IMF Executive Board Concludes 2025 Article IV Consultation with Iceland
IMF News, June 24, 2025
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- Published: June 24, 2025
Summary and Outlook
- The Executive Board completed the Article IV Consultation for Iceland on June 16, 2025.
- Growth decelerated in 2024 to 0.5 percent due largely to weak exports from a disappointing fishing season and constraints on energy supply that curtailed aluminum production.
- Growth projections:
- 2025: 1.6 percent
- 2026: 2.2 percent
- 2027 onward: moderate positive growth (Table shows 2027: 2.4 percent)
- Drivers of the 2025–26 rebound: a recovery in exports, higher real wages, and continued monetary easing that more than offsets the impact of a moderately contractionary fiscal impulse.
- Inflation outlook:
- Expected to gradually decline to the Central Bank of Iceland’s 2.5 percent target in the second half of 2026.
- Consumer price index (average): 2024: 5.9; 2025: 3.5
- Consumer price index (end period): 2024: 4.7; 2025: 3.6
- Direct impact of escalating global trade tensions is projected to be limited given that most goods exports are destined for Europe.
- Medium-term prospects: favorable, with continued diversification toward higher value-added export-oriented sectors and inflows of foreign labor expected to support a modest increase in employment growth.
Risks
- Risks to growth are tilted to the downside; risks to inflation are broadly balanced.
- Specific downside scenarios highlighted:
- Rising global trade tensions could have a larger impact if tariffs are extended to currently exempted items (e.g., pharmaceuticals).
- A reduction in travel to and from the US could negatively affect tourism.
- Trade tensions could trigger supply disruptions or capital outflows, increasing inflation.
- Premature loosening of monetary policy could further de-anchor inflation expectations.
- Second-round effects from higher wage growth could increase inflation.
- Upside/alternate risk:
- Capital inflows could lead to exchange rate appreciation, weakening competitiveness and putting downward pressure on inflation.
Executive Board Assessment
- Directors agreed with the thrust of the staff appraisal and welcomed the prudent macroeconomic policies that have helped reduce imbalances.
- Emphases by Directors:
- Ensure macroeconomic stability and gradually rebuild fiscal buffers while supporting stronger growth and reducing vulnerability to shocks.
- Support the authorities’ ambitious fiscal targets and the improved transparency and credibility around planned consolidation.
- Increased infrastructure spending would help close gaps in transport and energy and bolster growth prospects.
- Merit in implementing additional measures, if necessary, to achieve fiscal objectives.
- Need to reduce procyclicality in fiscal policy; supported planned activation of revised fiscal rules in 2026.
- Recommended measures to strengthen the Fiscal Council and increase the coverage and frequency of fiscal data.
- Noted that price pressures remain elevated; agreed tight monetary policy remained appropriate but encouraged gradual loosening as inflation declines and expectations re-anchor.
- Saw merit in transitioning to a more forecast‑based inflation targeting framework as uncertainty declines.
- Welcomed the Central Bank of Iceland’s decision to commence regular purchases of foreign exchange to increase reserves.
- Noted systemic risks in the financial sector are contained but urged vigilance on housing market and corporate sector vulnerabilities and continued strengthening of operational resilience.
- Saw scope to ease macroprudential policies should systemic risks recede.
- Urged further efforts to enhance pension fund governance, strengthen AML/CFT supervision of banks, and safeguard the independence and effectiveness of the CBI’s supervisory activities.
- Emphasized reforms to bolster productivity and diversify the economy: improving infrastructure, supporting innovation, reducing skill mismatches, maximizing efficiency of R&D incentives, promoting AI while mitigating related risks, and increasing housing supply to improve affordability.
- Next Article IV consultation expected on the standard 12‑month cycle.
Fiscal Policy and Public Finances
- Authorities’ plans to turn the fiscal deficit in 2024 into a surplus by 2028 are judged appropriate given the need to rebuild buffers.
- Details on planned fiscal measures to achieve targets have enhanced the credibility of consolidation.
