## Press Release: IMF Executive Board Concludes 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussion with Iceland

_IMF News, March 13, 2015_

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## Bibliographic details
- Published: March 13, 2015

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### Macroeconomic outlook and growth
- Iceland has reached a relatively strong macroeconomic position with good growth prospects.
- Unemployment continues to trend down, now at 4 percent.
- Growth slowed last year but is expected to pick up to around 3 percent over 2015–17, supported by robust domestic demand and tourism.
- Consumption will be boosted by household debt relief and—together with net trade—will benefit from favorable commodity prices.
- Output gap: -1.3 (2011), -1.0 (2012), -0.6 (2013), -0.4 (2014), 0.0 (2015 projection).

### External position, current account, and capital account liberalization
- Crisis legacies are still being unwound, including a large balance of payments (BOP) overhang contained by capital controls.
- The authorities expect significant progress this year in finalizing and implementing an updated capital account liberalization strategy.
- The current account balance is forecast at around 6 percent of GDP this year—boosted by falling oil prices—and is expected to gradually decline over the medium term to 2 percent of GDP.
- Directors recommended the strategy for liberalizing the capital account should remain conditions-based, be well communicated, and benefit from the support of sound macroeconomic and financial sector policies.
- Directors recommended greater focus on policies to strengthen Iceland’s balance of payments and on structural reforms to boost labor productivity and competitiveness.

### Inflation, wages, and monetary policy
- Inflation has fallen to 0.8 percent—well below the 2.5 percent target—pulled down by imported deflation and a stronger exchange rate.
- Real wages accelerated to almost 6 percent; the outcome of 2015 wage negotiations is highly uncertain.
- Inflation is expected to move closer to the target by the end of 2016.
- The Central Bank of Iceland (CBI) paused in February and continued foreign exchange accumulation.
- The CBI legislative framework review is currently in progress.
- Directors agreed that the monetary policy stance appropriately focuses on price stability and encouraged the central bank to remain vigilant and stand ready to respond to opposing pressures from external deflationary developments and potentially large wage increases.
- Directors supported ongoing efforts to accumulate foreign currency reserves to smooth eventual outflows, as conditions permit, and stressed the importance of maintaining an independent and accountable central bank.

### Fiscal policy and public finances
- The general government recorded a surplus of 1.8 percent of GDP last year—its first surplus in seven years—helped by one-off revenues.
- The fiscal stance, measured by the change in the structural primary balance, tightened 0.2 percent of potential GDP in 2014 and is projected to tighten further by about 0.5 percent of GDP over the medium term.
- Household debt relief became operational, and more frontloaded to 2014, though the overall costs are broadly as expected.
- General government gross debt remains high but on a downward sustainable path.
- The draft budget framework bill now before Parliament—when approved—will strengthen Iceland’s fiscal framework.
- The government has begun an important reform of the VAT system.
- Directors welcomed progress in consolidating public finances and the early repayment to the Fund.
- Directors saw merit in developing contingency measures to achieve the 2015 fiscal targets.
- Directors supported the medium-term objectives of pursuing a balanced budget and further reducing public indebtedness.
- Directors noted fiscal policy is well positioned for a transition toward boosting potential growth, particularly through public investment, while being mindful of distributional consequences.
- Directors underscored the importance of adopting the organic budget law to provide an institutional anchor for fiscal policy and reinforce market confidence ahead of capital account liberalization.
- Improving the efficiency of the tax system remains a priority.

### Financial sector and stability
- Good progress has been made in improving the financial stability framework, but gaps remain.
- Banking sector buffers are strong but uncertainties surrounding the unwinding of crisis legacies and legal risks, including challenges to CPI indexation, remain high.
- The CBI and the Financial Supervisory Authority (FME) are making progress in improving macrofinancial and supervisory stress tests, but gaps remain in bank supervision and financial safety nets.
- The authorities are working on permanent solutions for the loss-making government-owned Housing Financing Fund (HFF) and are developing mechanisms for a successor lender.
- Directors emphasized the need to maintain adequate buffers in the core financial sector in light of risks surrounding the unwinding of capital controls and some legal challenges.
- Directors recommended continued improvements to the financial stability framework, including supervision, deposit insurance, bank resolution, and emergency liquidity assistance.
- Directors called for a swift resolution of the Housing Financing Fund to minimize fiscal costs and financial stability risks.

