IMF Executive Board Concludes 2022 Article IV Consultation with Iceland
IMF News, June 27, 2022
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- Published: June 27, 2022
Macroeconomic outlook and recent performance
- Real GDP growth: 4.3 percent in 2021; projected 3.6 percent in 2022.
- Average inflation projected at 7.4 percent in 2022; inflation is projected to gradually fall back to target by 2025.
- By 2027, real GDP is expected to reach a level about 2 percent below its pre-COVID trend.
- Robust domestic demand and favorable terms of trade boosted output growth in 2021 despite slower recovery in tourism.
- Current account: projected to revert to a surplus as tourism continues to recover.
- Risks: global impact of the war in Ukraine, the pandemic, and potential labor market tensions from an impasse in collective bargaining negotiations; upside from faster tourism recovery and new innovative industries.
Fiscal position and policy advice
- Net general government debt: 60 percent of GDP.
- International reserves: 29 percent of GDP.
- Executive Board view: the authorities' planned fiscal consolidation is appropriate to help bring inflation back to target and rebuild fiscal buffers.
- Suggested consolidation measures: streamlining VAT expenditures, public consumption, and the transfer system.
- Recommendation: save any potential windfall fiscal revenues and reactivate the fiscal rules on time.
- Need to rebuild fiscal buffers while supporting the most vulnerable.
Monetary policy and inflation management
- Monetary tightening is welcome; the Central Bank of Iceland (CBI) should continue withdrawing monetary policy stimulus.
- Steering inflation and inflation expectations back to target will require further policy rate hikes and strengthening liquidity management to improve monetary policy transmission.
- Vigilance and data-driven policy rate decisions are required, considering: evolution of inflation and inflation expectations, prospects for economic recovery, wage and house price developments, capital flows, and imported inflation.
- Central bank 7-day term deposit rate: 5.00 (2016), 4.25 (2017), 4.50 (2018), 3.00 (2019), 0.75 (2020), 2.00 (2021), 3.75 (2022, rate as of end-April).
Financial sector, housing, and macroprudential policy
- Banking system: has weathered the pandemic well, but rising systemic risks call for additional action.
- Surging house prices require further tightening of macroprudential measures.
- Recommended housing measures: reduce administrative burdens in the construction sector, redesign regressive home ownership incentives, and provide more targeted rental assistance to address housing affordability.
- Institutional recommendations: further review the CBI’s committees, budgetary independence, and microprudential powers and capacities, including oversight of pension funds’ governance and risk management practices.
- Ensuring the quality of bank ownership should remain a key government objective and supervisory responsibility of the CBI.
- Participation and ownership criteria for investors in state-owned banks should mitigate potential reputational and stability risks.
- The CBI should review future divestiture plans to ensure fitness and probity of potential investors and address other potential prudential issues.
Structural reforms, diversification, and climate policy
- Further efforts needed to diversify the economy and achieve Iceland’s climate goals.
- Recommended measures: reduce burdens on start-ups, ease business regulations, promote R&D investment, ease access to finance for small firms, and further education reforms.
- Inclusiveness and aligning wage and productivity growth should be key features in the upcoming collective bargaining agreement.
- Climate-related recommendations: broaden and increase carbon pricing; make tax incentives for electric vehicles revenue neutral.
- Expanding renewable energy use requires infrastructure investments; technological improvements may need R&D support.
Executive Board assessment (summary)
- Iceland’s economic outlook is positive but subject to substantial risks.
- Careful policy coordination is required to: entrench the recovery; contain rising housing risks; rebuild fiscal buffers while supporting the most vulnerable; and stem external imbalances (external position assessed as weaker than fundamentals and desirable policies).
Key statistics (selected)
- National Accounts (Constant Prices)
- Gross domestic product growth: 6.3 (2016), 4.2 (2017), 4.9 (2018), 2.4 (2019), -7.1 (2020), 4.3 (2021), 3.6 (2022 Prel./Proj.).
- Total domestic demand growth: 7.7 (2016), 7.6 (2017), 4.8 (2018), 0.9 (2019), -1.7 (2020), 7.3 (2021), 2.5 (2022).
- Private consumption growth: 6.7 (2016), 8.0 (2017), 1.9 (2018), -2.9 (2019), 2.8 (2020).
- Gross fixed investment growth: 18.0 (2016), 10.6 (2017), 3.1 (2018), -2.4 (2019), -9.5 (2020), 13.6 (2021).
- Net exports (contribution to growth): -0.8 (2016), 0.5 (2017), 1.7 (2018), -5.4 (2019), -3.0 (2020), 0.6 (2021).
- Exports of goods and services growth: 11.0 (2016), 5.1 (2017), -4.7 (2018), -30.2 (2019), 12.3 (2020), 17.9 (2021).
