Iceland: 2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Iceland

IMF Staff Country Reports, November 14, 2018

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Iceland is experiencing an economic slowdown that has reduced overheating concerns.
Tourism growth has decelerated and the króna has stopped appreciating.
Demand management has become easier, allowing the authorities to focus on medium-term priorities, including infrastructure, healthcare, education, and the environment.
Risks have become more evident: high fuel prices and other factors are challenging the airline business; world trade tensions are escalating; and the United Kingdom—a vital trading partner—is not yet assured of a smooth EU exit.
Policy emphasis: increase resilience to shocks.

Slower economic activity has alleviated previous overheating pressures.
Exchange rate: the króna has stopped appreciating.
Tourism: growth has decelerated, reducing a key source of external demand.
Policy space: easier demand management permits reallocation toward medium-term priorities (infrastructure, healthcare, education, environment).

High fuel prices are challenging the airline business.
Escalating world trade tensions present external downside risks.
Uncertainty about the United Kingdom’s exit from the EU poses risks for a vital trading partner.
Overall policy implication: need to further increase resilience to shocks.

Use the eased demand-management stance to:
- Focus on medium-term public investment in infrastructure.
- Strengthen healthcare and education systems.
- Address environmental priorities.
Strengthen resilience against external shocks stemming from fuel price volatility, trade tensions, and Brexit-related uncertainties.