Statement by the IMF Mission to Iceland

Press Release No. 11/163
May 5, 2011

A mission from the International Monetary Fund (IMF), headed by Julie Kozack, visited Reykjavík during April 28–May 5 to continue discussions for the fifth review under the US$2.1 billion Stand-By Arrangement (SBA, see Press Release No. 08/296). The mission met with government officials, parliamentarians, academics, representatives of the private sector, and labor organizations. At the conclusion of the mission, Ms. Kozack made the following statement:

“The Icelandic authorities and the IMF mission have reached agreement—subject to approval by the IMF Management and Executive Board—on the completion of the fifth review of the SBA.

“The economic recovery is taking hold. Annual growth is expected to reach 2¼ percent in 2011, led by a recovery in investment—this assessment is broadly unchanged from our previous projections.

“Public and external debt remain on a downward path, supported by the ongoing fiscal consolidation and the strong underlying trade balance. Uncertainty about the possible impact of Icesave on public and external debt has increased given that the dispute will now be settled via a legal process. In any event, asset recovery from Landsbanki’s estate is expected to cover a significant portion of the Icesave deposits, which limits the financial risk faced by the government.

“The recently announced strategy for the liberalization of capital account transactions is appropriately cautious. The preconditions for beginning to lift controls are largely in place, but the process must be gradual, underpinned by a sufficiently robust balance of payments outlook and adequate reserves, as well as the stability of the financial system. To the extent that the external financing environment proves difficult, capital account liberalization would need to be slowed.

“The pace of household and corporate debt restructuring has accelerated but implementation is still slower than expected. Debt restructuring remains essential for a sustainable recovery, and should also help address the high level of non-performing loans in the banking system.

“The Nordic governments have re-iterated their commitment to extend the availability of their bilateral loans in support of the government’s program. We expect the review to be considered by the IMF’s Executive Board in early June.”



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