{ "title": "Iceland: Staff Concluding Statement of the 2022 Article IV Mission", "publication": "IMF News, May 11, 2022", "sourceUrl": "https://www.imf.org/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission", "overlayPath": "/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/index.md", "summary": "Iceland: Staff Concluding Statement of the 2022 Article IV Mission", "publishDate": "2022-05-11", "sections": [ { "heading": "Key findings and near-term outlook", "content": "- Iceland’s economy has weathered multiple shocks since 2019 relatively well, supported by a range of well-designed policy measures and a solid health system.\n- Real GDP and employment recovered strongly; output growth was 4.3 percent in 2021 despite slower recovery in tourism.\n- With net general government debt of 60 percent of GDP, international reserves of 29 percent of GDP, and a sound banking system, Iceland is positioned to handle potential negative shocks.\n- Growth is expected to remain moderate in 2022 and the medium term:\n - GDP growth in 2022 is projected at 3.5-4 percent.\n - Average inflation in 2022 is projected to reach 7.4 percent.\n - Real GDP is projected to remain about 2 percent below its pre-COVID trend by 2027.\n - Inflation is projected to gradually fall back to target by 2025, steered by ongoing monetary policy tightening.\n- The current account is projected to revert to a surplus as tourism continues to recover." }, { "heading": "Risks to the recovery", "content": "- Global risks:\n - Potential escalation of the war in Ukraine could dampen confidence, global outlook, and demand.\n - Evolution of the pandemic, including new highly contagious and/or lethal variants.\n - Extensive global supply chain disruptions could raise inflationary pressures and harm activity.\n - Tightening global financing conditions could increase the cost of servicing Icelandic debt.\n- Domestic risks:\n - Potential impasse in negotiations for a new collective bargaining agreement could lead to labor market tensions and economic dislocation.\n- Upside:\n - Stronger-than-expected recovery in tourism and growth in new innovative industries could boost the economy." }, { "heading": "Macroeconomic policy guidance — overall approach", "content": "- Policy mix objectives:\n - Steer inflation to target.\n - Mitigate financial stability concerns and reduce imbalances.\n - Protect the most vulnerable.\n - Advance structural reforms to facilitate economic diversification and resilience.\n- With a positive output gap, receding unemployment, and rising inflation, the need for policy support has rapidly declined." }, { "heading": "Fiscal policy — restoring buffers", "content": "- Authorities’ fiscal objectives:\n - A tightening fiscal stance in 2022 and over the medium term would help bring inflation back to target and rebuild fiscal buffers.\n - The authorities' medium-term fiscal strategy envisages a 4-percentage points of GDP reduction in the overall deficit in 2023–2027; staff view this as appropriate and feasible.\n- Suggested fiscal measures:\n - Savings could be achieved by streamlining VAT expenditures, public consumption, and the transfer system.\n - Government should follow through on its commitment to saving any fiscal revenues above the expected in the budget.\n- Fiscal framework performance:\n - Temporary suspension of fiscal rules allowed fiscal support of 3.4 percent of GDP per year in 2020–21.\n - Staff project net general government debt to decline by 18 percentage points of GDP from its peak in 2020.\n - Overall fiscal position projected to approach a balance by 2027.\n - Fiscal rules could be reactivated in 2026 as envisaged by law.\n - The holistic approach of the organic budget law should be preserved.\n - The introduction of margins of uncertainty has been useful, but a formal process for implementation needs to be established." }, { "heading": "Monetary policy — anchoring inflation expectations", "content": "- Policy rate and stance:\n - The policy rate has increased by 300 bps since April 2021, reversing most of its 3.8 percentage point reduction since May 2019.\n - Real policy rates have increased from their lows, but with inflation expectations around 5 percent, policy is still assessed as loose.\n - Steering inflation and inflation expectations back to the CBI’s target of 2.5 percent will likely require further policy rate hikes.\n- Operational guidance:\n - Given uncertainty, vigilance and data-driven policy rate decisions are required, considering inflation and inflation expectations, prospects for economic recovery, wage and house price developments, capital flows, and imported inflation.\n - Tighter systemic liquidity management may be needed: the Central Bank of Iceland (CBI) should absorb excess money supply to improve monetary policy transmission and strengthen the liquidity management framework." }, { "heading": "Financial sector stability and housing market", "content": "- Banking system resilience:\n - Banks are liquid, profitable, well capitalized, and resilient to adverse shocks.\n - Systemic risks are rising due to surging house prices that exceed fundamentals.\n- Housing market risks and recommended measures:\n - A sharp correction in house prices could weaken household and financial sector balance sheets and has worsened housing affordability, particularly for young and lower-income households.