Press Release: IMF Completes Sixth and Final Review Under the Stand-By Arrangement for Iceland

IMF News, August 26, 2011

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Canonical URL: Press Release: IMF Completes Sixth and Final Review Under the Stand-By Arrangement for Iceland

The Executive Board completed the sixth and final review of Iceland’s program under a Stand-By Arrangement (SBA).
Immediate disbursement enabled: an amount equivalent to SDR 280 million (about €312.4 million, or US$450.6 million).
Total disbursements under the program to date: an amount equivalent to SDR 1,400 million (about €1.56 billion or US$2.25 billion).
The 33-month SBA was approved on November 19, 2008 for an amount equivalent to SDR 1.4 billion and was subsequently extended to August 31, 2011.
The arrangement entails exceptional access to IMF resources, amounting to 1,190 percent of Iceland’s quota.
The SBA will expire on August 31.

The Fund concluded the program has been successfully completed owing to strong implementation by the authorities.
Key objectives met:
- public finances are on a sustainable path,
- the exchange rate has stabilized,
- the financial sector has been restructured.
Growth and labor market:
- Moderate growth is expected in 2011.
- Unemployment remains high.
Inflation and external risks:
- Inflation is rising on the back of high commodity prices.
- Remaining uncertainties and risks, including from the external environment, are weighing on the recovery.
- Further delays to investment projects and an acceleration of inflation may weaken current prospects.
Financing assurances: Iceland’s Nordic and Polish partners have extended their lending facilities until end-2011.

Authorities and staff agreed to ease the pace of fiscal consolidation, given:
- strong fiscal adjustment to date,
- favorable public debt dynamics,
- the need to support the recovery.
The fiscal target for 2011 was modestly eased (the revised plan must now be implemented).
Policy guidance:
- Fiscal adjustment must continue.
- There is some scope to ease the pace of consolidation on account of the significant fiscal effort to date and strong track record.
- The revised fiscal path would still deliver sustainable debt dynamics while providing near-term support to the economy.
- It will be critical that the authorities fully implement the new path to ensure that credibility gains are not eroded.

The Central Bank has appropriately raised policy rates, reflecting:
- inflation risks going forward,
- the fall in real interest rates,
- the need for a gradual normalization as capital controls are lifted.
Capital account liberalization:
- The initial steps of the capital account liberalization strategy are being implemented.
- Liberalization should proceed gradually and flexibly, while maintaining stability in the government bond market and financial sector and ensuring an adequate level of reserves.
- Effective enforcement of the capital controls will be essential.
The tightening bias in monetary policy is appropriate given rising inflation expectations and the risk of second-round effects from higher wages.

Recapitalization of Iceland’s core banking system has been completed.
Private sector debt restructuring:
- The pace of restructuring private debt finally appears to be accelerating, but efforts must continue until the end of the process.
- Progress is welcome, but further work is required.
Ongoing work:
- Reducing remaining vulnerabilities and strengthening prudential regulations and supervision is ongoing and efforts should be sustained.
- A further strengthening of financial sector supervision is needed.
- Addressing gaps in the legal, regulatory, and supervisory framework and fully implementing agreed reforms will be critical to reduce risks and vulnerabilities.

After the expiration of the SBA, Iceland and the IMF will continue to maintain a constructive policy dialogue.
In accordance with Fund policy, Post-Program Monitoring (PPM) will now be initiated.
PPM objective: to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements, entailing more frequent formal consultation with the Fund with a focus on macroeconomic and structural policies bearing on external viability.

Press Release No.11/316, August 26, 2011 — International Monetary Fund