- Imports of goods and services growth: 14.6 (2016), 11.8 (2017), -8.5 (2018), -21.6 (2019), 20.3 (2020), 15.2 (2021).
- Output gap (percent of potential output): 0.8 (2016), 1.2 (2017), 3.3 (2018), 4.0 (2019), -2.8 (2020), -0.7 (2021).
- Selected Indicators
- Gross domestic product (ISK bn.): 2,512 (2016), 2,642 (2017), 2,844 (2018), 3,043 (2019), 2,928 (2020), 3,233 (2021), 3,640 (2022).
- Gross domestic product ($ bn.): 20.8 (2016), 24.7 (2017), 26.3 (2018), 24.8 (2019), 21.6 (2020), 25.5 (2021), 28.0 (2022).
- GDP per capita ($ thousands): 62.5 (2016), 73.1 (2017), 75.4 (2018), 69.5 (2019), 59.4 (2020), 69.0 (2021), 74.8 (2022).
- Private consumption (percent of GDP): 49.3 (2016), 50.1 (2017), 50.3 (2018), 49.9 (2019), 51.6 (2020), 51.7 (2021), 50.7 (2022).
- Public consumption (percent of GDP): 23.0 (2016), 23.7 (2017), 24.1 (2018), 24.5 (2019), 27.8 (2020), 27.4 (2021), 25.3 (2022).
- Gross fixed investment (percent of GDP): 20.9 (2016), 21.8 (2017), 22.0 (2018), 21.3 (2019), 21.2 (2020), 22.9 (2021), 22.6 (2022).
- Gross national saving (percent of GDP): 29.2 (2016), 26.0 (2017), 25.8 (2018), 26.9 (2019), 22.2 (2020), 20.2 (2021).
- Unemployment rate (percent of labor force): 6.4 (2016), 6.0 (2017).
- Employment growth: 4.1 (2016).
- Labor productivity growth: 3.8 (2016), 2.7 (2017), 1.5 (2018), -4.2 (2020), 0.7 (2021).
- Real wages growth: 6.8 (2016), 7.4 (2017), 3.7 (2018), 3.4 (2019).
- Nominal wages growth: 8.6 (2016), 9.3 (2017), 6.5 (2018), 8.3 (2019).
- Consumer price index (average): 3.0 (2016), 4.5 (2017).
- Consumer price index (end period): 2.0 (2016).
- ISK/€ (average): 134 (2016), 121 (2017), 128 (2018), 141 (2019), 157 (2020), 148 (2021).
- ISK/$ (average): 107 (2016), 108 (2017), 123 (2018), 135 (2019), 127 (2020).
- Terms of trade (average): -3.7 (2016), -1.2 (2017), 6.2 (2018).
- Money and Credit (End Period)
- Base money (M0): 37.9 (2016), -9.2 (2017), 9.0 (2018), 13.2 (2019).
- Broad money (M3): -4.6 (2016), 5.0 (2017), 7.0 (2018), 6.6 (2019), 10.9 (2021).
- Bank credit to nonfinancial private sector: 4.4 (2016), 9.2 (2017), 11.9 (2018), 10.5 (2019), 10.3 (2020), 12.6 (2021).
- General Government Finances
- Revenue (percent of GDP): 59.0 (2016), 45.4 (2017), 44.8 (2018), 41.9 (2019), 42.1 (2020), 40.4 (2021), 42.0 (2022).
- Expenditure (percent of GDP): 46.4 (2016), 44.4 (2017), 43.8 (2018), 43.4 (2019), 46.8 (2020), [overall balance and other items provided in table].
- Gross debt: 82.4 (2016), 71.6 (2017), 63.1 (2018), 66.2 (2019), 77.4 (2020), 75.0 (2021), 68.3 (2022).
- Net debt: 67.6 (2016), 60.2 (2017), 54.1 (2018), 60.8 (2019), 59.9 (2020), 55.2 (2021).
- Balance of Payments and External Indicators
- Current account balance: 8.1 (2016), 3.5 (2017), 5.8 (2018), 0.3 (2019).
- Capital and financial account (+ = outflow): 8.5 (2016), 1.1 (2017), 5.7 (2018), 5.4 (2019), 5.5 (2020), 0.1 (2021).
- Gross external debt: 125.1 (2016), 90.3 (2017), 73.3 (2018), 77.9 (2019), 89.9 (2020), 82.9 (2021), 80.5 (2022).
- Central bank reserves ($ bn.): 7.2 (2016), 6.1 (2017), 7.1 (2018), 6.9 (2019).
IMF Executive Board Concludes 2022 Article IV Consultation with Iceland (Press Release No. 22/224), June 27, 2022.