\n - Macroprudential measures should be used alongside monetary tightening:\n - The existing debt-service-to-income regulation should require mortgage lenders to apply a premium over the contractual rate in the analysis of borrowers' debt-service capacity.\n - A cap on the debt-to-income ratio could be introduced.\n - Improve housing affordability by increasing supply and reducing administrative burdens in the construction sector:\n - Simplify planning regulations, ease building permit processes, and introduce a one-stop shop for permits and inspections.\n - Redesign regressive fiscal incentives for home ownership.\n - Provide more targeted rental housing assistance and continue investment in social housing.\n- Institutional arrangements:\n - The merger between the central bank and the financial regulator has supported financial stability by enabling timely responses.\n - Reviews should assess responsibilities of CBI committees, the decision-making structure of the Supervisory Committee, budgetary independence, and microprudential powers and capacities.\n - Given pension funds’ increasingly systemic role and interlinkages, CBI’s powers to oversee their governance and risk management should be strengthened.\n- Bank ownership and privatization:\n - Ensuring the quality of bank ownership is a key government objective and a supervisory responsibility of the CBI.\n - Participation and ownership criteria for investors in the sale of state-owned banks should be developed within the privatization framework to mitigate reputational and stability risks.\n - The CBI should review future divestiture plans to ensure fitness and probity of potential investors and address potential prudential issues." }, { "heading": "Structural reforms — diversification, labor, and innovation", "content": "- Diversification priorities:\n - Improve competition, promote innovation, and facilitate resource reallocation.\n - Reduce burdens on start-ups and young firms and ease business regulations.\n - Widen digital penetration in production processes and promote R&D investment.\n - Ease access to finance for small firms.\n - The current increase in R&D spending is welcome.\n - Continue efforts to improve education outcomes and address skill mismatches.\n- Collective bargaining negotiations:\n - Upcoming negotiations are an opportunity to promote competitiveness and facilitate diversification.\n - The agreement should ensure inclusiveness, reduce poverty risk, provide high job security, better align wage and productivity growth, and provide flexibility for firm- and industry-specific wage negotiations." }, { "heading": "Climate policy", "content": "- Climate policy stance:\n - Iceland’s ambitious climate goals are welcome, but more needs to be done to achieve them.\n - Reducing emissions in a growing economy requires a mix of fiscal incentives, government regulation, and technological improvements.\n- Specific guidance:\n - Carbon pricing should be broadened and increased to offset higher demand from rising incomes and population.\n - Other tax incentives, such as those promoting electric vehicles, need careful recalibration to preserve the revenue base.\n - Expanding renewable energy use and facilitating energy exchange will require infrastructure investments that may entail environmental tradeoffs.\n - Technological improvements, including carbon sequestration, may become viable but may require R&D support.\n\nIceland: Staff Concluding Statement of the 2022 Article IV Mission\n\n---\n\n\n References\n\n- Iceland and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/bundle-manifest.json)", "Published: May 11, 2022", "Iceland’s economy has weathered multiple shocks since 2019 relatively well, supported by a range of well-designed policy measures and a solid health system.", "Real GDP and employment recovered strongly; output growth was 4.3 percent in 2021 despite slower recovery in tourism.", "With net general government debt of 60 percent of GDP, international reserves of 29 percent of GDP, and a sound banking system, Iceland is positioned to handle potential negative shocks.", "Growth is expected to remain moderate in 2022 and the medium term:", "The current account is projected to revert to a surplus as tourism continues to recover.", "Global risks:", "Domestic risks:", "Upside:", "Policy mix objectives:", "With a positive output gap, receding unemployment, and rising inflation, the need for policy support has rapidly declined.", "Authorities’ fiscal objectives:", "Suggested fiscal measures:", "Fiscal framework performance:", "Policy rate and stance:", "Operational guidance:", "Banking system resilience:", "Housing market risks and recommended measures:", "Institutional arrangements:", "Bank ownership and privatization:", "Diversification priorities:", "Collective bargaining negotiations:", "Climate policy stance:", "Specific guidance:", "[Iceland and the IMF](http://www.imf.org/external/country/ISL/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/index.md", "json": "/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2022/05/10/iceland-staff-concluding-statement-of-the-2022-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T01:11:48.701Z" }