Abstract
IMF Country Report No. 21/106
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IMF Country Report No. 21/106
ICELAND
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; STAFF STATEMENT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ICELAND
June 2021
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 2021 Article IV consultation with Iceland, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 4, 2021 consideration of the staff report that concluded the Article IV consultation with Iceland.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 4, 2021, following discussions that ended on April 16, 2021, 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 May 12, 2021.
An Informational Annex prepared by the IMF staff.
A Statement by the Staff Representative for Iceland.
A Statement by the Executive Director for Iceland.
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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© 2021 International Monetary Fund
Press Release
PR21/164
IMF Executive Board Concludes 2021 Article IV Consultation with Iceland
FOR IMMEDIATE RELEASE
Washington, DC – June 8, 2021: On June 4, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Iceland.
Iceland entered the COVID-19 crisis from a position of strength and stands favorably in its handling of the pandemic. Net and gross public debt have declined by more than 50 percentage points of GDP since the Global Financial Crisis, private and external debt have declined by 200 percent of GDP, and international reserves have reached around 30 percent of GDP. Banks’ balance sheets have been strong, with significant capital and liquidity buffers. The available policy space allowed for a prompt and substantial policy response to the pandemic, with fiscal, monetary, and macroprudential measures alleviating the impact on households and firms. The COVID-19 cases were contained fast, and vaccinations have progressed as planned, with more than 60 percent of the population above age 16 having received at least one dose.
Nonetheless, the impact of the pandemic on the economy has been significant. The collapse in global tourism flows has affected Iceland’s engine of growth, which relies heavily on contact-intensive sectors. Real GDP declined by 6.6 percent, unemployment rose sharply, the current account surplus declined, and inflation rose above the notification band in 2020. A modest recovery is projected to take hold in 2021, with GDP projected to reach its 2019 level the following year. Scarring arising from an expected slow tourism recovery is projected to keep GDP below its pre-COVID trend by 3 percent in 2026. Risks to the outlook are significant, mainly stemming from uncertainty in the path of the pandemic domestically and abroad and the prospects for global tourism revival.
Executive Board Assessment2
Executive Directors commended Iceland’s handling of the severe impacts of the COVID-19 pandemic, thanks to the strong policy framework and prudently accumulated buffers. Looking ahead, Directors highlighted the challenging medium-term economic outlook, and encouraged sound macroeconomic policies and structural reforms to enhance sustainable growth, financial stability, and economic diversification.
Directors concurred that the budgeted fiscal support this year would help prop up domestic demand, mitigate scarring, and provide insurance against downside risks. Directors also assessed that Iceland’s medium-term fiscal policy plans would balance well the ongoing need for support to the economy with fiscal sustainability considerations. They noted these plans appropriately refocused fiscal policy from lifeline support toward active labor market policies and investments in physical and human capital. Maintaining the highest fiscal transparency will be crucial to preserve confidence in the fiscal framework.
Directors stressed that data-driven monetary policy rate decisions would remain essential to support confidence and mitigate inflation risks given the high degree of uncertainty. With the external position aligned with fundamentals and desirable policies, Directors advised the CBI to continue reducing its foreign exchange market presence as the effects of the pandemic subside. They also called for completion of the ongoing foreign exchange legislation reform to solidify the liberalization of the foreign exchange system and clarify the conditions for a potential use of capital flow management measures.
Directors stressed that emerging corporate vulnerabilities and housing market risks should be addressed to preserve the strength of the financial system. They recommended close monitoring of pandemic impacts on corporate and bank balance sheets and deploying macroprudential measures to mitigate risks from rapid bank mortgage credit growth.
Directors underscored that the upcoming review of the financial oversight architecture should ensure that the CBI’s powers and resources are commensurate with its expanded responsibilities. They stressed that the forthcoming bank privatization required vigilance to preserve high-quality ownership. Directors commended the authorities for swiftly completing the actions required for Iceland to exit FATF’s grey-list and encouraged them to continue improving AML/CFT effectiveness.
Directors stressed that Iceland’s post-pandemic growth strategy should strive to further diversify and strengthen the resilience of its economy. The strategy should aim to promote safe and sustainable tourism, support innovation, enhance human capital, reduce regulatory burdens, seek to better align wages and productivity, and ensure timely achievement of Iceland’s climate goals.
Iceland: Selected Economic Indicators, 2015–21
For 2021, rate as of end-April.
In 2020, the definition of the general government was expanded to include 24 new entities, of which the largest are the IL Fund and the Student loan Fund.
