Falkland Islands: Prosperity & Development: 2020 - 21 July 2020
The Governor's annual address to the Legislative Assembly in early June showed the Falkland Islands to be in good shape, with a sound economy, strong reserves and a prudent approach to government expenditure. Revenue streams remain generally robust, allowing increased infrastructure investment to be planned, including a new port development and power station. Apart from defence and foreign affairs, the Falkland Islands remain self-sufficient and for many years have had no call on the UK aid budget. But there are clouds on the horizon: the Covid-19 pandemic could have a significant adverse impact on the FI economy, depending on the resilience (or not) of global markets – and the position could be complicated further by Brexit, a sustained depression of oil prices and, of course, any impact of the more confrontational policies of the new administration in Argentina.
The Governor's annual 'state of the nation' address to the Islands' Legislative Assembly on 9 June 2020, when taken with the associated budget for FY 2020-21, showed the Falkland Islands' economy in good shape with revenue streams largely maintained and public expenditure plans kept within revenue forecasts. The Falkland Islands Government (FIG) does not borrow and has successfully avoided budget deficits for over a decade. It pursues a policy of holding 2.5 times the level of the annual operating budget in immediate reserves as a safeguard against unexpected expenditure requirements.
With a civilian population of around 3,400, the Islands' GDP stands at about £133 million. Key revenue streams include income from the fisheries sector, tourism, agriculture, and the retail and service sectors plus income from the investment of Government reserves and pension funds. The budget proposals set an FIG operating budget of £81.7m and a capital budget of £29.1m. Key areas of Government investment were transport, communications and infrastructure (£32.1m); health and social services (£25.3m); education and training (£8.9m); and environmental protection (£5.7m). Expenditure on Covid-19 issues was just under £8m in 2019-20 with provision for another £4.8m in 2020-21.
So far, the Islands' key income streams have held up:
- Fisheries: fishing revenues remained buoyant with 62k tonnes of Illex squid taken in the January - April season this year (above average over the catches in the last 4 years); the market price was high. The first Loligo squid season saw a catch of 30k tonnes (average over the last decade but down over the last 2 years); the second season in July is on-going. So far the Covid-19 drop in restaurant demand has only had a marginal impact on squid prices and sales and, as lockdown measures in traditional markets are lifted, this may ease. The fisheries sector accounts for about 40% of the Islands' GDP, generating about one third of Government revenue.
- Tourism: had a record-breaking cruise ship season with 72,836 visitors, up by 16.5% over the previous year. The expedition cruise ship market also rose by 30% with 16,931 passengers.
Land-based tourist figures (1,648 visitors) were up by 6.7% - the last time such figures were experienced was in 2007 - 2008 during the 25th anniversary of the conflict. FIGAS (Falkland Islands Government Air Service) flew a record 3,255 leisure trips during this year's austral summer season in addition to their scheduled services. Overall, the value of the sector to the economy is estimated to be about £18m.
- Corporation tax receipts and investment income also contributed £25.5m and £11.8m respectively to Government revenue.
But economic and fiscal forecasting for the next financial year has been complicated by the potential impact of the Coronavirus pandemic (see below).
Possible Problems Ahead
Despite the relatively stable economic out-turn, the Falkland Islands face potential problems ahead. These include:
- Covid-19: the Falklands escaped serious direct impact from the Coronavirus with only 13 cases of infection, all from the military base at Mount Pleasant, and no deaths. FIG put in counter-measures domestically but lifted them in mid-June after 50 days without a positive case. FIG has now obtained the necessary ventilator, oxygen and testing equipment to respond effectively to any renewed local outbreak. But the virus may have a wider negative impact deriving from the global situation. FIG has already promised a £3.2m support fund to buy unsold wool from FI farmers due to the virus-related drop in global demand. The tourism sector, particularly cruise ships, could be hit badly and fisheries and agricultural exports are likely to be susceptible to market fluctuations. There has already been an impact on communications, with the temporary suspension of the LATAM flights to Punta Arenas, Chile and Sao Paulo, Brazil and seating restrictions for social distancing purposes on the military airbridge, which is now the only air travel connection with the UK. North-bound flights for civilians remain twice-weekly but south-bound flights for civilians are restricted to once a week. The business sector could suffer as international trade grows smaller and so too could income from government investments (which saw a 25% drop in value after the 2008 stock market crash).
