removing the backlog will require very sizeable investments over several years. The total maintenance backlog has been estimated at approximately kr. 7.6 billion, with government-owned rental housing and energy and water supply making up a considerable share of the backlog, see chart 10. The assessment of the backlog in individual areas has not necessarily been carried out in a comparable way. In some areas, detailed studies of investment requirements are available, while in others they are estimates. The backlog of maintenance in the education and social areas has not been assessed.

Maintenance can be financed through user fees or tax revenue. The dilemma of the large backlog is that the funds set aside for maintenance in important areas where user fees are already common, such as housing and energy, are insufficient. In particular, the rent in many public rental properties has been set so low that housing associations are unable to pay the necessary maintenance and modernisation costs.¹ Many public housing units are therefore in poor condition, and there is no money for renovations and updates which are in the long-term interests of the tenants.

Sustainability issue and need for reform

The higher risk exposure of government finances and the considerable maintenance backlog in public buildings and installations should be seen in the context of a longer-term fiscal sustainability issue. The number of older people will increase significantly over the coming decades, while a declining population will lead to a smaller labour force and lower employment, see chart 11. An ageing population increases the pressure on health care and eldercare costs and expenditure on pensions etc. As government revenue cannot keep up with expenditure pressures, public finances are not sustainable in the longer term.

The trend of declining revenue as a percentage of GDP in the coming decades is due to the development in the block grant to Greenland from the Danish State, see chart 12. According to the Act on Greenland Self-Government, the grant from the Danish State is adjusted in step with Danish wage and price developments, and the grant as a share of GDP is slowly reduced, as the price and wage growth in Greenland is on average higher than in Denmark. In the mid-1990s, for example, the block grant constituted 35 per cent of GDP in Greenland, and that percentage has fallen to around 20 per cent in 2023 and is expected to decline further. According to the Economic Council of Greenland, the rising costs and pressure on revenues will require added annual funding of kr. 1.3 billion (calculated at 2021 level) if government finances are to be sustainable in the longer term, see chart 12.

The sustainability issue calls for political priorities. In the Finance Bill for 2024, it was announced that a Sustainability and Growth Plan II will be presented later this year. The aim is to curb expenditure growth and make the economy more resilient through increased private sector activity. This will be achieved through a number of reform tracks concerning education, sustainable growth and a multi-faceted economy, future-proofing of the public sector, tax system reforms, welfare services and housing and eldercare.

The analysis consists of a Danish, Greenlandic and an English version. In case of doubt as to the correctness of the translation, the Danish version will prevail.

Based on information available up to 23 October 2023