IMF Executive Board Concludes 2017 Article IV Consultation with Iceland
IMF News, June 22, 2017
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- Published: June 22, 2017
Growth and macroeconomic outlook
- Real GDP growth reached 7.2 percent in 2016 and is projected at almost 6 percent in 2017 before tapering to around 2½ percent over the medium term.
- Tourism is the primary driver of growth; expansion has been driven by exports, private consumption, and investment rather than leverage.
- Bank credit to the nonfinancial private sector grew by only 4.3 percent in 2016 but is expected to gain pace going forward.
- Iceland’s current account surplus is projected to shrink modestly over time, with some export sectors suffering while others thrive.
- Output gap: 0.5 percent of potential output in 2013 (table entry).
Inflation, exchange rate, and monetary policy
- Inflation was 1.7 percent in May (2017).
- Continued strong appreciation of the króna reflects market response to increased external demand for tourism and should help guide output to its sustainable long‑run growth path.
- Directors commended the Central Bank of Iceland for a prudent monetary policy stance and the inflation targeting framework.
- Recommendations for the Central Bank:
- Clearly communicate foreign exchange interventions policy.
- Introduce a fine‑tuning instrument to help sterilize the domestic liquidity impact of interventions.
- If tourism pickup is sustained, allow real exchange rate appreciation while monitoring competitiveness.
- If appreciation pushes inflation prospects lower, consider further interest rate cuts.
Financial sector oversight and capital flows
- Executive Directors stressed that strengthening financial sector oversight is a key priority.
- Recommended actions:
- Review the Act on Official Supervision of Financial Activities to strengthen regulatory and supervisory arrangements, reduce gaps in oversight, and address coordination issues.
- Maintain strong microprudential regulation and supervision of banks, supported by well‑targeted macroprudential measures.
- Stringent vetting of investors seeking significant ownership positions in banks given ongoing market interest.
- Capital flows:
- Directors emphasized careful management of capital inflows.
- Most Directors were sympathetic to the current use of a special reserve requirement on selected debt inflows.
- CFMs should not substitute for warranted macroeconomic adjustment; when used, CFMs should be temporary and transparent in line with the IMF’s Institutional View on the Liberalization and Management of Capital Flows.
Fiscal policy and public finances
- Directors recommended strict expenditure control to deliver a tighter‑than‑budgeted fiscal stance in 2017.
- Fiscal policy should be ready to tighten further if overheating risks materialize.
- Over the medium term, should fiscal space emerge under the Organic Budget Law, it could be used to support additional spending on infrastructure, healthcare, and education, guided by a comprehensive review of expenditures.
- Directors welcomed the recent public sector pension reform.
Structural reforms and tourism management
- Directors underscored the need for structural reforms to protect competitiveness and foster sustainable tourism.
- Recommendations:
- Revamp the wage bargaining framework (authorities’ efforts supported).
- Formulate a strategy to ensure adequate resources and coordination to develop the tourism sector in a sustainable manner.
Key statistics (selected figures from 2013–17 table)
- Gross domestic product (annual percent change): 2013: 4.4; 2014: 1.9; 2015: 4.1; 2016: 7.2; 2017 Proj: 5.8.
- Total domestic demand (annual percent change): 2013: 0.7; 2014: 5.2; 2015: 5.9; 2016: 8.7; 2017 Proj: 6.4.
- Private consumption (annual percent change): 2013: 1.0; 2014: 2.9; 2015: 4.3; 2016: 6.9; 2017 Proj: (blank for 2017 in table).
- Gross fixed investment (annual percent change): 2013: 2.2; 2014: 16.0; 2015: 17.8; 2016: 22.7; 2017 Proj: 9.9.
- Exports of goods and services (annual percent change): 2013: 6.7; 2014: 3.2; 2015: 9.2; 2016: 11.1; 2017 Proj: (blank in table).
- Imports of goods and services (annual percent change): 2013: 0.1; 2014: 9.8; 2015: 13.5; 2016: 14.7; 2017 Proj: 8.6.
- Gross domestic product (ISK bn.): 2013: 1,891; 2014: 2,006; 2015: 2,214; 2016: 2,422; 2017 Proj: 2,632.
- GDP per capita ($ thousands): 2013: 47.5; 2014: 52.2; 2015: 50.5; 2016: 59.6; 2017 Proj: 67.6.
- Private consumption (percent of GDP): 2013: 52.3; 2014: 49.8; 2015: 49.0; 2016: 49.1; 2017 Proj: (blank).
- Gross fixed investment (percent of GDP): 2013: 15.7; 2014: 17.2; 2015: 18.9; 2016: 21.2; 2017 Proj: 21.9.
- Gross national saving (percent of GDP): 2013: 21.5; 2014: 21.3; 2015: 24.6; 2016: 29.3; 2017 Proj: 28.5.
- Unemployment rate (percent of labor force): 2013: 5.4; 2014: 5.0; 2015: 4.0; 2016: 3.0; 2017 Proj: (blank).
- Employment (annual percent change): 2013: 3.3; 2014: 1.6; 2015: 3.4; 2016: 3.7; 2017 Proj: (blank).
- Labor productivity (annual percent change): 2013: 0.6; 2014: 0.8; 2015: 3.5; 2016: 2.5; 2017 Proj: (blank).
- Real wages (annual percent change): 2013: 0.9; 2014: (blank); 2015: 6.2; 2016: 8.1; 2017 Proj: (blank).
- Nominal wages (annual percent change): 2013: 4.8; 2014: (blank); 2015: 7.9; 2016: 10.1; 2017 Proj: (blank).
- Consumer price index (average): 2013: 3.9; 2014: 2.0; 2015: (blank); 2016: (blank); 2017 Proj: (blank).
- Consumer price index (end period): 2013: 4.2; 2014: 2.4; 2015: (blank); 2016: (blank); 2017 Proj: (blank).
- ISK/€ (average): 2013: 162; 2014: 155; 2015: 146; 2016: 134; 2017 Proj: 118.
- ISK/$ (average): 2013: 122; 2014: 117; 2015: 132; 2016: 121; 2017 Proj: 109.
- Central bank 7 day term deposit rate (for 2017, rate as of June 7): 2013: 5.75; 2014: 4.50; 2015: 5.00; 2016: 4.75; 2017 Proj: (blank).
- General Government Finances (percent of GDP) — Revenue: 2013: 42.1; 2014: 45.2; 2015: 42.0; 2016: 58.4; 2017 Proj: 41.6.
- General Government Finances (percent of GDP) — Expenditure: 2013: 43.9; 2014: 45.3; 2015: 42.9; 2016: 46.1; 2017 Proj: 40.6.
- Overall balance (percent of GDP): 2013: -1.8; 2014: -0.1; 2015: -0.8; 2016: 12.4; 2017 Proj: (blank).
- Gross debt (percent of GDP): 2013: 84.7; 2014: 82.4; 2015: 68.1; 2016: 54.0; 2017 Proj: 41.1.
- Net debt (percent of GDP): 2013: 62.2; 2014: 55.8; 2015: 49.3; 2016: 41.9; 2017 Proj: 32.9.
- Current account balance (percent of GDP): 2013: 6.0; 2014: 5.5; 2015: 8.0; 2016: 6.6; 2017 Proj: (blank).
- Gross external debt (percent of GDP): 2013: 248.7; 2014: 205.5; 2015: 180.0; 2016: 125.1; 2017 Proj: 114.9.
IMF Executive Board Concludes 2017 Article IV Consultation with Iceland, June 22, 2017.