IMF Executive Board Concludes 2021 Article IV Consultation with Iceland

IMF News, June 8, 2021

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Published: June 8, 2021

Pandemic impact and policy response

Iceland entered the COVID-19 crisis from a position of strength: net and gross public debt have declined by more than 50 percentage points of GDP since the Global Financial Crisis; private and external debt have declined by 200 percent of GDP; international reserves have reached around 30 percent of GDP.
Banks’ balance sheets have been strong, with significant capital and liquidity buffers.
The available policy space supported a prompt and substantial policy response: fiscal, monetary, and macroprudential measures alleviated the impact on households and firms.
COVID-19 cases were contained fast, and vaccinations progressed as planned, with more than 60 percent of the population above age 16 having received at least one dose.
Nonetheless, the pandemic’s economic impact was significant: Real GDP declined by 6.6 percent in 2020; unemployment rose sharply; the current account surplus declined; and inflation rose above the notification band in 2020.

Outlook, projections, and risks

A modest recovery is projected to take hold in 2021, with GDP growth projected at 3.7 percent in 2021.
GDP is projected to reach its 2019 level the following year.
Scarring from an expected slow tourism recovery is projected to keep GDP below its pre-COVID trend by 3 percent in 2026.
Risks to the outlook are significant, mainly stemming from uncertainty in the path of the pandemic domestically and abroad and the prospects for global tourism revival.

Executive Board assessment and policy recommendations

Directors commended Iceland’s handling of the pandemic, citing the strong policy framework and prudently accumulated buffers.
Directors highlighted the challenging medium-term economic outlook and encouraged sound macroeconomic policies and structural reforms to enhance sustainable growth, financial stability, and economic diversification.
Fiscal policy:
- Directors concurred that the budgeted fiscal support in 2021 would help prop up domestic demand, mitigate scarring, and provide insurance against downside risks.
- Directors assessed that Iceland’s medium-term fiscal policy plans would balance ongoing support needs with fiscal sustainability considerations.
- Plans appropriately refocus fiscal policy from lifeline support toward active labor market policies and investments in physical and human capital.
- Maintaining the highest fiscal transparency is crucial to preserve confidence in the fiscal framework.
Monetary and exchange rate policy:
- Data-driven monetary policy rate decisions remain essential to support confidence and mitigate inflation risks given high uncertainty.
- With the external position aligned with fundamentals and desirable policies, Directors advised the CBI to continue reducing its foreign exchange market presence as pandemic effects subside.
- Directors called for completion of ongoing foreign exchange legislation reform to solidify liberalization of the foreign exchange system and clarify conditions for potential use of capital flow management measures.
Financial sector and macroprudential policy:
- Directors stressed emerging corporate vulnerabilities and housing market risks should be addressed to preserve financial system strength.
- Recommended close monitoring of pandemic impacts on corporate and bank balance sheets and deploying macroprudential measures to mitigate risks from rapid bank mortgage credit growth.
- The upcoming review of financial oversight architecture should ensure the CBI’s powers and resources match its expanded responsibilities.
- Forthcoming bank privatization requires vigilance to preserve high-quality ownership.
- Directors commended authorities for completing actions required for Iceland to exit FATF’s grey-list and encouraged continued improvements to AML/CFT effectiveness.
Structural reforms and growth strategy:
- Post-pandemic growth strategy should aim to further diversify and strengthen economic resilience by promoting safe and sustainable tourism, supporting innovation, enhancing human capital, reducing regulatory burdens, better aligning wages and productivity, and ensuring timely achievement of Iceland’s climate goals.

Selected economic indicators and key statistics (2015–21)

Gross domestic product (growth, constant prices): 4.4; 6.3; 4.2; 4.7; 2.6; -6.6; 3.7
Total domestic demand: 6.1; 7.7; 7.6; 0.2; -1.3; 2.0
Private consumption: 4.5; 6.7; 8.0; 4.8; 1.9; -3.3; 3.0
Public consumption: -0.1; 0.9; 2.9; 3.9; 3.1; 0.6
Gross fixed investment: 21.5; 18.0; 10.6; 1.2; -3.7; -6.8
Net exports (contribution to growth): -1.1; -0.8; -2.9; 0.7; 2.1; -5.4; 1.7
Exports of goods and services: 8.9; 11.0; 5.1; -4.6; -30.5; 16.3
Imports of goods and services: 13.5; 14.6; 11.8; 0.5; -9.3; -22.0
Output gap (percent of potential output): 1.3; 2.4; -4.5; -2.3
Gross domestic product (ISK bn.): 2,311; 2,512; 2,642; 2,840; 3,045; 2,941; 3,132
Gross domestic product ($ bn.): 17.5; 20.8; 24.7; 26.2; 24.8; 21.7; 24.2
GDP per capita ($ thousands): 53.2; 62.5; 73.1; 75.3; 69.6; 59.6; 65.3
Private consumption (percent of GDP): 49.7; 49.3; 50.1; 50.3; 49.9; 51.4; 51.5
Public consumption (percent of GDP): 23.4; 23.0; 23.7; 24.4; 27.5; 26.8
Gross fixed investment (percent of GDP): 19.3; 20.9; 21.8; 21.6; 20.6; 21.1
Gross national saving (percent of GDP): 25.0; 29.2; 26.0; 25.7; 27.0; 22.7; 22.8
Unemployment rate (percent of labor force): 3.3; 6.4; 6.0
Employment: 4.1; 1.0; 1.8; -3.0; 0.8
Labor productivity: 1.1; 2.8; 1.6; -3.8
Real wages: 5.9; 7.2; 5.6; 3.4
Nominal wages: 9.0; 7.5; 6.5; 4.9; 4.3
Consumer price index (average): 2.7; 3.6
ISK/€ (average): 146; 134; 121; 128; 141; 157; …
ISK/$ (average): 132; 107; 108; 123; 135
Terms of trade (average): 6.8; 1.5; -0.7
Base money (M0): 27.8; 37.9; -1.7; -9.2; 6.2
Broad money (M3): 5.0; 7.0; 6.6; 7.4; 8.4
Bank credit to nonfinancial private sector: 3.5; 9.2; 11.9; 10.5
Central bank 7 day term deposit rate 1/: 5.75; 5.00; 4.25; 4.50; 3.00; 0.75 (For 2021, rate as of end-April.)
General Government Finances 2/ (Revenue): 43.2; 59.1; 45.4; 44.9; 41.9; 42.4; 40.3
General Government Finances 2/ (Expenditure): 43.6; 46.5; 44.5; 44.0; 43.4; 49.4
Overall balance: -0.4; 12.5; -1.5; -7.3; -9.1
Structural primary balance: -1.4; 0.3; -2.5
Cyclically-adjusted primary balance: 3.8; 15.0; -2.4; -5.8
Gross debt: 97.2; 79.9; 69.4; 61.1; 68.3; 80.0
Net debt: 78.0; 65.2; 57.9; 48.6; 55.4; 63.8; 67.2
Current account balance: 8.1
of which: services balance: 8.5; 2.5
Capital and financial account (+ = outflow): 5.5; 5.4
of which: direct investment, net (+ = outflow): -4.0; -3.5; 2.3
Gross external debt: 174.8; 125.1; 90.3; 73.3; 76.5; 86.0; 75.4

IMF Communications Department. Press Release No. 21/164. June 8, 2021.

IMF Executive Board Concludes 2021 Article IV Consultation with Iceland

Source details

Other formats

Bibliographic details

Pandemic impact and policy response

Outlook, projections, and risks

Executive Board assessment and policy recommendations

Selected economic indicators and key statistics (2015–21)

References