Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with Iceland

June 22, 2016

Press Release No. 16/301
June 22, 2016

On June 20, 2016 the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation with Iceland.1

The outlook is positive. Growth is accelerating this year and is expected to exceed 4.5 percent, led by robust domestic demand and booming tourism. Growth will likely slow thereafter as policies to dampen excess demand and inflationary pressures take hold.

Inflation, at 1.7 percent in May, is being contained by falling import prices and króna appreciation. Given recent large wage awards, however, it is projected to breach the inflation target of 2.5 percent later this year, peaking next year before coming down gradually. Wage growth is expected to erode competitiveness over time, with the current account surplus shrinking steadily. These processes, if not sufficiently restrained by macroeconomic policies, could overheat the economy. This is the main risk for Iceland.

Executive Board Assessment2

Executive Directors commended the Icelandic authorities’ progress in addressing crisis legacies, where recent milestones include the accords with the bank estates and the foreign exchange auction for offshore króna holders. This, coupled with the favorable macroeconomic conditions and outlook, should support the country’s reintegration into global financial markets. Directors noted that, beyond uncertainties associated with the imminent U.K. referendum on EU membership, the main challenge for Iceland is to avoid a possible overheating of its economy and, in this regard, they also cautioned against any pre election fiscal easing. Directors called on the authorities to exercise caution as they scale back capital controls on residents, accompanying this with monetary and some fiscal tightening to cool demand, a framework to build reserves, and institutional reforms to anchor wage bargaining on competitiveness and to further strengthen financial sector oversight.

Directors welcomed the new Organic Budget Law, which creates a rules based, multi year fiscal planning framework, brings in the municipalities, and helps anchor fiscal discipline. They emphasized that compliance with the new fiscal rules will be essential to maintain credibility. Directors supported the authorities’ commitment to save the one off fiscal receipts from the bank estates and the plans for a moderately tighter fiscal stance in 2017. They encouraged the authorities to revisit public spending priorities over the medium term, with a view to decompressing health, education, and capital spending, and to consider further reforms of value added taxes to mobilize additional revenues.

Directors supported the central bank’s readiness to raise interest rates as needed. They encouraged the monetary authorities to further articulate their exchange market intervention policy, re emphasizing the primacy of the inflation target and distinguishing between reserve accumulation and market stability objectives. Directors recommended a conservative approach to reserve adequacy, especially while capital account liberalization is ongoing. They welcomed steps to strengthen the macroprudential toolkit, and took note of recent legislation laying the basis for a reserve requirement on specified debt capital inflows. Directors emphasized that capital flow management measures should be transparent, targeted, temporary, and preferably non discriminatory, and should not substitute for warranted macroeconomic adjustment.

Directors advised that capital flow liberalization for residents should be executed cautiously. They agreed that permitting more outward investment by pension funds is a logical first step, albeit one that should be matched by actions to strengthen the Pension Fund Act. At the same time, a comprehensive strategy should be drawn up to guide liberalization for households, firms, and banks, embedding concrete commitments to further improve banking regulation and supervision.

Directors underscored that with increased presence of the government in the banking system, prudent management of the state banks is crucial while suitable disposal arrangements are pursued. They recommended increasing the powers and independence of the financial regulator. Given the involvement of both the financial regulator and the central bank in banking oversight, Directors encouraged consideration of streamlining options, such as unifying all prudential oversight of banks at the central bank; other options also warrant study.


Iceland: Selected Economic Indicators, 2013–2016
 
 
  2013 2014 2015 2016
        Proj
 
  (Percentage change unless otherwise indicated)

National Accounts (constant prices)

       

Gross domestic product

4.4 2.0 4.0 4.6

Total domestic demand

0.7 5.3 6.3 5.4

Private consumption

1.0 3.0 4.8 6.0

Public consumption

1.0 1.7 1.1 1.1

Gross fixed investment

2.2 16.0 18.6 10.0

Net exports (contribution to growth)

2.6 -1.6 -0.8 -0.3

Exports of goods and services

6.7 3.1 8.2 8.1

Imports of goods and services

0.1 9.8 13.5 11.2

Output gap (percent of potential output)

0.2 0.0 0.5 1.2
         

Selected Indicators

       

Gross domestic product (ISK bn.)

