June 24, 2025
PRESS OFFICER: Eva-Maria Graf
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Iceland on June 16, 2025.[1] The authorities have consented to the publication of the Staff Report prepared for this consultation.[2]
The economy 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 is expected to rebound to 1.6 percent in 2025 and 2.2 percent in 2026, driven by a recovery in exports, higher real wages, and continued monetary easing that more than offsets the impact of a moderately contractionary fiscal impulse. The impact of escalating global trade tensions is projected to be limited given that most goods exports are destined for Europe. Inflation is expected to gradually decline to the Central Bank of Iceland’s 2.5 percent target in the second half of 2026. Medium-term prospects are favorable, with continued diversification of the economy toward higher value-added export-oriented sectors anticipated to bolster productivity growth and inflows of foreign labor expected to support a modest increase in employment growth.
Risks to growth are tilted to the downside while risks to inflation are broadly balanced. In particular, the impact of rising global trade tensions could be larger than anticipated if tariffs are extended to currently exempted items (e.g., pharmaceuticals) or if a reduction in travel to and from the US negatively affects tourism. Inflation could increase if trade tensions trigger supply disruptions or capital outflows, if a premature loosening of monetary policy further de-anchors inflation expectations, or as result of second-round effects from higher wage growth. Conversely, capital inflows could result in an appreciation of the exchange rate that would weaken competitiveness and put downward pressure on inflation.
Executive Board Assessment[3]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the prudent macroeconomic policies, which have helped to reduce imbalances. While noting that medium‑term growth prospects are favorable, Directors observed that risks are tilted to the downside, notably from rising trade tensions. They emphasized the need to ensure macroeconomic stability and gradually rebuild fiscal buffers, while supporting stronger growth and reducing vulnerability to shocks.
Directors welcomed the ambitious fiscal targets and the improved transparency and credibility around the planned consolidation. They highlighted that increased infrastructure spending would help to close gaps in transport and energy and bolster growth prospects. Directors saw merit in implementing additional measures, if necessary, to achieve fiscal objectives. Noting the need to reduce procyclicality in fiscal policy, Directors supported the planned activation of revised fiscal rules in 2026. They also recommended measures to strengthen the Fiscal Council and increase the coverage and frequency of fiscal data.
Directors noted that price pressures remain elevated and agreed that tight monetary policy remained appropriate. They encouraged the Central Bank of Iceland (CBI) to gradually loosen the policy stance as inflation declines towards target and expectations become reanchored. Directors saw merit in transitioning to a more forecast‑based inflation targeting framework as uncertainty declines. Noting the importance of increasing reserves to more prudent levels, Directors welcomed the CBI’s decision to commence regular purchases of foreign exchange.
Directors welcomed that systemic risks in the financial sector are contained. They highlighted the need to remain vigilant to potential vulnerabilities in the housing market and the corporate sector, and to continue strengthening operational resilience. Directors saw scope to ease macroprudential policies should systemic risks recede as anticipated. While welcoming the progress on implementing FSAP recommendations, Directors 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.
Directors emphasized the importance of reforms to bolster productivity and diversify the economy, including by improving infrastructure and supporting innovation. Important measures include reducing skill mismatches, maximizing the efficiency of R&D incentives, and promoting AI while mitigating related risks. Directors welcomed plans to increase housing supply and improve housing affordability.
It is expected that the next Article IV consultation with Iceland will be held on the standard 12‑month cycle.
