IMF Executive Board Concludes 2026 Article IV Consultation with Iceland
IMF News, July 30, 2026
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- Published: July 30, 2026
Key messages and risks
- Tight macroeconomic policies have helped slow domestic demand, but wage growth and inflation remain elevated, raising concerns about a de-anchoring of inflation expectations and erosion of export competitiveness.
- The economy is projected to recover, led by a rebound in net trade, while inflation is expected to remain elevated in the near term.
- Risks to growth are tilted to the downside while risks to inflation are to the upside.
- Policy priorities: return inflation sustainably to target, anchor inflation expectations, and increase resilience to shocks by further building fiscal buffers and advancing productivity-enhancing structural reforms.
Economic activity and outlook
- 2025: GDP expanded by 1.3 percent after a 1.3 percent contraction in 2024.
- Drivers in 2025: private consumption (supported by strong wage growth) and investment (continued expansion of data centers), with significant import leakages; exports remained subdued partly due to idiosyncratic shocks.
- Labor market: has cooled though wage and inflation pressures persist.
- Growth projections:
- 2026: 1.8 percent
- 2027: 2.1 percent
- 2028: 2.4 percent (table projection)
- Inflation projections:
- 2026: around 5.2 percent (average)
- 2027: 3.2 percent (average)
- Decline toward the 2.5 percent target projected in early 2028
- Output gap status: negative output gap acknowledged despite elevated inflation.
- Key downside risks: escalation of geopolitical tensions, stronger‑than‑expected wage growth, disruptions to key export sectors.
- Medium-term growth: prospects remain favorable, supported by diversification toward new export-oriented sectors.
Fiscal assessment and recommendations
- Fiscal stance: appropriately contractionary; medium-term fiscal targets are appropriately ambitious and should be fully implemented.
- Policy role: fiscal stance in 2026 and beyond will help lower inflation and build buffers.
- VAT on fuel: the temporary reduction should remain time-bound and be phased out as planned.
- Medium-term targets: place public debt on a firm downward trajectory; sustained discipline and credible medium-term planning needed given longer-term spending pressures from healthcare and infrastructure.
- Fiscal risk management and revenue/options:
- Scope to raise revenues and reduce spending if needed to meet MTFS targets, mitigate long-term spending pressures, or scale up infrastructure investment.
- Options include raising the preferential VAT rate and/or narrowing its coverage, increasing housing-related taxation, streamlining R&D support, and further rationalizing public spending, including through spending efficiency and public sector wage restraint.
- State-owned infrastructure company: could help mobilize financing but should have strong safeguards to contain fiscal risks, including careful monitoring and transparent recording of contingent liabilities and off-balance-sheet exposures.
- Strengthening fiscal framework:
- The amended fiscal rule should help contain spending and reduce procyclicality.
- Meaningful increase in Fiscal Council capacity and resources is needed.
- Recommend regular publication of timely and independently-verifiable quarterly fiscal data consistent with the fiscal-rule perimeter.
- Expand coverage of the budget and fiscal rules to the entirety of the central government to improve transparency.
Monetary policy, reserves, and external position
- Monetary stance: appropriately restrictive; vigilance warranted alongside clear and forceful communication.
- Further tightening may be needed in the near term if inflationary pressures persist or intensify.
- Policy should remain restrictive until inflation and inflation expectations are firmly anchored at target.
- Strengthen communication, including use of alternative scenarios; transition toward a more forecast-based inflation targeting framework as uncertainty recedes.
- Reserves: adequate for precautionary purposes.
- Recommendation to further strengthen foreign exchange reserves toward the upper end of the Fund’s ARA range to enhance resilience.
- Deepen the foreign exchange market to support broader market participation and improve hedging opportunities.
- External position: current account deficit widened in 2025 due to imports for data centers and other idiosyncratic factors; external position assessed to be moderately weaker than implied by fundamentals and desirable policies.
Financial sector and macroprudential stance
- Systemic risks: contained; macroprudential stance broadly appropriate.
- Banking sector: banks remain well-capitalized, profitable, and liquid, with strong asset quality.
- Vulnerabilities: parts of the corporate sector—notably construction and tourism-related activities—require vigilance.
- Borrower-based measures: should remain broadly unchanged for now, given the slowing housing market.
