Statement by an IMF Mission to Iceland

Press Release No.11/269
July 1, 2011

A mission from the International Monetary Fund (IMF), led by Julie Kozack, visited Reykjavík during June 21–July 1 to hold discussions for the sixth 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 IMF mission have held productive discussions for the sixth, and final, review of the Stand-By Arrangement.

“The economy is gradually recovering. Annual growth is expected to reach 2½ percent in 2011, led by a strengthening of investment and consumption—this assessment is broadly unchanged from our previous projections. At the same time, inflation is now projected to be considerably higher than previously expected and above the CBI’s target, reflecting krona depreciation, rising wages and house prices, and commodity price increases.

“Monetary policy has shifted to a tightening bias, which is appropriate given the risks to the inflation outlook and the pick-up in measures of inflation expectations. The first steps have been taken to gradually lift capital controls in line with the authorities’ liberalization strategy, and the recent issuance of an international sovereign bond supports taking further steps.

“Financial sector reforms are moving ahead. The recapitalization of the financial system is near completion and good progress has been made in improving supervision and regulation. Looking ahead, the authorities are preparing plans for a further strengthening of supervision, which is critical to reduce risks and vulnerabilities in the financial system.

“Welcome progress is being made on household and corporate debt restructuring. Private sector debt restructuring is essential for a sustainable recovery, and should also help address the high level of non-performing loans in the banking system.

“Policy discussions focused primarily on 2011 budget and the medium-term fiscal path. It was agreed that, given the strong adjustment already achieved, there is scope to ease the pace of fiscal consolidation to support the economic recovery. Significant progress has been made, but more time is needed to agree on the specifics of the revised fiscal path. Discussions will continue in the coming weeks, with the aim of bringing the review forward for approval by the IMF’s Executive Board in late August.”



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