That really is absurd, and should be challenged. The insistence that traditional material cannot be "original" is oppressive - but the ideas that "original" in this context means written by the singer is just totally bonkers.

Even in terms of "singer-songwriters" - just check through the tracks on records made by some of the most respected among them (and in spite of the sneers, there are quite a few), and you'll find any number of songs actually written by other people, and credited to them.

Even in a songwriting competition it'd be absurd to try to impose this kind of rule - there are plenty of people who are a lot better at writing songs than singing them, or who for other reasons depend on singers who like to sing songs written by other people.

Maybe if you could let us have the name of this "prominent festival" which has the impertinance to call itself a "folk" festival, it might be possible for other people to get the point across to the organisers.