Press Release: IMF Executive Board Approves US$2.1 Billion Stand-By Arrangement for Iceland
IMF News, November 19, 2008
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Bibliographic details
- Authors: Arrangement. Program Summary Under
- Published: November 19, 2008
Program approval and financing
- Executive Board approved a two-year SDR 1.4 billion (about US$2.1 billion) Stand-By Arrangement for Iceland on November 19, 2008.
- SDR 560 million (about US$827 million) made immediately available; remainder disbursed in eight equal installments of SDR 105 million (about US$155 million), subject to quarterly reviews.
- Arrangement entails exceptional access to IMF resources, amounting to 1,190 percent of Iceland's quota.
- Approved under the Fund's fast-track Emergency Financing Mechanism procedures.
- The Stand-By Arrangement is expected to fill about 42 percent of Iceland's 2008-2010 financing gap; the remainder to be met by official bilateral creditors.
Objectives of the IMF-supported program
- Contain the negative impact of the crisis by restoring confidence and stabilizing the exchange rate in the near-term.
- Promote a viable domestic banking sector and safeguard international financial relations via a sound banking system strategy that is nondiscriminatory and collaborative.
- Safeguard medium-term fiscal viability by limiting socialization of losses in collapsed banks and implementing an ambitious multi-year fiscal consolidation program.
Immediate policy measures and strategy
- Exchange rate stabilization:
- Maintain an appropriately tight monetary policy in the context of a flexible exchange rate policy.
- Restrictions on capital outflows to remain in the near term.
- Banking sector strategy to be comprehensive and collaborative, including:
- Putting in place an efficient organizational structure to facilitate restructuring.
- Proceeding promptly with valuation of banks' assets.
- Maximizing asset recovery in the old banks.
- Ensuring fair and equitable treatment of depositors and creditors of intervened banks.
- Strengthening supervisory practices and the insolvency framework.
- Fiscal policy:
- Allow automatic fiscal stabilizers to work in full during 2009.
- Develop a strong medium-term fiscal consolidation plan to be launched in 2010 to cut expenditures and/or raise taxes.
- Address very substantial increase in public sector debt (of about 80 percent of GDP) due to bank restructuring.
Risks, outlook, and structural strengths
- Program subject to exceptionally large uncertainty and significant risks, reflecting the unprecedented magnitude of the banking sector collapse.
- Authorities committed to resolute policy implementation and readiness to adjust policies as circumstances change, working closely with the Fund.
- Long-term growth prospects described as favorable, supported by:
- A highly educated labor force.
- A favorable investment climate.
- A rich natural resource endowment.
Recent economic developments (context for program)
- Banking sector collapse:
- Three main banks (Glitnir, Landsbanki, and Kaupthing) collapsed within less than one week; they accounted for about 85 percent of the banking system.
- Key macro imbalances and consequences:
- Current account deficit surged to over 15 percent in each of the past three years.
- Banking sector accumulated assets amounting to almost 900 percent of GDP by end-2007.
- Gross external indebtedness reached 550 percent of GDP by end-2007.
- Onshore foreign exchange market dried up; króna depreciated by more than 70 percent in the off-shore market; equity market fell by 80 percent.
- Government initial actions taken while developing the comprehensive program.
Program summary and expected adjustment path
- Economy expected to adjust sharply in the near term; projected serious recession in 2009-10 given high leverage and private sector dependence on foreign currency and inflation-indexed debt.
- Anticipated large import compression expected to lead to a rapid swing of the current account into surplus, supporting the exchange rate.
- Once confidence is restored and balance sheets readjusted, domestic demand (investment and consumption) projected to rebound strongly in 2011.
- Program focus areas:
- Prevent further sharp króna depreciation (tight monetary policy; near-term capital flow restrictions).
- Implement comprehensive bank restructuring strategy (valuation, asset recovery, fair treatment, supervisory and insolvency improvements).
- Ensure medium-term fiscal sustainability (medium-term consolidation plan launched in 2010; address budgetary cost of recapitalizing banking system and deposit insurance obligations).
Selected economic projections and indicators (figures as presented)
- Real Economy (change in percent)
- Real GDP: 2004: 7.7; 2005: 7.4; 2006: 4.4; 2007: 4.9; 2008: 1.6; 2009: -9.6
- Domestic demand: 2004: 10.0; 2005: 16.0; 2006: 9.9; 2007: -1.5; 2008: -9.1; 2009: -19.7
- CPI: 2004: 3.2; 2005: 4.0; 2006: 6.8; 2007: 5.0; 2008: 12.7; 2009: 14.3
- Unemployment rate (in percent of labor force): 2004: 3.1; 2005: 2.1; 2006: 1.3; 2007: 1.0; 2008: 1.4; 2009: 5.7
- Gross domestic investment (in percent of GDP): 2004: 23.5; 2005: 28.4; 2006: 33.7; 2007: 27.6; 2008: 23.9; 2009: 18.2
- General Government Finances (in percent of GDP) 1/
- Financial balance: 2004: 0.0; 2005: 6.3; 2006: 5.5; 2007: -0.2; 2008: -13.5; 2009: ...
- Structural overall balance: 2004: 2.9; 2005: 3.5; 2006: 1.5; 2007: -3.4; 2008: -8.7; 2009: ...
- Gross debt: 2004: 34.5; 2005: 25.4; 2006: 30.1; 2007: 28.9; 2008: 108.9; 2009: 108.6
- Money and Credit (change in percent)
- Domestic credit (end of period): 2004: 37.2; 2005: 54.7; 2006: 33.6; 2007: 28.3; 2008: -19.1; 2009: -4.1
- Broad money (end of period): 2004: 15.0; 2005: 23.2; 2006: 19.6; 2007: 56.4; 2008: 34.0; 2009: -4.4
- CBI policy rate (period average, in percent) 2/: 2004: 8.20; 2005: 10.49; 2006: 14.08; 2007: 13.75; 2008: 14.9; 2009: ...
- Balance of Payments (in percent of GDP)
- Trade balance: 2004: -5.5; 2005: -12.2; 2006: -17.7; 2007: -10.1; 2008: 0.1; 2009: 10.3
- Current account balance: 2004: -9.8; 2005: -16.1; 2006: -25.4; 2007: -14.6; 2008: -10.7; 2009: ...
- Financial and capital account balance: 2004: 13.7; 2005: 36.5; 2006: 13.4; 2007: -118.9; 2008: -11.4; 2009: ...
- Gross external debt 3/: 2004: 179.1; 2005: 285.7; 2006: 445.9; 2007: 551.5; 2008: 670.2; 2009: 159.5
- Reserves 4/: 2004: 1.8; 2005: 3.4; 2006: 3.3; 2007: 11.0; 2008: ...
- Fund position (as of November 18, 2008)
- Holdings of currency (in percent of quota): 84.2
- Holdings of SDRs (in percent of allocation): 7.3
- Quota (in millions of SDRs): 117.6
- Exchange rate
- Exchange rate regime: Floating Exchange Rate
- Present rate (November 18, 2008) 5/: 218.2
- Nominal effective rate (change in percent) 6/: 2006: 10.4; 2007: 2.8; 2008: -43.0
- Real effective (change in percent) 6/: 2006: -6.8; 2007: -36.4
Press Release No. 08/296 — International Monetary Fund