### Executive Board Assessment — key judgments and recommendations
- Directors welcomed the improving economic conditions and progress in addressing crisis legacies.
- With sound policies, the outlook is for sustained growth, price stability, and declining debt ratios.
- Downside risks remain, including from lower global growth, wage pressures, and uncertainty surrounding capital account liberalization.
- It is important to maintain macroeconomic and financial stability, enhance growth, rebuild confidence, and prepare for the eventual removal of capital controls.
- Monetary policy: focus on price stability; remain vigilant to opposing pressures from external deflation and large wage increases.
- Capital account liberalization: conditions-based, well communicated, and supported by sound macroeconomic and financial policies.
- Fiscal policy: develop contingency measures for 2015 targets; pursue balanced budget and reduce public indebtedness; adopt organic budget law; consider public investment to boost potential growth.
- Financial sector: maintain buffers; improve supervision, deposit insurance, bank resolution, and emergency liquidity assistance; resolve HFF promptly.

### Selected economic indicators and key statistics (2011–16)
- Gross domestic product (percent change): 2.1 (2011), 1.1 (2012), 3.5 (2013), 1.8 (2014), 3.2 (2015 proj).
- Total domestic demand (percent change): 3.0 (2011), 1.2 (2012), 0.9 (2013), 3.1 (2014), 4.4 (2015), 4.5 (2016).
- Private consumption (percent change): 2.5 (2011), 2.0 (2012), 0.8 (2013), 3.4 (2014), (2015 not listed).
- Gross fixed investment (percent change): 11.6 (2011), 4.3 (2012), -2.2 (2013), 13.4 (2014), 13.2 (2015), 14.1 (2016).
- Exports of goods and services (percent change): 3.9 (2011), 6.9 (2012), 4.6 (2013).
- Imports of goods and services (percent change): 6.8 (2011), 4.9 (2012), 0.4 (2013), 9.4 (2014), 7.7 (2015), 7.0 (2016).
- Nominal GDP (ISK bn): 1,701 (2011), 1,774 (2012), 1,873 (2013), 1,961 (2014), 2,121 (2015), 2,237 (2016).
- Private consumption (percent of GDP): 51.7 (2011), 53.4 (2012), 52.7 (2013), 52.9 (2014), 51.0 (2015), 50.8 (2016).
- Public consumption (percent of GDP): 24.4 (2011), 24.3 (2012), 24.2 (2013), 23.8 (2014), 24.0 (2015).
- Gross fixed investment (percent of GDP): 15.5 (2011), 16.0 (2012), 15.1 (2013), 16.4 (2014), 17.2 (2015), 18.8 (2016).
- Unemployment rate (period average): 7.1 (2011), 6.0 (2012), 5.4 (2013), 5.0 (2014), 4.0 (2015).
- Real GDP per capita (ISK mln): 3.6 (2011), 3.8 (2012), (2013 value not listed).
- Consumer price index (period average): 5.2 (2011).
- Consumer price index (end of period): 5.3 (2011), 4.2 (2012), 2.3 (2013).
- Nominal wage index: 7.9 (2011), 5.5 (2012), 6.7 (2013), 5.1 (2014).
- Real wage: 2.6 (2011), -0.3 (2012), 5.8 (2013).
- Nominal effective exchange rate: 0.3 (2011), -3.3 (2012), 5.9 (2013).
- Terms of trade: -2.8 (2011), -3.1 (2012), -1.9 (2013), 2.4 (2014), -0.2 (2015).
- Base Money (percent change): -20.7 (2011), 32.0 (2012), -25.4 (2013), 8.8 (2014).
- Deposit money bank credit (percent change): 0.7 (2011), 1.4 (2012), 4.7 (2013).
- Broad money (percent change): 8.7 (2011), -2.7 (2012), 1.5 (2013).
- CBI policy rate: 4.75 (2011), 6.00 (2012), 5.25 (2013).
- General government revenue (percent of GDP): 40.1 (2011), 41.8 (2012), 42.5 (2013), 47.9 (2014), 43.9 (2015), 42.9 (2016).
- General government expenditure (percent of GDP): 45.7 (2011), 45.5 (2012), 44.2 (2013), 46.0 (2014), 43.8 (2015), 42.8 (2016).
- General government balance (percent of GDP): -5.6 (2011), -3.7 (2012), -1.7 (2013), 0.1 (2014).
- General government primary balance (percent of GDP): -2.5 (2011), -0.1 (2012), 3.3 (2013), 2.8 (2014).
- Current account balance (percent of GDP): -5.2 (2011), -4.2 (2012), 6.1 (2013).
- Trade balance (percent of GDP): 8.2 (2011), 6.3 (2012), 8.3 (2013), 8.1 (2014), 6.4 (2015).
- Financial and capital account: -4.9 (2011), 10.1 (2012).
- Central bank reserves (USD bn): 4.1 (year not specified).
- Excluding old banks' deposits (USD bn): (value not listed).

*Press Release No. 15/114; March 13, 2015 — IMF Communications Department.*

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_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr15114_