IMF Lending Case Study: Iceland

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Iceland’s banking system had assets 10 times the size of GDP and was heavily reliant on aggressive foreign borrowing.
Collapse of the Icelandic foreign exchange market and banks led the króna to threaten a spiral, severely affecting firms and households with foreign currency and inflation-indexed loans.
The IMF was called in and within 10 days there was an agreement on a set of policy measures.

The IMF-supported program was $2.1 billion.
The program size represented 18 percent of Iceland’s GDP.
The program amounted to 1,190 percent of Iceland’s quota in the IMF.
Support and solidarity of other countries in the region helped catalyze broad international support around the IMF’s seal of approval.

Capital controls with no predefined time frame were implemented to restore monetary stability.
- They helped stabilize the króna and prevented an increase in domestic interest rates that would have taken a higher toll on growth and balance sheets.
Banking sector strategy focused on splitting up failed banks and limiting taxpayer support to essential domestic operations.
- A split between the failed banks’ domestic operations and their much larger foreign operations allowed taxpayer support to focus on shielding the domestic economy while maximizing asset recovery.
Phased fiscal consolidation was adopted to accommodate fiscal pressure during the first year and prevent a deeper collapse in demand as government debt surged because of public support for the financial sector.
- There was a strong political commitment to restoring the downward path of public debt in due course.
Safeguarding Iceland’s social welfare system aimed to protect vulnerable groups and contributed to reducing inequality during the program.

Iceland experienced eight years of robust growth averaging close to 4 percent.
Capital controls have largely been lifted.
The current account and budget have remained in surplus for several years.
Gross public debt declined from 92 percent of GDP at its peak to 35 percent in 2018.
Iceland now has more assets abroad than liabilities, a high level of foreign exchange reserves, and banks that are sound and well capitalized.