{
  "title": "IMF and Iceland: Candid Discussions",
  "publication": "IMF News, May 3, 2017",
  "sourceUrl": "https://www.imf.org/en/news/articles/2017/04/21/na050317-imf-and-iceland-candid-discussions",
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  "summary": "In a wide-ranging interview, Governor of Iceland’s central bank Már Guðmundsson talked about how Iceland turned its economy around.",
  "publishDate": "2017-05-03",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Publication date: May 3, 2017.\n- Iceland is described as a Nordic country with a population of 340,000.\n- In 2008, Iceland experienced a financial meltdown that led to capital controls, austerity, and a $2.1 billion IMF-supported program.\n- Iceland recorded a growth rate of 7.2 percent of GDP in 2016."
    },
    {
      "heading": "Capital controls, external position, and financial stability",
      "content": "- Capital controls were largely lifted in mid-March (year not restated on page), marking a significant phase of crisis exit.\n- Current stance on capital flows:\n  - \"For all intents and purposes, capital flows are now free for businesses, households, pension funds, and financial institutions.\"\n  - A few legislative changes remain, but the process has gone \"very well\" with preserved stability.\n  - The original imposition of capital controls was a proposal that came from the IMF at the height of the crisis.\n  - The IMF engaged in good and helpful discussions on removing capital controls.\n- Factors cited as strengthening resilience after controls removal:\n  - A relatively well-balanced economy and a current account surplus.\n  - Debt levels \"much lower than they were prior to the crisis.\"\n  - Net external asset position: \"from being net borrowers abroad, we now have more assets abroad than liabilities for the first time in the history of compiled data.\"\n  - High level of foreign exchange reserves of \"around a third of GDP.\"\n  - Banks are described as \"well prepared with regulations that can mitigate and reduce the risks associated with free capital flows and foreign exchange positions.\"\n  - Continued policy measures limiting hot-money inflows: \"special reserve requirement on capital flows into the bond market and high yielding deposits.\"\n- Risks and preparedness:\n  - Acknowledged possibility of \"rougher seas\" after lifting most capital controls, but authorities state they are \"very well prepared.\"\n  - Vigilance against overvaluation of the currency and other risks associated with capital inflows."
    },
    {
      "heading": "Tourism, labor markets, and overheating risks",
      "content": "- Tourism has become Iceland’s number one industry, overtaking fishing.\n- Outlook on tourism:\n  - The governor's view: \"if you have a tourism boom of this magnitude, it is there to stay\" though \"there might be some ebb and flow.\"\n  - Emphasis on the need to \"manage it well.\"\n- Overheating concerns:\n  - \"Yes, it is quite clear that there is a risk of overheating in the Icelandic economy.\"\n  - Labor market pressures: importing labor \"on a significant scale\"; tourism hiring competes with other industries; contributes to rising wages.\n  - Employment: \"We are at—or above—full employment.\"\n  - Housing market pressures: home building collapsed during the crisis; construction sector focused on hotels, creating excess demand for homes though supply has begun to increase.\n  - Exchange rate pressures: tourism-generated foreign exchange has put upward pressure on the exchange rate; viewed as largely benign but with risk of overvaluation.\n  - Policy posture: \"We are very vigilant in this regard\" and \"it is better to deal with challenges in good times.\""
    },
    {
      "heading": "Financial sector oversight and regulatory architecture",
      "content": "- IMF concluding statement suggested improving financial sector oversight as top priority.\n- Central Bank position:\n  - \"The Central Bank does not have an institutional view on it.\"\n  - The country has \"done a lot to improve both regulation and the supervision.\"\n  - A \"relatively new architecture of financial stability oversight\" is in place; whether it is best remains to be seen.\n  - Changes to unify banking regulation and supervision under the central bank would require parliamentary legislation.\n  - The governor notes that \"I think what the IMF proposes is in many ways good,\" but leaves ultimate decision to Parliament."
