## IMF and Iceland: Candid Discussions

_IMF News, May 3, 2017_

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**Canonical URL:** [IMF and Iceland: Candid Discussions](https://www.imf.org/en/news/articles/2017/04/21/na050317-imf-and-iceland-candid-discussions)

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## Bibliographic details
- Published: May 3, 2017

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### Overview
- 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, external position, and financial stability
- 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:
  - "For all intents and purposes, capital flows are now free for businesses, households, pension funds, and financial institutions."
  - A few legislative changes remain, but the process has gone "very well" with preserved stability.
  - The original imposition of capital controls was a proposal that came from the IMF at the height of the crisis.
  - The IMF engaged in good and helpful discussions on removing capital controls.
- Factors cited as strengthening resilience after controls removal:
  - A relatively well-balanced economy and a current account surplus.
  - Debt levels "much lower than they were prior to the crisis."
  - 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."
  - High level of foreign exchange reserves of "around a third of GDP."
  - Banks are described as "well prepared with regulations that can mitigate and reduce the risks associated with free capital flows and foreign exchange positions."
  - Continued policy measures limiting hot-money inflows: "special reserve requirement on capital flows into the bond market and high yielding deposits."
- Risks and preparedness:
  - Acknowledged possibility of "rougher seas" after lifting most capital controls, but authorities state they are "very well prepared."
  - Vigilance against overvaluation of the currency and other risks associated with capital inflows.

### Tourism, labor markets, and overheating risks
- Tourism has become Iceland’s number one industry, overtaking fishing.
- Outlook on tourism:
  - 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."
  - Emphasis on the need to "manage it well."
- Overheating concerns:
  - "Yes, it is quite clear that there is a risk of overheating in the Icelandic economy."
  - Labor market pressures: importing labor "on a significant scale"; tourism hiring competes with other industries; contributes to rising wages.
  - Employment: "We are at—or above—full employment."
  - 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.
  - Exchange rate pressures: tourism-generated foreign exchange has put upward pressure on the exchange rate; viewed as largely benign but with risk of overvaluation.
  - Policy posture: "We are very vigilant in this regard" and "it is better to deal with challenges in good times."

### Financial sector oversight and regulatory architecture
- IMF concluding statement suggested improving financial sector oversight as top priority.
- Central Bank position:
  - "The Central Bank does not have an institutional view on it."
  - The country has "done a lot to improve both regulation and the supervision."
  - A "relatively new architecture of financial stability oversight" is in place; whether it is best remains to be seen.
  - Changes to unify banking regulation and supervision under the central bank would require parliamentary legislation.
  - The governor notes that "I think what the IMF proposes is in many ways good," but leaves ultimate decision to Parliament.

### Banking sector reforms, performance, and IMF role in the crisis
- Crisis actions taken early on (before IMF program agreement) were crucial, particularly handling of failing banks through resolution.
- Banking sector characteristics and safeguards:
  - Failed international banks previously held assets amounting to 10 times Iceland’s GDP.
  - Those banks’ balance sheets were primarily denominated in foreign currencies.
  - Authorities allowed failing banks to go into resolution and carved out three smaller domestically-oriented banks.
  - 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."
  - Banks are described as strong with capital adequacy rates "in the range of 25 to 30 percent" and "high liquidity buffers."
  - The percentage of bad loans "has also been dramatically reduced."
- IMF’s role:
  - IMF intervened in 2008 to help deal with the balance of payments crisis, the markdown in currency, and stabilizing the macroeconomy.
  - The governor characterizes the IMF’s strengths as creating conditions for recovery and crisis management in a banking crisis.
  - Relationship with the IMF was "good," featuring candid discussions and occasional disagreements; collaboration produced compromises ("we met in the middle").
  - The governor describes the process as showing "a relationship of equals between the Central Bank and the IMF."

### Key statistics and exact figures (as stated)
- 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"

*International Monetary Fund — May 3, 2017.*

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## 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)
- [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)

_Source: https://www.imf.org/en/news/articles/2017/04/21/na050317-imf-and-iceland-candid-discussions_