- Key fiscal figures (percent of GDP):
- Revenue: 2024: 42.8; 2025: 43.2; 2026: 42.4; 2027: 42.5; 2028: 42.6; 2029: (table continues)
- Expenditure: 2024: 46.3; 2025: 44.5; 2026: 42.9; 2027: 42.7
- Overall balance: 2024: -3.5; 2025: -1.3; 2026: -0.5; 2027: -0.2; 2028: -0.1
- Gross debt: 2024: 59.1; 2025: 47.7; 2026: 45.4; 2027: 43.6; 2028: 41.7; 2029: 39.9; 2030: 38.1
- Notes on fiscal accounting:
- For 2024, the deficit now includes 1.2 percent of GDP in costs related to the purchase of houses in Grindavík that in the 2024 Article IV were classified below the line due to uncertainty about the correct statistical treatment.
- In April 2025, an agreement was reached on the settlement of remaining outstanding liabilities in the IL Fund (HFF).
Monetary Policy and Reserves
- Monetary policy: suitably tight given still elevated inflation; stance should be reduced as inflation declines.
- Central bank policy rate (7 day term deposit rate):
- 2024: 8.50
- 2025: 7.50 (policy rate as of May)
- Money and credit:
- Credit to nonfinancial private sector (end period): 2024: 8.1; 2025: 5.6; 2026: 5.7
- Directors welcomed the CBI’s decision to commence regular purchases of foreign exchange to raise reserve coverage.
Financial Sector and Macroprudential Policy
- Systemic risks in the financial sector are contained.
- Areas for continued focus:
- Vigilance for vulnerabilities in the housing market and the corporate sector.
- Strengthening operational resilience.
- Scope to ease macroprudential policies should systemic risks recede as anticipated.
- Further implementation of FSAP recommendations; urged enhancements in pension fund governance and AML/CFT supervision of banks.
- Safeguard independence and effectiveness of CBI supervisory activities.
Structural Policies and Growth Enhancers
- Policies to support medium-term growth:
- Investments in physical and human capital.
- Continued efforts to promote innovation and reduce skills mismatches.
- Increase housing supply and improve housing affordability.
- Taxation can play a supportive role in reducing housing market imbalances.
- Maximize efficiency of R&D incentives and promote AI while mitigating related risks.
Key Economic Indicators (selected, 2024–30) — exact values from Table 1
- National Accounts (constant prices):
- Gross domestic product: 2024: 0.5; 2025: 1.6; 2026: 2.2; 2027: 2.4
- Total domestic demand: 2024: 2.3; 2025: 1.5; 2026: 0.6
- Private consumption: 2024: 2.5; 2025: 2.6
- Public consumption: 2024: 1.3; 2025: 1.0
- Gross fixed investment: 2024: 7.5; 2025: 4.1; 2026: -3.2; 2027: 2.8; 2028: 3.2
- Net exports (contribution to growth): 2024: -1.8; 2025: -0.3; 2026: 0.3; 2027: 0.1; 2028: 0.0; 2029: 0.2
- Exports of goods and services: 2024: -1.2; 2025: 3.3; 2026: 3.0; 2027: 3.1
- Imports of goods and services: 2024: 2.7; 2025: 3.9; 2026: -0.7; 2027: 2.9
- Labor market and wages:
- Unemployment rate (percent of labor force): 2024: 3.4; 2025: 4.0
- Employment: 2024: 0.4; 2025: 0.9; 2026: 1.1
- Labor productivity: 2024: -3.3; 2025: 1.2
- Real wages: 2024: 1.4
- Nominal wages: 2024: 6.4; 2025: 4.9; 2026: 4.4; 2027: 3.8
- Exchange rate:
- ISK/€ (average): 2024: 164
- Balance of Payments:
- Current account balance: 2024: -2.5; 2025: -2.6
- Gross external debt: 2024: 67.0; 2025: 65.4; 2026: 61.6; 2027: 58.5; 2028: 55.4; 2029: 52.4; 2030: 49.5
IMF Executive Board Concludes 2025 Article IV Consultation with Iceland (Press Release No. 25/212).