Front Matter Page
INTERNATIONAL MONETARY FUND
IMF Country Report No. 19/375
ICELAND
2019 ARTICLE IV CONSULTATION—PRESS RELEASE AND STAFF REPORT
December 2019
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Iceland, the following documents have been released and are included in this package:
A Press Release.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on laps-of-time basis, following discussions that ended on November 12, 2019, with the officials of Iceland on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 4, 2019.
An Informational Annex prepared by the IMF staff.
The documents listed below have been or will be separately released. Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2019 International Monetary Fund
Iceland: Selected Economic Indicators, 2015-19
For 2019, rate as of November 21.
Data for 2018 are preliminary.
Actual data include accrued interest payments on intracompany debt held by a large multinational; projected data do not.
Data reflect the impact of the bank estates’ compositions.
Iceland: Selected Economic Indicators, 2015-19
| 2015 | 2016 | 2017 | 2018 | 2019 Proj. | |
|---|---|---|---|---|---|
| (Percentage change unless otherwise indicated) | |||||
| National Accounts (constant prices) | |||||
| Gross domestic product | 4.7 | 6.6 | 4.4 | 4.8 | 0.3 |
| Total domestic demand | 5.9 | 7.5 | 7.0 | 4.7 | -0.3 |
| Private consumption | 4.5 | 7.2 | 8.1 | 4.7 | 1.9 |
| Public consumption | 1.1 | 1.9 | 3.7 | 3.5 | 2.9 |
| Gross fixed investment | 21.3 | 17.8 | 10.2 | 4.0 | -8.9 |
| Net exports (contribution to growth) | -0.5 | -0.2 | -2.0 | 0.4 | 0.6 |
| Exports of goods and services | 9.1 | 10.9 | 5.4 | 1.7 | -4.9 |
| Imports of goods and services | 13.8 | 14.5 | 12.3 | 0.8 | -7.3 |
| Output gap (percent of potential output) | -0.7 | 1.2 | 1.1 | 1.7 | -0.3 |
| Selected Indicators | |||||
| Gross domestic product (ISK bn.) | 2,294 | 2,491 | 2,613 | 2,812 | 2,931 |
| GDP per capita ($ thousands) | 52.8 | 62.0 | 72.3 | 74.5 | 66.3 |
| Private consumption (percent of GDP) | 50.0 | 49.6 | 50.4 | 50.6 | 51.5 |
| Public consumption (percent of GDP) | 23.3 | 22.9 | 23.5 | 23.7 | 24.7 |
| Gross fixed investment (percent of GDP) | 19.4 | 21.1 | 21.9 | 22.3 | 20.2 |
| Gross national saving (percent of GDP) | 24.7 | 28.8 | 25.7 | 25.5 | 23.5 |
| Unemployment rate (percent of labor force) | 4.0 | 3.0 | 2.8 | 2.7 | 3.7 |
| Employment | 3.4 | 3.7 | 1.8 | 2.3 | 1.3 |
| Labor productivity | 1.4 | 3.5 | 3.4 | 2.1 | -0.9 |
| Real wages | 5.7 | 7.3 | 7.3 | 1.7 | 1.9 |
| Nominal wages | 7.4 | 9.1 | 9.2 | 4.5 | 4.8 |
| Consumer price index (average) | 1.6 | 1.7 | 1.8 | 2.7 | 3.0 |
| Consumer price index (end period) | 2.0 | 1.9 | 1.9 | 3.7 | 2.6 |
| ISK/€ (average) | 146 | 134 | 121 | 128 | |
| ISK/$ (average) | 132 | 121 | 107 | 108 | |
| Terms of trade (average) | 6.7 | 2.4 | 1.7 | -3.6 | -2.1 |
| Money and Credit (end period) | |||||
| Base money (M0) | 27.8 | 3.0 | 37.9 | -1.7 | 3.4 |
| Broad money (M3) | 5.6 | -4.6 | 5.0 | 7.0 | 5.2 |
| Bank credit to nonfinancial private sector | 3.5 | 4.4 | 9.2 | 11.9 | 3.4 |
| Central bank 7-day term deposit rate 1/ | 5.75 | 5.00 | 4.25 | 4.50 | 3.00 |
| (Percent of GDP unless otherwise indicated) | |||||
| General Government Finances 2/ | |||||
| Revenue | 40.6 | 56.9 | 43.6 | 42.8 | 40.6 |
| Expenditure | 41.4 | 44.5 | 43.0 | 42.0 | 40.9 |
| Overall balance | -0.8 | 12.4 | 0.5 | 0.8 | -0.3 |
| Structural primary balance | 2.8 | 3.4 | 1.8 | 1.4 | 1.1 |
| Gross debt | 65.0 | 51.2 | 43.3 | 35.9 | 29.8 |
| Net debt | 47.4 | 39.7 | 35.8 | 27.6 | 26.7 |
| Balance of Payments | |||||
| Current account balance 3/ | 5.1 | 7.6 | 3.8 | 2.8 | 2.9 |
| Capital and financial account (+ = outflow) | 5.0 | 8.8 | 2.0 | 6.5 | 2.8 |
| Gross external debt 4/ | 175.7 | 125.2 | 90.0 | 73.3 | 74.0 |
| Central bank reserves ($ bn.) | 5.0 | 7.2 | 6.6 | 6.1 | 6.2 |
For 2019, rate as of November 21.