Iceland: Selected Economic Indicators, 2015–21
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 Prel. | 2021 Proj. | |
|---|---|---|---|---|---|---|---|
| National Accounts (constant prices) | |||||||
| Gross domestic product | 4.4 | 6.3 | 4.2 | 4.7 | 2.6 | -6.6 | 3.7 |
| Total domestic demand | 6.1 | 7.7 | 7.6 | 4.4 | 0.2 | -1.3 | 2.0 |
| Private consumption | 4.5 | 6.7 | 8.0 | 4.8 | 1.9 | -3.3 | 3.0 |
| Public consumption | -0.1 | 0.9 | 2.9 | 4.7 | 3.9 | 3.1 | 0.6 |
| Gross fixed investment | 21.5 | 18.0 | 10.6 | 1.2 | -3.7 | -6.8 | 4.4 |
| Net exports (contribution to growth) | -1.1 | -0.8 | -2.9 | 0.7 | 2.1 | -5.4 | 1.7 |
| Exports of goods and services | 8.9 | 11.0 | 5.1 | 1.7 | -4.6 | -30.5 | 16.3 |
| Imports of goods and services | 13.5 | 14.6 | 11.8 | 0.5 | -9.3 | -22.0 | 11.8 |
| Output gap (percent of potential output) | -1.1 | 0.9 | 1.3 | 3.0 | 2.4 | -4.5 | -2.3 |
| Selected Indicators | |||||||
| Gross domestic product (ISK bn.) | 2,311 | 2,512 | 2,642 | 2,840 | 3,045 | 2,941 | 3,132 |
| Gross domestic product ($ bn.) | 17.5 | 20.8 | 24.7 | 26.2 | 24.8 | 21.7 | 24.2 |
| GDP per capita ($ thousands) | 53.2 | 62.5 | 73.1 | 75.3 | 69.6 | 59.6 | 65.3 |
| Private consumption (percent of GDP) | 49.7 | 49.3 | 50.1 | 50.3 | 49.9 | 51.4 | 51.5 |
| Public consumption (percent of GDP) | 23.4 | 23.0 | 23.7 | 24.2 | 24.4 | 27.5 | 26.8 |
| Gross fixed investment (percent of GDP) | 19.3 | 20.9 | 21.8 | 21.6 | 20.6 | 21.1 | 21.8 |
| Gross national saving (percent of GDP) | 25.0 | 29.2 | 26.0 | 25.7 | 27.0 | 22.7 | 22.8 |
| Unemployment rate (percent of labor force) | 4.5 | 3.3 | 3.3 | 3.1 | 3.9 | 6.4 | 6.0 |
| Employment | 3.9 | 4.1 | 1.0 | 1.8 | 0.9 | -3.0 | 0.8 |
| Labor productivity | 1.1 | 4.2 | 2.8 | 1.8 | 1.6 | -3.8 | 3.0 |
| Real wages | 5.9 | 7.2 | 5.6 | 3.7 | 1.8 | 3.4 | 0.7 |
| Nominal wages | 7.6 | 9.0 | 7.5 | 6.5 | 4.9 | 6.3 | 4.3 |
| Consumer price index (average) | 1.6 | 1.7 | 1.8 | 2.7 | 3.0 | 2.9 | 3.6 |
| Consumer price index (end period) | 2.0 | 1.9 | 1.9 | 3.7 | 2.0 | 3.6 | 3.0 |
| ISK/€ (average) | 146 | 134 | 121 | 128 | 141 | 157 | … |
| ISK/$ (average) | 132 | 121 | 107 | 108 | 123 | 135 | … |
| Terms of trade (average) | 6.8 | 2.7 | 1.5 | -3.7 | -0.7 | -2.3 | -3.0 |
| Money and Credit (end period) | |||||||
| Base money (M0) | 27.8 | 3.0 | 37.9 | -1.7 | -9.2 | 11.8 | 6.2 |
| Broad money (M3) | 5.6 | -4.6 | 5.0 | 7.0 | 6.6 | 7.4 | 8.4 |
| Bank credit to nonfinancial private sector | 3.5 | 4.4 | 9.2 | 11.9 | 2.9 | 10.5 | 3.5 |
| Central bank 7 day term deposit rate 1/ | 5.75 | 5.00 | 4.25 | 4.50 | 3.00 | 0.75 | 0.75 |
| General Government Finances 2/ | |||||||
| Revenue | 43.2 | 59.1 | 45.4 | 44.9 | 41.9 | 42.4 | 40.3 |
| Expenditure | 43.6 | 46.5 | 44.5 | 44.0 | 43.4 | 49.7 | 49.4 |
| Overall balance | -0.4 | 12.5 | 1.0 | 0.9 | -1.5 | -7.3 | -9.1 |
| Structural primary balance | 3.4 | 3.6 | 2.0 | 0.8 | -1.4 | 0.3 | -2.5 |
| Cyclically-adjusted primary balance | 3.8 | 15.0 | 3.3 | 1.6 | -0.7 | -2.4 | -5.8 |
| Gross debt | 97.2 | 79.9 | 69.4 | 61.1 | 68.3 | 79.9 | 80.0 |
| Net debt | 78.0 | 65.2 | 57.9 | 48.6 | 55.4 | 63.8 | 67.2 |
| Balance of Payments | |||||||
| Current account balance | 5.6 | 8.1 | 4.2 | 3.8 | 6.4 | 1.0 | 0.7 |
| of which: services balance | 8.9 | 10.5 | 10.6 | 9.0 | 8.5 | 2.5 | 3.4 |
| Capital and financial account (+ = outflow) | 4.8 | 8.5 | 1.7 | 5.5 | 6.8 | 5.4 | 0.6 |
| of which: direct investment, net (+ = outflow) | -4.0 | -3.5 | -0.7 | 1.7 | 3.1 | 2.5 | 2.3 |
| Gross external debt | 174.8 | 125.1 | 90.3 | 73.3 | 76.5 | 86.0 | 75.4 |
| Central bank reserves ($ bn.) | 5.0 | 7.2 | 6.6 | 6.1 | 6.7 | 6.4 | 5.9 |
For 2021, rate as of end-April.
