IMF Executive Board Concludes 2018 Article IV Consultation with Iceland
IMF News, November 14, 2018
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- Published: November 14, 2018
Macroeconomic outlook and projections
- Strong real GDP growth is expected to continue in 2018, although "at around 4 percent" the pace will be somewhat slower than in previous years, on the back of moderating tourism growth.
- IMF staff projection: Gross domestic product (2018, Proj.) 3.7 (percentage change).
- Over the medium term:
- Growth is expected to taper to about 2½ percent.
- Inflation is expected to remain near target.
- The current account surplus is expected to settle at about 2 percent of GDP.
- Unemployment rate: 2½ percent (remains well below its long-run average).
- Inflation: described as "close to target" due to a robust supply response to past property price increases and slower tourism growth.
Executive Board assessment — risks and policy stance
- Directors welcomed the favorable economic outlook and the dissipation of overheating concerns; past króna appreciation has helped guide growth to more sustainable rates.
- Noted risks:
- Strong oil prices.
- Competitive pressures in the airline sector.
- Escalating trade tensions.
- Potentially excessive wage awards.
- Brexit.
- Fiscal policy:
- Directors viewed the broadly neutral fiscal stance as appropriate in the near term.
- Supported the authorities’ medium term fiscal plan aimed at further debt reduction.
- Advised careful prioritization of expenditures (infrastructure, healthcare, education) to reach overall budget targets.
- Recommended prioritizing expenditures based on medium term effects on growth and productivity, with less reliance on ad hoc revenues such as dividend flows and careful assessment of tax reforms.
- Monetary and foreign exchange policy:
- Directors agreed monetary policy should remain focused on price stability.
- The inflation target should reflect households’ spending patterns and be understood by all.
- Foreign exchange intervention should be limited to countering disorderly market conditions, with strong emphasis on maintaining reserve adequacy.
- External position:
- Directors judged Iceland’s external position to be broadly in line with fundamentals and desired policy settings.
Financial supervision, capital flow measures, and structural policies
- Financial supervision:
- Directors supported creating an integrated financial supervisor by merging the financial regulator into the central bank, covering all aspects of the financial sector including pension funds.
- Emphasized ensuring a smooth transition and maintaining regulatory and operational independence.
- Capital flow management:
- Directors welcomed the authorities’ decision to halve the special reserve requirement on selected debt inflows.
- Many Directors supported a gradual lifting as conditions permit; a few favored immediate removal.
- Noted that capital flow management measures can have a useful role under certain conditions but should not substitute for warranted macroeconomic adjustment.
- Structural reforms:
- Supported ongoing initiatives to reform the wage bargaining system and anchor it on productivity growth and competitiveness.
- Recommended increasing public spending on education.
- Suggested a comprehensive strategy for further tourism development, including contingency plans.
- Called for ongoing international efforts to ensure sustainable management of migratory marine species.
Selected economic indicators and key statistics (2014–18, exact reported figures)
- National Accounts (constant prices) — Gross domestic product (percentage change):
- 2014: 2.1
- 2015: 4.5
- 2016: 7.4
- 2017: 4.0
- 2018 Proj.: 3.7
- Total domestic demand (percentage change):
- 2014: 5.3
- 2015: 6.4
- 2016: 8.8
- 2017: 7.0
- 2018: 4.6
- Private consumption (percentage change): 2014: 3.2; 2015: 7.2; 2016: 7.9; 2017: 5.4; 2018: (not separately listed in the table for 2018 projection).