- CPI-indexed mortgages: reducing reliance may strengthen monetary transmission over time but should be carefully timed and sequenced given their role in borrower resilience and financial stability.
- Financial sector reforms and priorities:
- Build on FSAP implementation progress.
- Strengthen pension fund governance and safeguard independence of financial supervision.
- Strengthen operational resilience, including against cyber and payments-related risks.
Structural reforms and EU/euro considerations
- Structural reform priorities to raise productivity and diversification:
- Reduce regulatory barriers and streamline licensing and permitting processes.
- Address skills shortages through education reform, vocational training, and improved reskilling.
- Reform wage-setting arrangements to better align wage growth with productivity and the inflation target.
- Close infrastructure gaps.
- Improve efficiency of R&D support and strengthen the broader innovation ecosystem.
- Growth Plan to 2035: well aligned with priorities; successful implementation requires strong cross-ministerial coordination, prioritization, monitoring and reporting.
- EU accession and euro adoption: ultimately political choices.
- Potential benefits: deeper integration and potential credibility gains.
- Trade-offs: loss of independent monetary policy and exchange rate flexibility.
- Preconditions if process moves forward: maintain low inflation, sound public finances, exchange rate aligned with fundamentals, advance structural reforms to increase productivity, and align wages with productivity to safeguard stability and competitiveness.
Key selected indicators (as reported)
- GDP growth (annual percent change): 2021: 5.2; 2022: 8.9; 2023: 5.0; 2024: -1.3; 2025: 1.3; 2026: 1.8; 2027: 2.1; 2028: 2.4
- Total domestic demand (percent change): 2021: 7.9; 2022: 8.0; 2023: 2.5; 2024: 1.4; 2025: 3.9; 2026: 0.4
- Private consumption (percent change): 2021: 8.1; 2022: 7.6; 2023: 0.9; 2024: 4.3; 2025: 1.7
- Gross fixed investment (percent change): 2021: 13.5; 2022: 15.3; 2023: 6.2; 2024: 6.5; 2025: 4.0; 2026: -2.9; 2027: 2.7; 2028: 3.2; 2029: 3.6
- Net exports (contribution to growth): 2021: -2.8; 2022: 0.6; 2023: -2.6; 2024: -2.7; 2025: -0.1; 2026: -0.2; 2027: -0.3
- Exports of goods and services (percent change): 2021: 12.4; 2022: 26.1; 2023: -2.2; 2024: 1.0; 2025: 0.5; 2026: 3.5; 2027: 3.1
- Imports of goods and services (percent change): 2021: 20.3; 2022: 22.6; 2023: -1.9; 2024: 4.2; 2025: 7.2; 2026: -2.4; 2027: 3.8; 2028: 3.4
- Output gap (percent of potential output): 2021: -3.8; 2022: 1.6; 2023: 0.3; 2024: 0.0
- GDP (ISK bn.): 2021: 3,332; 2022: 3,947; 2023: 4,373; 2024: 4,578; 2025: 4,956; 2026: 5,351; 2027: 5,645; 2028: 5,937; 2029: 6,259; 2030: 6,590; 2031: 6,937
- GDP ($ Mn.): 2021: 26,235; 2022: 29,176; 2023: 31,702; 2024: 33,187; 2025: 38,583; 2026: 43,664; 2027: 46,316; 2028: 48,777; 2029: 51,189; 2030: 53,619; 2031: 56,153
- GDP per capita ($ thousands): 2021: 73.2; 2022: 80.0; 2023: 84.5; 2024: 86.5; 2025: 99.1; 2026: 109.7; 2027: 114.0; 2028: 117.6; 2029: 121.0; 2030: 124.2; 2031: 127.5
