Iceland: Staff Report for the 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussions—Informational Annex
Author:
International Monetary Fund. European Dept.
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Publication Date:
13 Mar 2015
eISBN:
9781498398893
Language:
English
Keywords:
ISCR; CR; inflation expectation; balance of payments; crisis legacy; liberalization strategy; cash flow; statistics standard; broad money measure; inflation-indexed loan; research and development expenditure; Exchange rate arrangements
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This 2014 Article IV Consultation highlights that Iceland has reached a relatively strong macroeconomic position with good growth prospects. Unemployment continues to trend down, now at 4 percent. Growth is expected to pick up to about 3 percent over 2015–17, supported by robust domestic demand and tourism. Consumption will be boosted by household debt relief and—together with net trade—will benefit from favorable commodity prices. Good progress has also been made in improving the financial stability framework, but gaps remain.

Abstract

This 2014 Article IV Consultation highlights that Iceland has reached a relatively strong macroeconomic position with good growth prospects. Unemployment continues to trend down, now at 4 percent. Growth is expected to pick up to about 3 percent over 2015–17, supported by robust domestic demand and tourism. Consumption will be boosted by household debt relief and—together with net trade—will benefit from favorable commodity prices. Good progress has also been made in improving the financial stability framework, but gaps remain.

Fund Relations

(As of January 31, 2015)

Membership Status: Iceland became a member of the Fund on December 27, 1945

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to the Fund 1 (SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative: Not applicable.

Implementation of Multilateral Debt Relief Initiative (MDRI): Not applicable.

Implementation of Post-Catastrophe Debt Relief (PCDR): Not applicable.

Exchange Rate Arrangements: The Icelandic króna is floating effective October 2008. Iceland accepted the obligations under Article VIII, Sections 2(a), 3, and 4 but maintains exchange restrictions 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), (ii) the principal payments from holdings of amortizing bonds, and (iii) payments on the indexation of principal from holdings of amortizing bonds. The retention of the three exchange restrictions was first approved by the Executive Board on April 6, 2012 (Decision No. 15133-(12/35)) and subsequently extended in March 2013 (Decision No. 15335-(13/25) and further in March, 2014 until March 6, 2015 (Decision No. 15552-(14/22). 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. The de jure exchange rate arrangement is free floating and the de facto exchange rate arrangement is classified as floating. Since the króna followed an appreciating trend within a 2 percent band against the euro in 2014, the de facto exchange rate arrangement is currently under review for possible revision to crawl-like as of January 2014.

Safeguards Assessment: The 2009 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. The authorities have since taken steps to implement safeguard recommendations, notably by appointing an international audit firm to conduct annual external audits of the CBI in line with international standards, establishing an internal audit function and appointing a Chief Audit Executive per the board approved charter. Additionally, new reserves management guidelines were approved in 2012. Work on the remaining recommendation—amendments to the Central Bank Act—remains in progress.

Last Article IV Consultation: Discussions for the 2013 Article IV Consultation were held in Reykjavik during June 4-14, 2013. The Staff Report (country report No. 13/256) was considered by the Executive Board on August 1, 2013. Article IV consultations with Iceland are currently held on a 12-month cycle.

ROSC: A Basel Core Principles for Effective Banking Supervision (BCP) ROSC was published in August 2014.

Technical Assistance:

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Statistical Issues

Data provision to the Fund is adequate for surveillance purposes. Iceland subscribed to the Special Data Dissemination Standard (SDDS) in 1996, and is in observance of the SDDS specifications for coverage, periodicity, and timeliness, but uses a flexibility option on the timeliness and periodicity for the production index and the producer price index (PPI). The Statistics Department (STA) prepared a data module of the Report on the Observance of Standards and Codes (data ROSC) that was published on November 22, 2005.

Data on a wide range of economic and financial variables are provided to the Fund in a timely manner during and between consultations. In addition to periodic press releases, statistical information is disseminated to the public through a range of monthly, quarterly, and annual publications by three main institutions (The Central Bank of Iceland (CBI), the Ministry of Finance, and Statistics Iceland), and is available on their internet sites. Provision of electronic data in English has improved substantially in recent years, especially from Statistics Iceland.