Data for 2018 are preliminary.
Actual data include accrued interest payments on intracompany debt held by a large multinational; projected data do not.
Data reflect the impact of the bank estates’ compositions.
Iceland: Selected Economic Indicators, 2015-19
| 2015 | 2016 | 2017 | 2018 | 2019 Proj. | |
|---|---|---|---|---|---|
| (Percentage change unless otherwise indicated) | |||||
| National Accounts (constant prices) | |||||
| Gross domestic product | 4.7 | 6.6 | 4.4 | 4.8 | 0.3 |
| Total domestic demand | 5.9 | 7.5 | 7.0 | 4.7 | -0.3 |
| Private consumption | 4.5 | 7.2 | 8.1 | 4.7 | 1.9 |
| Public consumption | 1.1 | 1.9 | 3.7 | 3.5 | 2.9 |
| Gross fixed investment | 21.3 | 17.8 | 10.2 | 4.0 | -8.9 |
| Net exports (contribution to growth) | -0.5 | -0.2 | -2.0 | 0.4 | 0.6 |
| Exports of goods and services | 9.1 | 10.9 | 5.4 | 1.7 | -4.9 |
| Imports of goods and services | 13.8 | 14.5 | 12.3 | 0.8 | -7.3 |
| Output gap (percent of potential output) | -0.7 | 1.2 | 1.1 | 1.7 | -0.3 |
| Selected Indicators | |||||
| Gross domestic product (ISK bn.) | 2,294 | 2,491 | 2,613 | 2,812 | 2,931 |
| GDP per capita ($ thousands) | 52.8 | 62.0 | 72.3 | 74.5 | 66.3 |
| Private consumption (percent of GDP) | 50.0 | 49.6 | 50.4 | 50.6 | 51.5 |
| Public consumption (percent of GDP) | 23.3 | 22.9 | 23.5 | 23.7 | 24.7 |
| Gross fixed investment (percent of GDP) | 19.4 | 21.1 | 21.9 | 22.3 | 20.2 |
| Gross national saving (percent of GDP) | 24.7 | 28.8 | 25.7 | 25.5 | 23.5 |
| Unemployment rate (percent of labor force) | 4.0 | 3.0 | 2.8 | 2.7 | 3.7 |
| Employment | 3.4 | 3.7 | 1.8 | 2.3 | 1.3 |
| Labor productivity | 1.4 | 3.5 | 3.4 | 2.1 | -0.9 |
| Real wages | 5.7 | 7.3 | 7.3 | 1.7 | 1.9 |
| Nominal wages | 7.4 | 9.1 | 9.2 | 4.5 | 4.8 |
| Consumer price index (average) | 1.6 | 1.7 | 1.8 | 2.7 | 3.0 |
| Consumer price index (end period) | 2.0 | 1.9 | 1.9 | 3.7 | 2.6 |
| ISK/€ (average) | 146 | 134 | 121 | 128 | |
| ISK/$ (average) | 132 | 121 | 107 | 108 | |
| Terms of trade (average) | 6.7 | 2.4 | 1.7 | -3.6 | -2.1 |
| Money and Credit (end period) | |||||
| Base money (M0) | 27.8 | 3.0 | 37.9 | -1.7 | 3.4 |
| Broad money (M3) | 5.6 | -4.6 | 5.0 | 7.0 | 5.2 |
| Bank credit to nonfinancial private sector | 3.5 | 4.4 | 9.2 | 11.9 | 3.4 |
| Central bank 7-day term deposit rate 1/ | 5.75 | 5.00 | 4.25 | 4.50 | 3.00 |
| (Percent of GDP unless otherwise indicated) | |||||
| General Government Finances 2/ | |||||
| Revenue | 40.6 | 56.9 | 43.6 | 42.8 | 40.6 |
| Expenditure | 41.4 | 44.5 | 43.0 | 42.0 | 40.9 |
| Overall balance | -0.8 | 12.4 | 0.5 | 0.8 | -0.3 |
| Structural primary balance | 2.8 | 3.4 | 1.8 | 1.4 | 1.1 |
| Gross debt | 65.0 | 51.2 | 43.3 | 35.9 | 29.8 |
| Net debt | 47.4 | 39.7 | 35.8 | 27.6 | 26.7 |
| Balance of Payments | |||||
| Current account balance 3/ | 5.1 | 7.6 | 3.8 | 2.8 | 2.9 |
| Capital and financial account (+ = outflow) | 5.0 | 8.8 | 2.0 | 6.5 | 2.8 |
| Gross external debt 4/ | 175.7 | 125.2 | 90.0 | 73.3 | 74.0 |
| Central bank reserves ($ bn.) | 5.0 | 7.2 | 6.6 | 6.1 | 6.2 |
For 2019, rate as of November 21.