- Private consumption (percent of GDP): 2021: 51.2; 2022: 49.8; 2023: 48.7; 2024: 49.1; 2025: 49.6; 2026: 49.2; 2027: 48.9; 2028: 48.8
- Gross fixed investment (percent of GDP): 2021: 22.5; 2022: 23.8; 2023: 24.9; 2024: 26.8; 2025: 26.7; 2026: 24.6; 2027: 24.8; 2028: 25.0; 2029: 25.4; 2030: 25.6
- Gross national saving (percent of GDP): 2021: 20.2; 2022: 24.2; 2023: 23.0; 2024: 23.3; 2025: 24.0; 2026: 24.5
- Unemployment rate (percent of labor force): 2021: 5.8
- Employment (percent change): 2022: 7.0; 2023: 4.1; 2024: -0.6; 2025: -0.4; 2026: 1.1
- Labor productivity (percent change): 2021: -5.1; 2022: 1.9; 2023: 2.2
- Real wages (percent change): 2021: 3.7; 2022: 0.7
- Nominal wages (percent change): 2021: 8.3; 2022: 9.8; 2023: 6.6; 2024: 4.5
- Consumer price index (average): 2021: 8.7; 2022: 5.9
- Consumer price index (end period): 2021: 5.1; 2022: 9.6; 2023: 7.7; 2024: 4.7; 2025: 2.6
- Core CPI (average): 2021: 8.6; 2022: 6.1
- ISK/€ (average): 2021: 148; 2022: 159; 2023: 163; 2024: 164; 2025: 152
- ISK/$ (average): 2021: 127; 2022: 135; 2023: 138; 2024: 128
- Terms of trade (average): 2021: -4.9; 2022: -0.7; 2023: 0.1
- Base money (M0) (end period percent change): 2021: 9.0; 2022: -21.5; 2023: 16.7; 2024: 2.9; 2025: 11.8; 2026: 10.9; 2027: 9.9; 2028: 9.2
- Broad money (M3) (end period percent change): 2021: 11.7; 2022: 5.6; 2023: 9.5; 2024: 6.7
- Credit to nonfinancial private sector (end period percent change): 2021: 10.5; 2022: 11.3; 2023: 5.3; 2024: 6.3; 2025: 5.7
- Central bank 7 day term deposit rate (percent): 2021: 2.00; 2022: 6.00; 2023: 9.25; 2024: 8.50; 2025: 7.25; 2026: 7.75 (For 2026, policy rate as of the May MPC meeting.)
- General government revenue (percent of GDP): 2021: 40.7; 2022: 42.3; 2023: 43.1; 2024: 42.9; 2025: 42.6; 2026: 43.2; 2027: 43.6; 2028: 43.7; 2029: 43.8
- General government expenditure (percent of GDP): 2021: 46.2; 2022: 45.2; 2023: 47.1; 2024: 45.0; 2025: 44.7; 2026: 44.2; 2027: 44.1; 2028: 44.0; 2029: 43.9
- Overall balance (percent of GDP): 2021: -8.0; 2022: -2.1; 2023: -4.2; 2024: -1.4
- Structural primary balance (percent of GDP): 2021: 2.0
- Gross debt (percent of GDP): 2021: 73.6; 2022: 66.4; 2023: 61.5; 2024: 60.4; 2025: 56.1; 2026: 54.7; 2027: 53.2; 2028: 52.3; 2029: 50.7; 2030: 49.3; 2031: 48.2
- Net debt (percent of GDP): 2021: 58.8; 2022: 55.3; 2023: 52.1; 2024: 50.4; 2025: 45.8; 2026: 45.1; 2027: 42.5; 2028: 41.5; 2029: 40.8
- Current account balance (percent of GDP): 2021: -1.7; 2022: -3.2; 2023: -3.6; 2024: -0.5; 2025: 0.2
- Services balance (percent of GDP): 2021: 7.4; 2022: 5.5; 2023: 6.4; 2024: 6.8
- Capital and financial account (+ = outflow) (percent of GDP): 2021: -1.0; 2022: -3.0
- Direct investment, net (+ = outflow) (percent of GDP): 2021: -3.9; 2022: -4.8; 2023: -7.6
- Gross external debt (percent of GDP): 2021: 83.1; 2022: 74.3; 2023: 73.7; 2024: 67.9; 2025: 61.7; 2026: 56.0; 2027: 54.2; 2028: 52.8; 2029: 51.5
- Central bank reserves ($ Mn.): 2021: 7,091; 2022: 5,879; 2023: 5,720; 2024: 6,387; 2025: 7,643; 2026: 7,916; 2027: 8,248; 2028: 8,565; 2029: 8,978; 2030: 9,308; 2031: 9,642
Source: IMF press release, July 30, 2026.