- Gross fixed investment (percentage change): 2014: 15.9; 2015: 19.7; 2016: 21.7; 2017: 9.5; 2018: 4.8
- Net exports (contribution to growth): 2014: -1.5; 2015: -0.5; 2016: -0.2; 2017: -2.1; 2018: -0.7
- Exports of goods and services (percentage change): 2014: 9.1; 2015: 10.9; 2016: 5.5; 2017: (not listed for 2018)
- Imports of goods and services (percentage change): 2014: 9.8; 2015: 13.8; 2016: 14.5; 2017: 12.5
- Output gap (percent of potential output): 2014: 0.0; 2015: 0.5; 2016: 2.4; 2017: 1.5
- Selected indicators:
- Gross domestic product (ISK bn.): 2014: 2,074; 2015: 2,288; 2016: 2,503; 2017: 2,615; 2018: 2,797
- GDP per capita ($ thousands): 2014: 54.0; 2015: 52.2; 2016: 61.2; 2017: 70.2; 2018: 75.5
- Private consumption (percent of GDP): 2014: 52.7; 2015: 50.1; 2016: 49.4; 2017: 50.3; 2018: 50.4
- Public consumption (percent of GDP): 2014: 23.9; 2015: 23.4; 2016: 22.8; 2017: 23.3; 2018: 23.8
- Gross fixed investment (percent of GDP): 2014: 17.2; 2015: 19.2; 2016: 21.5; 2017: 22.3
- Gross national saving (percent of GDP): 2014: 21.2; 2015: 24.5; 2016: 29.1; 2017: 25.8; 2018: 25.5
- Unemployment rate (percent of labor force): 2014: 5.0; 2015: 3.0; 2016: 2.8; 2017: (not separately listed for 2018 in the table)
- Employment (percentage change): 2014: 1.6; 2015: 3.4; 2016: 1.8; 2017: 2.3
- Labor productivity (percentage change): 2014: 0.2; 2015: 0.9; 2016: 3.6; 2017: 2.2; 2018: 1.4
- Real wages (percentage change): 2016: 6.0; 2017: 5.6
- Nominal wages (percentage change): 2016: 4.1; 2017: 7.6; 2018: 8.7
- Consumer price index (average): 2014: 2.0; 2015: 1.7; 2016: 2.5
- Consumer price index (end period): 2014: 0.8; 2015: 2.6
- ISK/€ (average) 1/: 2014: 155; 2015: 146; 2016: 134; 2017: 121; 2018: 126
- ISK/$ (average) 1/: 2014: 117; 2015: 132; 2016: 107; 2017: 106
- Terms of trade (average): 2014: 3.3; 2015: 6.7; 2016: -1.0
- Money and Credit (end period):
- Base money (M0) (percentage change): 2014: -17.6; 2015: 27.8; 2016: 37.9; 2017: 7.7
- Broad money (M3) (percentage change): 2014: 7.1; 2015: -4.6
- Bank credit to nonfinancial private sector (percentage change): 2014: -2.4; 2015: 3.5; 2016: 4.4; 2017: 9.2; 2018: 7.5
- Central bank 7-day term deposit rate 2/: 2014: 4.50; 2015: 5.75; 2016: 5.00; 2017: 4.75; 2018: 4.25
- General Government Finances (percent of GDP unless otherwise indicated) 3/:
- Revenue: 2014: 43.7; 2015: 40.7; 2016: 56.7; 2017: 42.4; 2018: 41.6
- Expenditure: 2014: 43.8; 2015: 41.5; 2016: 44.3; 2017: 41.0; 2018: 41.0
- Overall balance: 2014: -0.1; 2015: -0.8; 2016: 12.3
- Structural primary balance: 2014: 1.2
- Gross debt: 2014: 79.7; 2015: 66.0; 2016: 51.7; 2017: 40.0; 2018: 37.0
- Net debt: 2014: 47.8; 2015: 39.6; 2016: 34.2; 2017: 30.3
- Balance of Payments:
- Current account balance 4/: 2014: 3.9; 2015: 5.2
- Capital and financial account (+ = outflow): 2014: 5.1; 2015: 8.9
- Gross external debt 5/: 2014: 198.8; 2015: 176.0; 2016: 124.4; 2017: 90.0; 2018: 75.9
- Central bank reserves ($ bn.): 2014: 4.2; 2015: 6.5
IMF Executive Board press release, November 14, 2018.