1,889 2,004 2,205 2,402

GDP per capita ($ thousands)

48.0 52.7 50.9 57.8

Private consumption (percent of GDP)

52.3 52.2 50.1 49.8

Public consumption (percent of GDP)

24.3 24.2 23.6 24.3

Gross fixed investment (percent of GDP)

15.7 17.3 19.1 19.6

Gross national saving (percent of GDP)

21.2 21.0 23.5 23.6

Unemployment rate (percent of labor force)

5.4 5.0 4.0 3.5

Employment

3.3 1.6 3.4 3.3

Labor productivity

0.2 -0.2 0.8 1.3

Real wages

0.9 2.8 7.3 8.8

Nominal wages

4.7 4.9 8.9 11.0

Consumer price index (average)

3.9 2.0 1.6 2.1

Consumer price index (end period)

4.2 0.8 2.0 2.6

ISK/€ (average) 1/

162 155 146 139

ISK/$ (average) 1/

122 117 132 124

Terms of trade (average)

-1.9 3.3 6.8 2.0
         

Money and Credit (end period)

       

Base money (M0)

0.3 -17.6 27.8 8.6

Broad money (M3)

4.5 7.1 5.6 -11.3

Bank credit to nonfinancial private sector

-3.2 -2.4 3.5 4.8

Central bank 7 day term deposit rate 1/

5.75 4.50 5.75 5.75
         
  (Percent of GDP unless otherwise indicated)

General Government Finances

       

Revenue

42.1 45.3 42.2 56.8

Expenditure

44.0 45.3 42.7 42.2

Overall balance

-1.8 -0.1 -0.5 14.6

Structural primary balance

1.4 2.1 1.4 0.9

Gross debt

84.8 82.5 67.6 55.1

Net debt

62.2 55.9 50.6 45.6
         

Balance of Payments

       

Current account balance 2/

5.7 3.7 4.2 4.0

Capital and financial account (+ = outflow)

6.9 3.4 7.6 3.8

Gross external debt 3/

249.0 205.7 159.2 130.8

Central bank reserves ($ bn.)

4.1 4.2 5.0 6.0

 

 

 

 

 

 
 

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

1/ For 2016, rate as of June 2.

2/ Actual data include accrued interest payments on intracompany debt held by a large multinational; projected data do not.

3/ Includes the effects of the compositions in 2015; projected data for the remaining debt of the bank estates calculated from their foreign currency claims on the domestic deposit money banks.

Iceland: Selected Economic Indicators, 2013–2016
 
 
  2013 2014 2015 2016
        Proj
 
  (Percentage change unless otherwise indicated)

National Accounts (constant prices)

       

Gross domestic product

4.4 2.0 4.0 4.6

Total domestic demand

0.7 5.3 6.3 5.4

Private consumption

1.0 3.0 4.8 6.0

Public consumption

1.0 1.7 1.1 1.1

Gross fixed investment

2.2 16.0 18.6 10.0

Net exports (contribution to growth)

2.6 -1.6 -0.8 -0.3

Exports of goods and services

6.7 3.1 8.2 8.1

Imports of goods and services

0.1 9.8 13.5 11.2

Output gap (percent of potential output)

0.2 0.0 0.5 1.2
         

Selected Indicators

       

Gross domestic product (ISK bn.)

1,889 2,004 2,205 2,402

GDP per capita ($ thousands)

48.0 52.7 50.9 57.8

Private consumption (percent of GDP)

52.3 52.2 50.1 49.8

Public consumption (percent of GDP)

24.3 24.2 23.6 24.3

Gross fixed investment (percent of GDP)

15.7 17.3 19.1 19.6

Gross national saving (percent of GDP)

21.2 21.0 23.5 23.6

Unemployment rate (percent of labor force)

5.4 5.0 4.0 3.5

Employment

3.3 1.6 3.4 3.3

Labor productivity

0.2 -0.2 0.8 1.3

Real wages

0.9 2.8 7.3 8.8

Nominal wages

4.7 4.9 8.9 11.0

Consumer price index (average)

3.9 2.0 1.6 2.1

Consumer price index (end period)

4.2 0.8 2.0 2.6

ISK/€ (average) 1/

162 155 146 139

ISK/$ (average) 1/

122 117 132 124

Terms of trade (average)

-1.9 3.3 6.8 2.0
         

Money and Credit (end period)

       

Base money (M0)

0.3 -17.6 27.8 8.6

Broad money (M3)

4.5 7.1 5.6 -11.3

Bank credit to nonfinancial private sector

-3.2 -2.4 3.5 4.8

Central bank 7 day term deposit rate 1/

5.75 4.50 5.75 5.75
         
  (Percent of GDP unless otherwise indicated)

General Government Finances

       

Revenue

42.1 45.3 42.2 56.8

Expenditure

44.0 45.3 42.7 42.2

Overall balance

-1.8 -0.1 -0.5 14.6

Structural primary balance

1.4 2.1 1.4 0.9

Gross debt

84.8 82.5 67.6 55.1

Net debt

62.2 55.9 50.6 45.6
         

Balance of Payments

       

Current account balance 2/

5.7 3.7 4.2 4.0

Capital and financial account (+ = outflow)

6.9 3.4 7.6 3.8

Gross external debt 3/

249.0 205.7 159.2 130.8

Central bank reserves ($ bn.)

4.1 4.2 5.0 6.0

 

 

 

 

 

 
 

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

1/ For 2016, rate as of June 2.

2/ Actual data include accrued interest payments on intracompany debt held by a large multinational; projected data do not.

3/ Includes the effects of the compositions in 2015; projected data for the remaining debt of the bank estates calculated from their foreign currency claims on the domestic deposit money banks.


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.

2 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.




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