Press Release: IMF Completes First Review Under Stand-By Arrangement with Iceland, Extends Arrangement, and Approves US$167.5 Million Disbursement
IMF News, October 28, 2009
Source details
- Canonical URL
- Press Release: IMF Completes First Review Under Stand-By Arrangement with Iceland, Extends Arrangement, and Approves US$167.5 Million Disbursement
Other formats
Bibliographic details
- Published: October 28, 2009
Executive action and program update
- The Executive Board completed the first review of Iceland’s performance under a Stand-By Arrangement (SBA).
- At the request of Iceland’s authorities, the SBA was extended by six months to May 31, 2011 to compensate for delays in program implementation and review.
- The Board approved the rephasing of the undisbursed amount over the remainder of the arrangement.
- The completion of the first review enables the immediate disbursement of SDR 105 million (about US$167.5 million).
Financial disbursements and arrangement size
- Immediate disbursement: SDR 105 million (about US$167.5 million).
- Total disbursements under the program following this review: SDR 665 million (about US$1,061.1 million).
- Original SBA approval date: November 19, 2008.
- SBA original amount: SDR 1.4 billion (about US$2.2 billion).
- The arrangement entails exceptional access amounting to 1,190 percent of Iceland’s quota.
Waivers and nonobservance of performance criteria
- The Board approved waivers for nonobservance of the following performance criteria:
- Central government net financial balance (performance criterion).
- Net international reserves (performance criterion).
- Structural performance criterion concerning a capital injection into three new banks.
- Continuous performance criterion concerning the imposing or intensification of restrictions on the making of payments and transfers for current international transactions.
Assessment of economic conditions and program progress (Mr. Murilo Portugal, Deputy Managing Director and Acting Chair)
- Causes of delay:
- Change in government.
- Time required to reach agreement on a policy program with the new authorities.
- Ongoing negotiations with creditors, which complicated securing financing needed for the program from some participating countries.
- Economic toll and positive signs:
- The financial crisis has taken a very heavy toll on the economy, though the decline in output has been less than expected.
- Positive signs: inflation has come down sharply; the program’s main objective of stabilizing the krona has been met; financial sector restructuring and fiscal consolidation objectives have been met; external financing has been secured.
- With determined and timely policy implementation, the economy could begin to turn the corner in the middle of 2010 and a recovery should follow in the medium term.
- Debt and program adjustments:
- Iceland has emerged with high external and public sector debt, higher than understood at program outset.
- Stronger policies in the revised program—more rapid fiscal adjustment, more gradual capital control liberalization, and enhanced focus on private sector debt restructuring—should keep debt on a robust and sustainable downward path.
- Monetary policy stance and capital controls:
- Focus remains on preserving currency stability within a flexible exchange rate regime, given private sector balance sheet exposures.
- Progress with financial sector restructuring and fiscal consolidation should improve confidence and allow for cautious interest rate reductions.
- Capital controls remain an essential feature of the monetary policy framework, given the scale of potential capital outflows, and in line with the authorities’ published plan should be removed gradually as confidence returns and as balance of payments developments permit.
- Fiscal and public debt management:
- The authorities’ strengthened medium-term fiscal consolidation plan will help improve debt dynamics and limit financing risks.
- It will be important to identify remaining measures needed to achieve medium-term targets, in consultation with social partners.
- In light of higher public debt, a full medium-term public debt management strategy needs to be articulated in time for the next fiscal year.
- Financial sector restructuring and creditor treatment:
- Important milestones reached with recapitalization of New Kaupthing and Islandsbanki.
- It is important to conclude the Landsbanki discussions and finalize the program of savings bank recapitalization.
- Creditors must be treated fairly and equitably, in line with applicable law, but the government should not further absorb losses from the private sector.
- Private sector debt restructuring and insolvency:
- Facilitating voluntary private sector debt restructuring is a key complement to financial sector restructuring and will play an important role in reviving the economy.
- Given binding fiscal constraints, the focus should be on targeted voluntary private work-outs, underpinned by measures to strengthen the insolvency regime.
Key statistics and dates
- SDR 105 million disbursement (about US$167.5 million).
- Total disbursed under the program after review: SDR 665 million (about US$1,061.1 million).
- SBA original amount: SDR 1.4 billion (about US$2.2 billion).
- Exceptional access: 1,190 percent of Iceland’s quota.
- SBA approved on November 19, 2008.
- SBA extended to May 31, 2011.
- Potential economic turning point: middle of 2010.
Source: Press Release No. 09/375, October 28, 2009, International Monetary Fund.