I think you're mostly fine with communication on the scope of the game, it would've been ridiculous to assume this was going to be anything like the actual Morrowind on a GBC and I was very excited to play as a simple fan. Take my feedback with a grain of salt, I'm not a game dev, but I think you should capitalize on your art elements within the ability that the Gameboy Color allows you and keep this as an interactive adventure game. Keep your work on parodying Morrowind, add in quest elements and perhaps puzzles tied to those so it isn't solely walking and talking + you can test gameplay elements within the tiny scope of puzzles.
You already have plans to add in a questline and you should keep on track. I actually went looking to see if I could get Fargoth's ring back initially, but I see after another playthrough that it was meant to be a simple cutscene switching a variable to spawn the thief in the Tradehouse as a talking NPC with nothing more to it.