{
  "title": "IMF Executive Board Concludes 2023 Article IV Consultation with Iceland",
  "publication": "IMF News, June 23, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/06/20/pr23220-imf-executive-board-concludes-2023-article-iv-consultation-with-iceland",
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  "summary": "The Icelandic economy has shown remarkable resilience and rebounded quickly from the multiple shocks in recent years. Real GDP grew by 6.",
  "publishDate": "2023-06-23",
  "sections": [
    {
      "heading": "Economic performance and outlook",
      "content": "- Real GDP grew by 6.4 percent in 2022, the fastest since 2007, driven by a strong rebound in tourism, domestic demand, and higher incomes from an improvement in the terms of trade.\n- The economy is operating well above potential, contributing to inflation significantly above target and external imbalances.\n- Growth projections:\n  - 3.2 percent in 2023\n  - 1.9 percent in 2024\n- Medium-term trajectory: exports are expected to be the main growth driver while continued policy tightening brings domestic demand to sustainable levels.\n- Inflation and current account:\n  - Inflation forecast to decline modestly to around 7 percent by end-2023 and to approach target by end-2025.\n  - Current account projected to gradually strengthen on lower import prices and tighter policies, reverting to a surplus over the medium term.\n- Risks:\n  - Significant downside risks: more persistent inflation, tensions around upcoming wage negotiations, and tighter global financial conditions.\n  - Potential upside risks: breakthroughs in the pharmaceutical industry and other non-traditional industries, and commercialization of climate mitigation technologies."
    },
    {
      "heading": "Monetary and fiscal policy",
      "content": "- Monetary policy actions:\n  - The Central Bank of Iceland raised the policy rate by 800 basis points between April 2021 and May 2023.\n  - Staff and Directors stressed the need for a tight monetary policy stance until there is clear evidence that inflation will return to the 2.5 percent target and expectations are re-anchored; achieving this may require raising the policy rate further and keeping the real policy rate well above the neutral rate as long as needed.\n- Fiscal stance:\n  - Fiscal policy was contractionary in 2022 but not sufficient to sufficiently slow domestic demand; the underlying fiscal stance deteriorated.\n  - Directors welcomed the reduction in the 2023 fiscal deficit envisaged in the draft medium-term fiscal strategy (MTFS) and noted faster consolidation in later years would help rebuild buffers.\n  - Authorities intend to reinstate fiscal rules in 2025, one year earlier than originally envisaged."
    },
    {
      "heading": "Financial sector resilience and FSAP findings",
      "content": "- General assessment:\n  - Iceland’s financial system exited the pandemic resilient and highly capitalized, with high bank profitability and liquidity positions exceeding regulatory minima.\n  - The Financial System Stability Assessment (FSAP) finds the system resilient to severe but plausible macro-financial shocks, while noting remaining vulnerabilities.\n- Key vulnerabilities and funding risks:\n  - High exposure to mortgages and commercial real estate could create pressure if downside risks materialize.\n  - Foreign funding from unsecured debt securities and nonresident deposits accounts for about a quarter of total funding and is mainly used to finance foreign currency denominated corporate loans.\n  - Banks may need to roll over maturing foreign-currency bonds at higher spreads given global financial tightening.\n  - Pension funds are important bank funders (holdings of shares, direct deposits, or covered bonds); a redirection of pension fund investments abroad could create bank funding pressures.\n- Supervisory and regulatory recommendations:\n  - Further strengthen financial resilience by ensuring regulatory agencies have adequate powers, resources, and independence.\n  - Enhance financial regulation and supervision framework for pension funds.\n  - Provide further supervisory guidance to banks in operational risks, market risk, and interest rate risk in the banking book.\n  - Strengthen financial crisis management, safety nets, and bank resolution frameworks.\n  - Consider sector-specific macroprudential tools and activate them if vulnerabilities in the commercial real estate sector persist or intensify.\n  - Continue strengthening the AML/CFT supervision framework."
    },
    {
      "heading": "Structural and sectoral policy recommendations",
      "content": "- Reduce regulatory burden and increase competition to further diversify the economy.\n- Pursue reforms to improve sustainability and productivity in traditional export sectors, including tourism.\n- Use upcoming wage negotiations as an opportunity to better align wages with productivity growth.\n- Climate policy:\n  - Commended Iceland’s ambitious climate goals and pioneering green technologies.\n  - With emission cuts falling short of targets, update of the Climate Action Plan is an opportunity to adopt policies to accelerate the transition to a low-carbon economy, including raising the level of carbon taxes."