The existing methodological framework for producing national accounts data was replaced in September 2014 with the new European System of Accounts (ESA 2010). Statistics Iceland (SI) published revisions of national accounts calculated backwards to 1997. Alongside the implementation of ESA 2010, additional new statistics standards, improved benchmarks and sources of data have been introduced. The main methodological changes which were introduced are:

• Recognition that expenditure on research and development (R&D) has the nature of investment. Research and development expenditure is recorded as gross fixed capital formation and no longer as current expenditure. This increased the level of yearly GDP by 1.4 percent on average. The impact on gross fixed capital formation is a level raise by 7.5 -17.3 percent per year.

• Thorough revision of the methodology for calculating financial intermediation services indirectly measured (FISIM). According to Chapter 14 of ESA 2010 FISIM are calculated as the the difference between the loan rates and reference rates, or reference rates and the deposit rates, multiplied by the corresponding stock of loans or deposits. SI defined the reference rates as the weighted average of monthly loans and deposit rates for each type of loan. In volume terms, FISIM are calculated based on the CPI published by SI in regard to the general price index for resident non-indexed and inflation-indexed loans and deposits. The narrow trade index and OECD World CPI are used for currency-linked and foreign currency loans and deposits as is used for foreign private consumption. Due to the different methodology as well as improved sources of data, there is a drastic change in the FISIM data during the boom-bust years (2006-09), especially in relation to private consumption and exports.

• A new standard for foreign trade statistics which resulted in transfer between trade in goods to trade in services was introduced.

• Measures of illegal activities were added to the household final consumption statistics increasing the GDP by less than 0.5%.

• Other minor methodological changes affected the investment, public consumption, and private consumption accounts, and also resulted in a marginal increase of about 0.5% to 1% of GDP over the revision period.

In December 2014, the authorities (CBI) raised an issue about the quality and interpretation of Statistics Iceland’s Q3 data, particularly on domestic demand and inventories. The mission and CBI discussed the issue with Statistics Iceland, which resulted in the conclusion that the difficulties with dealing with Iceland’s national accounts data stem mainly from high seasonality and volatility of the quarterly data. This data pattern particularly affects inventories, but also consumption and deflators in a given quarter. Looking into and adopting best practices from the countries with similar data patterns are advisable to better adjust for volatility in the quarterly data.

The authorities publish a Treasury cash flow statement on a monthly basis, quarterly data on the general government operations, and annual data on the general government operations and financial assets and liabilities.

Iceland reports government finance statistics in accordance with the GFSM 2001 framework in the GFS Yearbook, and is an up-to-date contributor to the International Financial Statistics (IFS). Fiscal data was revised in autumn 2014 to reflect changes in treatment of capital expenditure and research and development. The 2014 preliminary accounts reflect a number of one-off items related to revenues generated by the financial sector. The accounting treatment of these items will be revisited when the final GFS accounts are finalized during 2015.

In September 2014, the CBI concluded the migration of the balance of payments (BOP) and International Investment Position (IIP) to the 6th edition of the Balance of Payments Manual (BPM6), and published for the first time BOP statistics (Q2 2014) using the new standards. The new standards take the place of the 5th edition, implemented in Iceland since 1996. The changes will affect foreign direct investment, external trade in goods and services, and insurance, pension, and standardized guarantee schemes that will be included with financial assets and liabilities. In addition to better reflecting Iceland’s external trade and IIP positions, the migration to BPM6 ensured compliance to most recent standards, as well as greater consistency with other statistical reporting standards, such as the System of National Accounts. It also improved overall transparency, presentation, and comparability with other countries.

On monetary and financial statistics, the concepts and definitions broadly conform to the guidelines of the Monetary and Financial Statistics Manual (MFSM). Departing from the MFSM, M3/Broad Money measure includes deposits of the central government, positions of commercial banks with private nonfinancial corporations include some positions with public nonfinancial corporations, and the latter include some positions with private nonfinancial corporations. Beginning in February 2010, the CBI reports for publication in IFS monetary data for central bank and other depository corporations using the Standardized Report Forms (SRFs).

Iceland: Table of Common Indicators Required for Surveillance

(As of February 13, 2015)

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1

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section

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Cover IMF Staff Country Reports
Iceland: 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussions-Staff Report; Press Release; and Statement by the Executive Director for Iceland
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 072
Publisher:
International Monetary Fund
ISBN:
9781498398893
ISSN:
1934-7685
Pages:
67
DOI:
https://doi.org/10.5089/9781498398893.002