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Table 1. Iceland: Selected Economic Indicators, 2024–30 |
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2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
|
|
Proj. |
Proj. |
Proj. |
Proj. |
Proj. |
Proj. |
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|
(Percentage change unless otherwise indicated) |
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|
National Accounts (constant prices) |
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|
Gross domestic product |
0.5 |
1.6 |
2.2 |
2.4 |
2.4 |
2.4 |
2.4 |
|
Total domestic demand |
2.3 |
1.5 |
0.6 |
2.2 |
2.4 |
2.4 |
2.3 |
|
Private consumption |
0.6 |
2.2 |
2.4 |
2.5 |
2.6 |
2.6 |
2.6 |
|
Public consumption |
2.5 |
1.5 |
1.3 |
1.0 |
1.0 |
1.0 |
1.0 |
|
Gross fixed investment |
7.5 |
4.1 |
-3.2 |
2.8 |
3.2 |
3.2 |
3.2 |
|
Net exports (contribution to growth) |
-1.8 |
-0.3 |
1.6 |
0.3 |
0.1 |
0.0 |
0.2 |
|
Exports of goods and services |
-1.2 |
3.3 |
3.0 |
3.3 |
3.1 |
3.0 |
3.2 |
|
Imports of goods and services |
2.7 |
3.9 |
-0.7 |
2.7 |
2.9 |
2.9 |
2.9 |
|
Output gap (percent of potential output) |
1.0 |
0.2 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
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Selected Indicators |
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|
Unemployment rate (percent of labor force) |
3.4 |
3.9 |
4.0 |
4.0 |
4.0 |
4.0 |
4.0 |
|
Employment |
4.1 |
0.4 |
0.9 |
1.1 |
1.1 |
1.1 |
1.1 |
|
Labor productivity |
-3.3 |
1.2 |
1.3 |
1.3 |
1.3 |
1.3 |
1.3 |
|
Real wages |
0.5 |
1.4 |
1.3 |
1.3 |
1.3 |
1.3 |
1.3 |
|
Nominal wages |
6.4 |
4.9 |
4.4 |
3.8 |
3.8 |
3.9 |
3.8 |
|
Consumer price index (average) |
5.9 |
3.5 |
3.0 |
2.5 |
2.5 |
2.5 |
2.5 |
|
Consumer price index (end period) |
4.7 |
3.6 |
2.5 |
2.5 |
2.5 |
2.5 |
2.5 |
|
ISK/€ (average) |
164 |
… |
… |
… |
… |
… |
… |
|
|
|
|
|
|
|
|
|
|
Money and Credit (end period) |
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|
Credit to nonfinancial private sector |
8.1 |
5.6 |
5.6 |
5.6 |
5.6 |
5.6 |
5.7 |
|
Central bank 7 day term deposit rate 1/ |
8.50 |
7.50 |
… |
… |
… |
… |
… |
|
(Percent of GDP unless otherwise indicated) |
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|
General Government Finances 2/ |
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|
Revenue |
42.8 |
43.2 |
42.4 |
42.4 |
42.4 |
42.5 |
42.6 |
|
Expenditure |
46.3 |
44.5 |
43.2 |
42.9 |
42.8 |
42.7 |
42.7 |
|
Overall balance 3/ |
-3.5 |
-1.3 |
-0.7 |
-0.5 |
-0.3 |
-0.2 |
-0.1 |
|
Cyclically-adjusted primary balance |
-1.5 |
0.7 |
0.9 |
1.2 |
1.4 |
1.6 |
1.7 |
|
Structural primary balance 4/ |
0.7 |
1.1 |
1.1 |
1.3 |
1.4 |
1.6 |
1.7 |
|
Gross debt |
59.1 |
47.7 |
45.4 |
43.6 |
41.7 |
39.9 |
38.1 |
|
Balance of Payments |
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|
Current account balance |
-2.5 |
-2.6 |
-0.5 |
0.0 |
0.4 |
0.7 |
1.0 |
|
Gross external debt |
67.0 |
65.4 |
61.6 |
58.5 |
55.4 |
52.4 |
49.5 |
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Sources: Central Bank of Iceland; Ministry of Finance; Statistics Iceland; and IMF staff projections. |
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1/ For 2025, policy rate as of May. |
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2/ In April 2025, an agreement was reached on the settlement of remaining outstanding liabilities in the IL Fund (HFF). |
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3/ 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. |
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4/ Cyclically-adjusted primary balance excluding one offs. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/iceland page.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