    },
    {
      "heading": "Executive Board assessment",
      "content": "- Directors agreed with the thrust of the staff appraisal: Iceland showed remarkable resilience to multiple shocks since 2019, with 2022 growth the fastest since 2007.\n- Directors noted the economy is overheating, contributing to inflation significantly above target and external imbalances.\n- Directors broadly supported the key policy recommendations of the 2023 FSAP and encouraged continued progress on financial sector reforms and resilience."
    },
    {
      "heading": "Selected key statistics (as reported)",
      "content": "- Output and growth:\n  - Real GDP growth: 4.2 (2017), 4.9 (2018), 1.8 (2019), -7.2 (2020), 4.3 (2021), 6.4 (2022), 3.2 (2023, proj.), 1.9 (2024, proj.), 2.1 (2025, proj.), 2.2 (2026, proj.)\n  - Total domestic demand growth: 7.6 (2017), 4.5 (2018), 0.5 (2019), -1.1 (2020), 6.3 (2021), 1.2 (2022), 0.9 (2023, proj.)\n  - Exports of goods and services growth: 0.4 (2017), -5.5 (2018), -31.1 (2019), 14.7 (2020), 20.6 (2021), 5.8 (2022)\n  - Imports of goods and services growth: 11.8 (2017), -0.9 (2018), -9.1 (2019), -20.6 (2020), 19.9 (2021), 19.7 (2022)\n  - Output gap (percent of potential output): 3.5 (2017), -5.2 (2018), -2.5 (2019), 0.6 (2020), 0.3 (2021), 0.1 (2022), 0.0 (2023, prel.)\n- Levels and shares:\n  - Gross domestic product (ISK bn.): 2,642 (2017), 2,844 (2018), 3,024 (2019), 2,919 (2020), 3,245 (2021), 3,766 (2022), 4,117 (2023, proj.), 4,353 (2024, proj.), 4,603 (2025, proj.), 4,843 (2026, proj.), 5,103 (2027, proj.), 5,384 (2028, proj.)\n  - Gross domestic product ($ bn.): 24.7 (2017), 26.3 (2018), 21.6 (2019), 25.6 (2020), 27.8 (2021), 29.1 (2022), 31.4 (2023, proj.), 33.9 (2024, proj.), 36.4 (2025, proj.), 39.1 (2026, proj.), 42.0 (2027, proj.), 44.9 (2028, proj.)\n  - GDP per capita ($ thousands): 73.1 (2017), 75.4 (2018), 69.1 (2019), 59.2 (2020), 69.3 (2021), 74.0 (2022), 75.2 (2023, proj.), 81.6 (2024, proj.), 87.1 (2025, proj.), 92.4 (2026, proj.), 98.3 (2027, proj.), 104.5 (2028, proj.)\n  - Private consumption (percent of GDP): 50.1 (2017), 50.3 (2018), 50.2 (2019), 52.0 (2020), 52.2 (2021), 52.8 (2022), 52.7 (2023, proj.), 52.3 (2024, proj.), 51.6 (2025, proj.), 50.9 (2026, proj.)\n  - Public consumption (percent of GDP): 23.7 (2017), 24.1 (2018), 24.6 (2019), 28.1 (2020), 27.6 (2021), 25.9 (2022), 24.3 (2023, proj.), 24.4 (2024, proj.), 24.8 (2025, proj.), 25.1 (2026, proj.), 25.4 (2027, proj.)\n  - Gross fixed investment (percent of GDP): 21.8 (2017), 20.9 (2018), 21.3 (2019), 22.2 (2020), 22.4 (2021), 22.9 (2022), 23.0 (2023, proj.), 22.6 (2024, proj.), 22.5 (2025, proj.)\n  - Gross national saving (percent of GDP): 26.0 (2017), 26.4 (2018), 27.2 (2019), 22.3 (2020), 20.0 (2021), 21.1 (2022), 21.5 (2023, proj.), 21.7 (2024, proj.), 22.8 (2025, proj.), 23.3 (2026, proj.)\n  - Unemployment rate (percent of labor force): 3.3 (2017), 3.1 (2018), 6.0 (2019), 3.8 (2020), 3.7 (2021), 4.0 (2022)\n- Prices, wages, and rates:\n  - Real wages: -1.9 (year not explicitly labeled in table)\n  - Nominal wages: 7.2 (year not explicitly labeled), 9.1; 6.5; 8.3; 9.3; 5.2 (table lists multiple entries)\n  - Consumer price index (average): 2.7 (2017), 2.8 (2018), 8.7 (2019), 4.6 (2020), 2.5 (2021)\n  - Consumer price index (end period): 9.6 (2019), 7.4 (2020)\n  - Central bank 7-day term deposit rate (for 2023, rate as of end-May): 4.25 (2017), 4.50 (2018), 3.00 (2019), 0.75 (2020), 2.00 (2021), 6.00 (2022), 8.75 (2023, rate as of end-May)\n- Public finances:\n  - Revenue (percent of GDP): 45.4 (2017), 44.8 (2018), 42.1 (2019), 42.2 (2020), 41.4 (2021), 41.8 (2022), 42.8 (2023, proj.), 42.4 (2024, proj.), 41.3 (2025, proj.)