Data for 2018 are preliminary.
Actual data include accrued interest payments on intracompany debt held by a large multinational; projected data do not.
Data reflect the impact of the bank estates’ compositions.
Front Matter Page
INTERNATIONAL MONETARY FUND
ICELAND
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION
December 4, 2019
KEY ISSUES
After years of robust growth, economic activity has significantly weakened. Supply disruptions in tourism, the engine of recent growth, and the associated uncertainty have triggered a drop in domestic demand and an increase in unemployment. A swift policy response, with fiscal relaxation and monetary easing, has stabilized expectations and cushioned the effects. A moderate but fragile growth recovery is expected in 2020.
Significant downside risks weigh on the outlook. World trade tensions and weaker than expected global growth, the UK’s still uncertain Brexit process, worsening of tourism activity in Iceland, and pressures in financial markets or payments due to Iceland’s grey-listing by the FATF could negatively impact the economy.
The authorities’ policy mix is appropriate. With output near potential, a neutral policy stance will keep debt on a downward path in the medium term. With inflation expectations near the target, the projected baseline economic outlook, and lagged expected effects of recent policy cuts, further monetary policy easing is not immediately needed. Policy space is available, and further easing would be warranted if economic conditions deteriorate significantly.
Macroprudential measures are helping to preserve buffers for managing financial stability risks. Macroprudential policies are adequate, given still elevated household debt and real estate prices and benign external financing conditions. Looking forward, the macroprudential toolkit could be expanded to contain potential risks in the loan portfolio over the medium term.
Reforms should strengthen the financial sector oversight architecture and the AML/CFT framework. The approved merger of the supervisory authority and the central bank should enhance the synergies between the oversight, lender-of-last resort, and resolution functions. Full and swift implementation of the FATF recommendations is needed to improve effectiveness of the AML/CFT framework.
Structural reforms could reignite Iceland’s long-term growth. Ongoing education reforms would boost human capital and productivity, greater transparency of large unlisted companies would preserve the business environment, and strategic policies in tourism and fisheries would protect the sustainability of traditional economic sectors.
Approved By
Julie Kozack (EUR) and Kristina Kostial (SPR)
Discussions took place in Reykjavik during October 30-November 12, 2019. The team comprised Iva Petrova (head), Jorge Canales-Kriljenko, Davide Malacrino, and Seng Guan Toh (all EUR) and Carolina Claver (LEG). Jon Sigurgeirsson (OED) observed. The mission met with senior officials from the government, the central bank, and the financial supervisory authority, as well as representatives from trade unions and the business and financial community. Chikako Baba (EUR) supported the mission from headquarters. Chun Jin and Indra Mahadewa (both EUR) provided analytical and administrative support.
Contents
AT A GLANCE
THE SETTING
A. Recent Indicators
B. Baseline Outlook
C. Risks Around the Baseline
MACROECONOMIC POLICIES
A. Fiscal and Public Debt Management Policy
B. Monetary, Exchange Rate, and Reserve Management Policy
C. Macroprudential and Capital Flow Management Policy
FINANCIAL SECTOR OVERSIGHT
A. Financial Oversight Architecture Reform
B. Strengthening the AML/CFT Framework
STRUCTURAL REFORMS
STAFF APPRAISAL
BOXES
1. Revised Fiscal Policy Statement and Medium-Term Plan
2. External Sector Assessment
TABLES
1. Selected Economic Indicators, 2015-24
2. Money and Banking, 2015-24
3. Financial Soundness Indicators, 2015Q4-19Q3
4. General Government Operations, 2015-24
5. General Government Financial Balance Sheet, 2015-24
6. Balance of Payments, 2015-24
7. International Investment Position, 2009-18
ANNEXES
I. Responses to Past Policy Recommendations
II. Risk Assessment Matrix
III. Public Sector Debt Sustainability Analysis
IV. External Debt Sustainability Analysis
V. The Real Estate Market in Iceland
VI. Foreign Reserves and the Build-up of Excess Structural Liquidity
VII. Iceland’s Financial Oversight Architecture Reform
VIII. Strengthening Iceland’s AML/CFT Framework
Front Matter Page
Press Release No. 19/475
FOR IMMEDIATE RELEASE
December 19, 2019
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Front Matter Page
INTERNATIONAL MONETARY FUND
ICELAND
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
December 4, 2019
Prepared By
The European Department
(in consultation with other departments)
Contents
FUND RELATIONS
STATISTICAL ISSUES