- Brexit: the UK Government has asserted that there will be no extension of the transition period beyond the end of the year. It remains unclear whether a free trade agreement with the EU can be negotiated successfully by then. The UK has, on FIG's behalf, been pressing hard for tariff-free trade in loligo squid, which remain the largest export from the Falkland Islands to the EU market (primarily through the Spanish port of Vigo). The fisheries sector amounts to some 40% of FI economic output and generates a third of Government revenue. The imposition of tariffs in the fisheries sector could have a significant negative impact on FIG revenues. Equally, it would damage Vigo's economy. There are also uncertainties about FI access to EU environmental and other funds. Separately, Argentina has been pressing its sovereignty case with EU member states in the hope that after Brexit, the EU will no longer maintain its treaty position recognising UK sovereignty over its Overseas Territories.
- Oil: plans for the commercial exploitation of the oil/gas discoveries around the Falkland Islands were were being steadily progressed, particularly for the Sea Lion field. All the necessary technical planning for the first phase of the Sea Lion development had been done, including the environmental and socio-economic impact surveys. The projection was for 250m barrels using a floating production, storage and off-loading platform (FPSO) with a second phase expected to yield 520m barrels of oil. Premier Oil and Rockhopper, which own 60% and 40% of the rights were in negotiation with Navitas to buy into the project on a 40%-30%-30% basis. Things were looking good. But the international drop in oil prices forced Premier Oil to shelve the $1.8bn project pending a bounce-back in oil prices. The production of oil would have been a significant boost to the Islands' economy and Government revenues; as it is, the Islands have benefited substantially from the income derived from the exploration phase of the hydrocarbon sector – and FIG has not based any expenditure plans on the expectation of oil development.
- Argentina: the new government of Alberto Fernando and Cristina de Kirchner, which took office in December 2019, has, as predicted, overturned the moderate stance of President Macri's administration. Argentina's claim to sovereignty is being ever more stridently asserted. Co-operation on the exchange of fisheries data has been stopped and the planned programme of scientific research cruises abandoned. Legislation has been put to Congress significantly increasing the fines on vessels fishing in Falklands' waters without an Argentine licence. No action against the commercial flights to/from Punta Arenas and Sao Paulo has yet been taken (since both have been suspended temporarily because of the Covid-19 virus) but a review is 'threatened' for later in the year.
Some Real Positives
Despite these uncertainties, there are some real positives for the Falkland Islands:
- UK Political Support: strong bipartisan support for the Falkland Islands has been restored. Both the Conservative and Labour Parties included firm statements on self-determination for the Islanders in their election manifestos for the UK general elections in December 2019 and Boris Johnson's Christmas message to the Falkland Islanders was admirably supportive. Sir Keir Starmer, elected leader of the Labour Party in April 2020, is wholly on-side in his support for the Falkland Islanders.
- Infrastructure Development: the current Islands Plan provides for a capital investment programme of some £130m over 5 years; 27 projects have been approved, at least in principle. The new Falkland Islands College and library (to be named after FIA founders Bill and Merle Christie) have already been built and there are plans for more patient care facilities at the hospital, including a new social care facility (Tussac House); road improvements , especially on the Stanley – Mount Pleasant road; more housing development; refurbishment of the swimming pool; a new waste management project; and more significantly a new port and power station. FIG has contracted BAM Nuttall Ltd to design and build the port, which would involve the removal of the old FIPASS (floating interim port and storage system) built shortly after the 1982 conflict. Various stages have been built into the project to allow for re-appraisal but, if all goes well, it should be finished by 2014. Plans for a new power station are still being developed but interim back-up units have been installed. Both the port and power are major projects which may require some mix of public and private financing (or even borrowing).
- De-Mining: next year could see the end of the UK Government-funded demining programme in the Falkland Islands. The Argentine military laid about 30,000 mines (including anti-tank and anti-personnel mines) in the Falklands in 1982. For many years, the minefields were fenced off and there was no local pressure to have them removed. But the UK was committed by its ratification of the 1999 Ottawa Convention to do so (the onus of removal lying with the sovereign authority rather than the aggressor). De-mining under a commercial contract using experienced personnel from Zimbabwe began in 2009 and is due to be completed in the austral summer of 2020. This should remove a visual reminder of the war and give Islanders access to beaches and other areas long forbidden to them.
The Falkland Islanders have lived with political and economic uncertainties for many years in their time. Since 1982, they have built a thriving economy with a strong business community and a quality of life which many other states would envy. The coronavirus pandemic will undoubtedly have global implications but provided global markets bounce back from any downturn, the Falkland Islands should continue to prosper.
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