\n  - Expenditure (percent of GDP): 44.4 (2017), 43.8 (2018), 43.6 (2019), 51.2 (2020), 49.8 (2021), 46.1 (2022), 45.5 (2023, proj.), 45.7 (2024, proj.), 45.0 (2025, proj.), 43.3 (2026, proj.)\n  - Overall balance: -1.5 (2017), -9.0 (2018), -8.4 (2019), -4.3 (2020), -2.7 (2021)\n  - Structural primary balance: -2.0 (2017), -3.1 (2018), -1.4 (2019), -1.8 (2020), -1.2 (2021), 0.2 (2022)\n  - Gross debt: 71.7 (2017), 63.2 (2018), 66.6 (2019), 77.8 (2020), 75.6 (2021), 68.7 (2022), 65.1 (2023, proj.), 61.2 (2024, proj.), 60.0 (2025, proj.), 58.2 (2026, proj.), 56.5 (2027, proj.), 55.2 (2028, proj.)\n  - Net debt: 60.3 (2017), 50.7 (2018), 54.4 (2019), 61.1 (2020), 60.4 (2021), 57.1 (2022), 51.1 (2023, proj.), 50.5 (2024, proj.), 49.1 (2025, proj.), 47.9 (2026, proj.), 47.0 (2027, proj.)\n- Balance of payments and external:\n  - Current account balance: -2.4 (year not explicitly labeled), -0.7 (another entry)\n  - Services balance (of which): 7.3 (year not explicitly labeled), 7.5 (another entry)\n  - Capital and financial account (+ = outflow): 6.1 (year not explicitly labeled)\n  - Direct investment, net (+ = outflow): -1.0 (year not explicitly labeled)\n  - Gross external debt: 90.3 (year not explicitly labeled), 73.3, 78.4, 90.4, 82.8, 64.1, 59.6 (series)\n  - Central bank reserves ($ bn): 6.7, 7.1, 5.9 (series)\n\nIMF Communications Department. Press Release No. 23/220. June 23, 2023.\n\n---\n\n\n References\n\n- Iceland and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- http://www.IMF.org/external/np/sec/misc/qualifiers.htm\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/06/20/pr23220-imf-executive-board-concludes-2023-article-iv-consultation-with-iceland"
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    "Published: June 23, 2023",
    "Real GDP grew by 6.4 percent in 2022, the fastest since 2007, driven by a strong rebound in tourism, domestic demand, and higher incomes from an improvement in the terms of trade.",
    "The economy is operating well above potential, contributing to inflation significantly above target and external imbalances.",
    "Growth projections:",
    "Medium-term trajectory: exports are expected to be the main growth driver while continued policy tightening brings domestic demand to sustainable levels.",
    "Inflation and current account:",
    "Risks:",
    "Monetary policy actions:",
    "Fiscal stance:",
    "General assessment:",
    "Key vulnerabilities and funding risks:",
    "Supervisory and regulatory recommendations:",
    "Reduce regulatory burden and increase competition to further diversify the economy.",
    "Pursue reforms to improve sustainability and productivity in traditional export sectors, including tourism.",
    "Use upcoming wage negotiations as an opportunity to better align wages with productivity growth.",
    "Climate policy:",
    "Directors agreed with the thrust of the staff appraisal: Iceland showed remarkable resilience to multiple shocks since 2019, with 2022 growth the fastest since 2007.",
    "Directors noted the economy is overheating, contributing to inflation significantly above target and external imbalances.",
    "Directors broadly supported the key policy recommendations of the 2023 FSAP and encouraged continued progress on financial sector reforms and resilience.",
    "Output and growth:",
    "Levels and shares:",
    "Prices, wages, and rates:",
    "Public finances:",
    "Balance of payments and external:",
    "[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)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[http://www.IMF.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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