Abstract
This paper discusses key findings of the First Review Under the Stand-By Arrangement for Iceland. Post-crisis dynamics has followed the expected pattern: a sharp drop in GDP, rapid decline in inflation, shift of the current account to balance, and gradual stabilization of currency and financial markets. Several quantitative and structural program targets were missed. The authorities and IMF staff have agreed that a faster pace of fiscal adjustment and more gradual pace of capital account liberalization would be the key toward preserving stability and sustainability.
Iceland: Fund Relations
(As of September 30, 2009)
I. Membership Status: Joined: December 27, 1945; Article VIII
II. General Resources Account:
| SDR Million | Percent Quota | |
| Quota | 117.60 | 100.00 |
| Fund holdings of currency | 658.97 | 560.35 |
| Reserve position in Fund | 18.63 | 15.84 |
| Holdings Exchange Rate |
| SDR Million | Percent Quota | |
| Quota | 117.60 | 100.00 |
| Fund holdings of currency | 658.97 | 560.35 |
| Reserve position in Fund | 18.63 | 15.84 |
| Holdings Exchange Rate |
III. SDR Department:
| SDR Million | Percent Allocation | |
| Net cumulative allocation | 112.18 | 100.00 |
| Holdings | 97.22 | 86.66 |
| SDR Million | Percent Allocation | |
| Net cumulative allocation | 112.18 | 100.00 |
| Holdings | 97.22 | 86.66 |
IV. Outstanding Purchases and Loans:
| SDR Million | Percent Quota | |
| Stand-By Arrangements | 560.00 | 476.19 |
| SDR Million | Percent Quota | |
| Stand-By Arrangements | 560.00 | 476.19 |
V. Latest financial Arrangements:
| Type | Date of Arrangement |
Expiration Date |
Amount Approved (SDR million) |
Amount Drawn (SDR million) |
|---|---|---|---|---|
| Stand-By | Nov 19,2008 | Nov 18,2010 | 1,400.00 | 560.00 |
| Type | Date of Arrangement |
Expiration Date |
Amount Approved (SDR million) |
Amount Drawn (SDR million) |
|---|---|---|---|---|
| Stand-By | Nov 19,2008 | Nov 18,2010 | 1,400.00 | 560.00 |
VI. Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Principal | 280.00 | 280.00 | |||
| Charges/Interest | 2.70 | 12.42 | 12.42 | 9.38 | 2.61 |
| Total | 2.70 | 12.42 | 12.42 | 289.38 | 282.61 |
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Principal | 280.00 | 280.00 | |||
| Charges/Interest | 2.70 | 12.42 | 12.42 | 9.38 | 2.61 |
| Total | 2.70 | 12.42 | 12.42 | 289.38 | 282.61 |
VII. Implementation of HIPC Initiative: Not applicable
VIII. Exchange Rate Arrangements: Icelandic krona is floating effective October 2008. Iceland has accepted Article VIII, Sections 2(a), 3, and 4 obligations, but maintains exchange restrictions subject to Fund approval arising from limitations imposed on the conversion and transfer of: (i) interest on bonds (whose transfer the FX rules apportion depending on the period of the holding); and (ii) the indexed portion of amortized principal on bonds. In addition, Iceland has in place measures that constitute exchange restrictions imposed for security reasons related to financial transactions based on UN Security Council Resolutions. Exchange restrictions arising from the rationing of foreign exchange in respect of certain imports were in place at the time of approval of the Stand-By arrangement, but they were lifted in November 2008.
IX. Safeguards Assessment: A first-time safeguards assessment of the CBI has been conducted in connection with the current Stand-By Arrangement. The assessment concluded that the CBI’s overall control environment was broadly appropriate for a small central bank, with good controls in the accounting and financial reporting area. The CBI’s external and internal audit procedures practices were not found to be in line with international practices, however, and the foreign reserves management area would benefit from development. Recommendations were made to strengthen the external audit process, improve the independence of the internal audit function, establish procedures and controls for the data reporting to the Fund, and review and further develop the CBI’s foreign reserves management operations. The authorities have already taken steps to implement these recommendations, notably by appointing an international audit firm under the auspices of the Auditor General to conduct annual external audits of the CBI in line with international standards, starting with financial year 2009.
X. Last Article IV Consultation: Discussion for the 2008 Article IV Consultation were held in Reykjavik during June 23–July 4, 2008. The Staff Report (Country Report No. 08/367) was considered by the Executive Board on September 10, 2008. Article IV consultations with Iceland are currently held on the 12–month cycle.
XI. Discussions for the First Review of the Stand-By Arrangements. Discussions were held during February 27-March 13, May 19–28, and July 14–17, 2009. The mission met with the Prime Minister, Ms. Sigurdardóttir; the Minister of Finance, Mr. Sigfússon; the Governor of the Central Bank of Iceland, Mr. Øygard; the Minister of Business Affairs, Mr. Magnússon; and other senior officials; as well as parliamentarians, CEOs of the new banks and Icelandic corporations, the employers federation and labor unions, representatives of creditors, and academics. The staff team comprised Mr. Flanagan (head), Ms. Chivakul and Messrs. Maliszewski and Lam (all EUR); Ms. Everaert (FAD); Ms. Christopherson (LEG); Mr. Cortavarria (MCM); and Ms. Stuart and Mr. Dohlman (SPR). The missions overlapped with technical assistance missions by MCM and LEG. The missions were assisted by Mr. Rozwadowski (resident representative). Messrs. Henriksson and Olafsson (OED) attended many meetings.
XII. Technical Assistance:
| Department | Purpose | Date |
|---|---|---|
| MCM | Foreign exchange regulation | November 2008 |
| FAD | Budget framework | January 2009 |
| MCM | Monetary operations | February 2009 |
| MCM | Capital account liberalization | February 2009 |
| LEG | Debt restructuring | February 2009 |
| FAD | Budget framework | May 2009 |
| MCM | Capital account liberalization | June 2009 |
| MCM | Public debt management | August 2009 |
| MCM | Monetary operations | September 2009 |
| STA | Monetary and financial statistics | September 2009 |
| FAD | Cash management | September 2009 |
| Department | Purpose | Date |
|---|---|---|
| MCM | Foreign exchange regulation | November 2008 |
| FAD | Budget framework | January 2009 |
| MCM | Monetary operations | February 2009 |
| MCM | Capital account liberalization | February 2009 |
| LEG | Debt restructuring | February 2009 |
| FAD | Budget framework | May 2009 |
| MCM | Capital account liberalization | June 2009 |
| MCM | Public debt management | August 2009 |
| MCM | Monetary operations | September 2009 |
| STA | Monetary and financial statistics | September 2009 |
| FAD | Cash management | September 2009 |
XIII. Resident Representative:
Mr. Franek Rozwadowski assumed the position in March 2009.