Iceland: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
IMF Staff Country Reports, June 22, 2016
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- Iceland: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
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Bibliographic details
- Published: June 22, 2016
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781475563603.002
Assessment and Overview
- Provides an assessment of the economic conditions, outlook, and crises in Iceland.
- Recent settlements with the bank estates are described as "a huge step forward, improving already favorable macroeconomic conditions."
- There is "a mounting sense that capital controls hurt growth prospects, repressing local financial markets, scaring foreign investors, and impeding savings diversification, and that it is time for them to go."
Growth Performance and Outlook
- Real GDP expansion was "4 percent in 2015 and gaining pace," described as "among the fastest growing in Europe."
- The expansion is "opening up a positive output gap."
Financial Sector and Capital Account
- Capital controls are characterized as harming growth prospects by:
- Repressing local financial markets.
- Scaring foreign investors.
- Impeding savings diversification.
- Recent settlements with the bank estates are highlighted as materially improving macroeconomic conditions.
Risks and Vulnerabilities
- The report identifies overheating as "the biggest risk for Iceland."
- Contributing factors to overheating include "Large wage awards on top of already hot economic readings" and a history of boom-bust dynamics ("Iceland’s boom-bust history").
Key Findings (bulleted)
- "Capital controls hurt growth prospects" and there is momentum toward removal.
- Bank estate settlements significantly strengthen the outlook.
- Real GDP growth: "4 percent in 2015 and gaining pace."
- Economic expansion is creating "a positive output gap."
- Main risk: overheating driven by wage dynamics and strong demand.
Policy Implications and Recommendations
- Implicit policy direction: consider removal of capital controls given their negative effects on markets, investment, and savings diversification ("it is time for them to go").
- Continue to monitor wage developments and demand pressures to contain overheating risk.
Iceland: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland