IMF Executive Board Concludes 2012 Article IV Consultation with Iceland and Ex Post Evaluation of Exceptional Access Under the 2008 Stand-By Arrangement

Public Information Notice (PIN) No. 12/34
April 12, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for 2012 Article IV Consultation with Iceland and Ex-Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement is also available.

The Executive Board of the International Monetary Fund (IMF) concluded the 2012 Article IV consultation with Iceland1 on April 6, 2012.


Iceland is gradually emerging from its post-crisis recession. The economy expanded by 3 percent in 2011 driven by a broad-based rebound in consumption and a gradual pick-up in investment. Unemployment declined steadily and now stands at around 7 percent. The trade balance continued to post strong surpluses, but the krona nonetheless depreciated—in part reflecting repayments of foreign debt by the private sector. International reserves increased sharply on account of IMF program disbursements, international sovereign bond issuance, and the drawing of bilateral loans. Financial markets became more active, but remained dominated by the government bond market.

The fiscal consolidation initiated in 2009 is continuing, but at a slower pace than previously expected. Expenditure overruns materialized in 2011 and the primary deficit will now reach 1 percent of GDP (compared with ¼ percent of GDP expected previously).

Inflation increased in 2011 and now stands well above the central bank’s target of 2½ percent. Krona depreciation, wage and commodity price increases pushed inflation up and prompted the central bank to tighten policy twice in 2011. Yet, inflation expectations have remained largely above the target and monetary policy remains accommodative with real policy rates in negative territory.

Regarding the financial sector, banks reported strong profits, high capital, and large liquidity buffers. Although the latest Supreme Court decision will likely have an adverse effect on banks’ capital position, banks expect the impact to be manageable. The ongoing restructuring of household and corporate debt has led to a notable decline in Non-Performing Loans (NPLs) from 40 percent in 2010 to 23 percent.

As part of their reserve management strategy, Iceland in March made early repayments of repurchases of most of its Fund obligations falling due in 2013 (around 20 percent of the total). Reserve adequacy in 2012 and 2013 will be somewhat weaker compared with no early repayments, but the ratio of gross reserves to short term debt is projected remain well above 100 percent.2

Executive Board Assessment

Directors commended Iceland’s emerging recovery and significant achievements in restoring macroeconomic and financial stability. In March, Iceland made an early repayment of part of its obligations under the Stand-By Arrangement. Given the persistence of external as well as domestic risks, strong commitment to prudent policies and focus on addressing remaining challenges will nevertheless remain crucial.

Directors stressed the importance of completing the fiscal consolidation. They called for additional measures to put the medium-term fiscal path back on track, and for contingency measures to guard against implementation risks. They welcomed the authorities’ commitment to their medium-term fiscal plan and their efforts to strengthen the fiscal framework.

Directors supported a gradual tightening of monetary policy to help bring down inflation, anchor inflation expectations, and support capital account liberalization. They noted the impact that further wage increases could have on inflation and competitiveness. Regarding the future monetary regime, Directors supported the near-term priority being given to strengthening the existing monetary framework, including through the introduction of macroprudential tools.

Directors underscored that lifting capital controls is a key challenge. They agreed that the pace of liberalization should be guided by the balance of payments outlook, reserve adequacy, and the need to safeguard financial stability, noting that additional time may be needed given continuing global uncertainties. At the same time, risks associated with the prolonged maintenance of controls should be kept in mind. Noting the recent removal of certain exemptions from controls as a way to mitigate risks of rapid liberalization, Directors underscored the need to publish the new rules on exemptions as quickly as possible to help guide investor and public expectations.

Directors welcomed the progress on private sector debt restructuring, and looked forward to the swift completion of the process. They cautioned against additional untargeted household debt relief, which would not fully address the needs of households in greatest distress and strain public finances.

Directors called for further efforts to address the remaining risks and vulnerabilities in the banking system. They welcomed the progress made in strengthening the banking system and reducing nonperforming loans. They underscored the need to continue to address legacy vulnerabilities and to monitor closely how banks recognize income, notably from restructured and nonperforming loans. They considered that dividend payments should continue to be disallowed to ensure that banks maintain high capital buffers while vulnerabilities are still being addressed. Directors encouraged the authorities to further strengthen supervision, including by continuing to address supervisory gaps and preserving the independence of the Financial Supervisory Authority (FME).