    },
    {
      "heading": "Banking sector reforms, performance, and IMF role in the crisis",
      "content": "- Crisis actions taken early on (before IMF program agreement) were crucial, particularly handling of failing banks through resolution.\n- Banking sector characteristics and safeguards:\n  - Failed international banks previously held assets amounting to 10 times Iceland’s GDP.\n  - Those banks’ balance sheets were primarily denominated in foreign currencies.\n  - Authorities allowed failing banks to go into resolution and carved out three smaller domestically-oriented banks.\n  - These domestically-oriented banks are now \"strong financial institutions\" with strict regulation on the international asset side and \"specific liquidity and funding requirements in foreign currencies.\"\n  - Banks are described as strong with capital adequacy rates \"in the range of 25 to 30 percent\" and \"high liquidity buffers.\"\n  - The percentage of bad loans \"has also been dramatically reduced.\"\n- IMF’s role:\n  - IMF intervened in 2008 to help deal with the balance of payments crisis, the markdown in currency, and stabilizing the macroeconomy.\n  - The governor characterizes the IMF’s strengths as creating conditions for recovery and crisis management in a banking crisis.\n  - Relationship with the IMF was \"good,\" featuring candid discussions and occasional disagreements; collaboration produced compromises (\"we met in the middle\").\n  - The governor describes the process as showing \"a relationship of equals between the Central Bank and the IMF.\""
    },
    {
      "heading": "Key statistics and exact figures (as stated)",
      "content": "- Population: 340,000\n- IMF-supported program size: $2.1 billion\n- Growth rate in 2016: 7.2 percent of GDP\n- Foreign exchange reserves: \"around a third of GDP\"\n- Failed banks' assets pre-crisis: 10 times Iceland’s GDP\n- Banks' capital adequacy rates: \"in the range of 25 to 30 percent\"\n\nInternational Monetary Fund — May 3, 2017.\n\n---\n\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Country Focus\n- Preliminary economic findings\n- Iceland and the IMF\n- 2017 Spring Meetings\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/04/21/na050317-imf-and-iceland-candid-discussions"
    }
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    "Published: May 3, 2017",
    "Publication date: May 3, 2017.",
    "Iceland is described as a Nordic country with a population of 340,000.",
    "In 2008, Iceland experienced a financial meltdown that led to capital controls, austerity, and a $2.1 billion IMF-supported program.",
    "Iceland recorded a growth rate of 7.2 percent of GDP in 2016.",
    "Capital controls were largely lifted in mid-March (year not restated on page), marking a significant phase of crisis exit.",
    "Current stance on capital flows:",
    "Factors cited as strengthening resilience after controls removal:",
    "Risks and preparedness:",
    "Tourism has become Iceland’s number one industry, overtaking fishing.",
    "Outlook on tourism:",
    "Overheating concerns:",
    "IMF concluding statement suggested improving financial sector oversight as top priority.",
    "Central Bank position:",
    "Crisis actions taken early on (before IMF program agreement) were crucial, particularly handling of failing banks through resolution.",
    "Banking sector characteristics and safeguards:",
    "IMF’s role:",
    "Population: 340,000",
    "IMF-supported program size: $2.1 billion",
    "Growth rate in 2016: 7.2 percent of GDP",
    "Foreign exchange reserves: \"around a third of GDP\"",
    "Failed banks' assets pre-crisis: 10 times Iceland’s GDP",
    "Banks' capital adequacy rates: \"in the range of 25 to 30 percent\"",
    "[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)",
    "[Preliminary economic findings](https://www.imf.org/en/News/Articles/2017/03/28/mcs032817-iceland-staff-concluding-statement-of-the-2017-article-iv-mission)",
    "[Iceland and the IMF](https://www.imf.org/external/country/ISL/)",
    "[2017 Spring Meetings](http://www.imf.org/external/spring/2017/index.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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