## IMF Survey : Iceland Makes Strong Recovery from 2008 Financial Crisis

_IMF News, March 13, 2015_

## Source details

**Canonical URL:** [IMF Survey : Iceland Makes Strong Recovery from 2008 Financial Crisis](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar031315a)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/53/socar031315a/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/53/socar031315a/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/53/socar031315a/bundle-manifest.json)

## Bibliographic details
- Published: March 13, 2015

---

### Macroeconomic overview and current conditions
- Iceland has rebounded after the "2008/9 crisis" and will soon surpass pre-crisis output levels.
- Macroeconomic conditions are "at their best since the 2008/9 crisis."
- Iceland has been one of the top economic performers in Europe over the past several years in terms of economic growth and has one of the lowest unemployment rates.
- Noted indicators: low inflation, stable exchange rate, ready market access, strong balance of payments.
- Strong balance of payments allowed early repayment of all Nordic loans and much of IMF loans while maintaining adequate foreign exchange reserves.
- Remaining vulnerabilities and risks:
  - Public and external debt ratios are still high, though "on a downward sustainable path."
  - Potential vulnerability from funds exiting quickly and disrupting external stability in the absence of capital controls.
  - Downside risks from significant wage pressures and an uncertain external environment, including risks of slower demand and deflationary pressures from trading partners.

### Main drivers of the recovery
- Sectoral contributors:
  - Booming tourism industry since 2010.
  - Traditional fishing industry.
  - Energy sector: geothermal clean energy attracted energy-intensive industries (data storage centers and silica plants).
- Policy contributors:
  - Quick restoration of the domestic banking system and early steps to facilitate domestic debt restructuring.
  - Steady fiscal adjustment while preserving the Nordic welfare model; Iceland is "one of just a handful of European countries running budget surpluses."
  - Central bank policies steering inflation close to target.
  - Capital controls providing breathing room to address remaining vulnerabilities.
  - Maintenance of competitiveness boost from early depreciation of the krona, contributing to rebalancing toward export-oriented sectors.
  - Strong ownership and performance under the "2008-2011 IMF-supported program."

### How Iceland differs from other crisis-hit European countries
- Iceland is expected to become "the first 2008-10 crisis country in Europe to surpass its pre-crisis peak of economic output."
- Key differentiating factors: rapid external adjustment through depreciation, limited government absorption of private financial sector debt, and a low debt ratio going into the crisis.
- Relative to past financial crises in Nordic countries, Iceland’s experience has been "quite similar."

### Financial sector status and unresolved issues
- Positive signs:
  - Core banking sector looks strong.
  - Nonperforming loan ratio is down.
  - Capital and liquidity buffers are high.
  - Banks have been profitable and lending is rebounding.
- Important remaining items:
  - Ownership normalization of the core banking sector: currently in the hands of government and the failed old bank estates; needs transfer to "fit and proper" owners.
  - Unwinding of the loss-making government-owned Housing Financing Fund, which "dominates the mortgage market"; replace with a financially viable successor housing program meeting public policy housing objectives.
  - Strengthening financial safety nets: deposit insurance system, bank resolution process, and emergency liquidity assistance.
  - Financial Supervisory Authority of Iceland should proceed with plans to strengthen bank supervision.

### Policy priorities and recommendations going forward
- Key challenge: re-integrate Iceland’s financial markets with the rest of the world through removal of capital controls.
  - Capital controls continue to provide stability but "have a distorting effect and their macroeconomic costs rise over time."
  - Authorities are updating their capital account liberalization strategy and "expect to make significant progress this year" while "keenly aware of the need to preserve stability."
- Support liberalization by maintaining sound policies, including:
  - Financial sector reforms noted above (ownership normalization, Housing Financing Fund replacement, stronger safety nets, strengthened supervision).
  - Use fiscal policy to rebuild fiscal buffers and support growth while carefully assessing distributional consequences.
    - This could include a shift towards more public investment in roads and the health sector, and revisiting the mix of direct and indirect taxes.
  - Steps to strengthen Iceland’s budget framework and the independence and accountability of the central bank.
- Progress in these areas should provide a solid foundation for continued growth in Iceland.

*IMF Survey interview with Peter Dohlman, IMF Mission Chief for Iceland; Karin Hammar; March 13, 2015.*

---

## Content in this bundle

- [Cr1572pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/scr/2015/_cr1572pdf.pdf){rel="external" type="application/pdf"}
- [Cr1573pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/scr/2015/_cr1573pdf.pdf){rel="external" type="application/pdf"}

---

## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [IMF Survey Interview](https://www.imf.org/en/news/search)
- [Press release](http://www.imf.org/external/np/sec/pr/2015/pr15114.htm)
- [Lessons and challenges](http://www.imf.org/external/np/seminars/eng/2011/isl/)
- [iMFdirect blog: Iceland recovers](http://blog-imfdirect.imf.org/2011/10/26/how-iceland-recovered-from-its-near-death-experience/)
- [Quiet progress on key reforms](http://www.imf.org/external/pubs/ft/survey/so/2009/int102109a.htm)
- [Getting help](http://www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm)
- [Iceland and the IMF](http://www.imf.org/external/country/isl/index.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar031315a_