Directors agreed with the key findings of the ex post evaluation. They concurred that the program has achieved its objectives, owing to strong ownership and good program design. They noted that the program was flexible and managed risks well, including through bank restructuring that limited the public sector burden and through the use of capital controls. Agreement on a fiscal adjustment consistent with the authorities’ objective of preserving Iceland’s social model was key in easing the social impact of the crisis and fostering program ownership.

Iceland: Selected Economic Indicators, 2005–12
  2005 2006 2007 2008 2009 2010 2011 2012


            Est. Proj.
  (Percentage change, unless otherwise indicated)

National Accounts (constant prices)


Gross domestic product

7.2 4.7 6.0 1.3 -6.8 -4.0 3.1 2.4

Total domestic demand

15.5 9.1 0.0 -8.6 -20.3 -2.3 3.9 3.7

Private consumption

12.7 3.6 5.7 -7.9 -14.9 -0.4 4.0 3.0

Public consumption

3.5 4.0 4.1 4.6 -1.7 -3.4 -0.6 -0.4

Gross fixed investment

34.4 24.4 -12.2 -20.0 -51.6 -8.1 13.4 13.8

Export of goods and services

7.5 -4.6 17.7 7.0 6.6 0.4 3.2 2.9

Imports of goods and services

29.3 11.3 -1.5 -18.4 -24.0 4.0 6.3 5.1

Output gap 1/

2.8 2.0 3.6 2.2 -1.9 -4.5 -1.0 -0.7

Selected Indicators


Nominal GDP (bln ISK)

1,025.7 1,168.6 1,308.5 1,482.0 1,495.4 1,534.2 1,630.2 1,732.5

Unemployment rate 2/

2.1 1.3 1.0 1.6 8.0 8.1 7.4 6.3

Consumer price index

4.0 6.8 5.0 12.4 12.0 5.4 4.0 4.8

Nominal wage index

6.5 9.1 9.3 4.0 0.5 3.1 5.7 6.0

Nominal effective exchange rate 3/

10.2 -11.8 2.5 -40.4 -34.2 2.9 -0.1

Real effective exchange rate 3/

13.3 -7.1 5.1 -20.7 -18.4 6.4 0.9

Terms of trade

0.9 3.4 0.2 -9.3 -6.7 6.1 -1.8 -0.7

Money and Credit


Base Money

32.2 27.9 190.7 -31.5 1.3 -19.4 -20.7 ...

Deposit money bank credit (end-period)

76.0 44.4 56.6 -28.3 -17.8 -3.4 3.2 ...

of which to residents (end-period)

54.7 33.6 28.3 ... ... ... ... ...

Broad money (end-period)

23.2 19.6 56.4 36.3 1.0 -10.0 7.2 ...

CBI policy rate (period average) 4/

10.5 14.1 13.8 15.4 13.7 7.8 4.4 ...
  (Percent of GDP, unless otherwise indicated)

Public Finance


General government 5/



47.1 48.0 47.7 44.1 41.1 41.5 41.7 41.8


42.2 41.6 42.3 44.6 49.7 47.9 46.3 44.6


4.9 6.3 5.4 -0.5 -8.6 -6.4 -4.6 -2.8

Primary balance

6.1 6.7 5.7 -0.5 -6.5 -2.7 -1.1 1.3

Balance of Payments


Current account balance

-16.1 -25.6 -15.7 -28.4 -11.8 -8.4 -6.5 -2.8

Trade balance

-12.2 -17.5 -10.1 -2.3 8.4 10.1 8.2 6.6

Financial and capital account

14.0 43.3 18.1 -66.9 -28.2 52.9 15.3 -0.5

Net errors and omissions

2.6 -11.0 -1.0 -19.5 37.3 -37.7 -2.8 0.0

Gross external debt 6/

284.5 433.5 605.9 564.7 266.5 289.7 250.4 207.1

Central bank reserves (US$ billion)

1.1 2.3 2.6 3.6 3.9 5.8 8.7 7.4

Sources: Statistics Iceland; Central Bank of Iceland; Ministry of Finance; and IMF staff estimates.

1/ Staff estimates. Actual minus potential output, in percent of potential output.

2/ In percent of labor force.

3/ A positive (negative) sign indicates an appreciation (depreciation).

4/ Data prior to 2007 refers to annual rate of return. 2007 and on, refers to nominal interest rate.

5/ National accounts basis.

6/ Including face value of old banks debt before 2009. Related interest transactions are not included from Q4 2008 on.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 See Iceland to Repay Early Some Outstanding Obligations to the IMF, Press Releasse No. 12/84 March 15, 2012.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100