In 2020, the definition of the general government was expanded to include 24 new entities, of which the largest are the IL Fund and the Student loan Fund.
Iceland: Selected Economic Indicators, 2015–21
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 Prel. | 2021 Proj. | |
|---|---|---|---|---|---|---|---|
| National Accounts (constant prices) | |||||||
| Gross domestic product | 4.4 | 6.3 | 4.2 | 4.7 | 2.6 | -6.6 | 3.7 |
| Total domestic demand | 6.1 | 7.7 | 7.6 | 4.4 | 0.2 | -1.3 | 2.0 |
| Private consumption | 4.5 | 6.7 | 8.0 | 4.8 | 1.9 | -3.3 | 3.0 |
| Public consumption | -0.1 | 0.9 | 2.9 | 4.7 | 3.9 | 3.1 | 0.6 |
| Gross fixed investment | 21.5 | 18.0 | 10.6 | 1.2 | -3.7 | -6.8 | 4.4 |
| Net exports (contribution to growth) | -1.1 | -0.8 | -2.9 | 0.7 | 2.1 | -5.4 | 1.7 |
| Exports of goods and services | 8.9 | 11.0 | 5.1 | 1.7 | -4.6 | -30.5 | 16.3 |
| Imports of goods and services | 13.5 | 14.6 | 11.8 | 0.5 | -9.3 | -22.0 | 11.8 |
| Output gap (percent of potential output) | -1.1 | 0.9 | 1.3 | 3.0 | 2.4 | -4.5 | -2.3 |
| Selected Indicators | |||||||
| Gross domestic product (ISK bn.) | 2,311 | 2,512 | 2,642 | 2,840 | 3,045 | 2,941 | 3,132 |
| Gross domestic product ($ bn.) | 17.5 | 20.8 | 24.7 | 26.2 | 24.8 | 21.7 | 24.2 |
| GDP per capita ($ thousands) | 53.2 | 62.5 | 73.1 | 75.3 | 69.6 | 59.6 | 65.3 |
| Private consumption (percent of GDP) | 49.7 | 49.3 | 50.1 | 50.3 | 49.9 | 51.4 | 51.5 |
| Public consumption (percent of GDP) | 23.4 | 23.0 | 23.7 | 24.2 | 24.4 | 27.5 | 26.8 |
| Gross fixed investment (percent of GDP) | 19.3 | 20.9 | 21.8 | 21.6 | 20.6 | 21.1 | 21.8 |
| Gross national saving (percent of GDP) | 25.0 | 29.2 | 26.0 | 25.7 | 27.0 | 22.7 | 22.8 |
| Unemployment rate (percent of labor force) | 4.5 | 3.3 | 3.3 | 3.1 | 3.9 | 6.4 | 6.0 |
| Employment | 3.9 | 4.1 | 1.0 | 1.8 | 0.9 | -3.0 | 0.8 |
| Labor productivity | 1.1 | 4.2 | 2.8 | 1.8 | 1.6 | -3.8 | 3.0 |
| Real wages | 5.9 | 7.2 | 5.6 | 3.7 | 1.8 | 3.4 | 0.7 |
| Nominal wages | 7.6 | 9.0 | 7.5 | 6.5 | 4.9 | 6.3 | 4.3 |
| Consumer price index (average) | 1.6 | 1.7 | 1.8 | 2.7 | 3.0 | 2.9 | 3.6 |
| Consumer price index (end period) | 2.0 | 1.9 | 1.9 | 3.7 | 2.0 | 3.6 | 3.0 |
| ISK/€ (average) | 146 | 134 | 121 | 128 | 141 | 157 | … |
| ISK/$ (average) | 132 | 121 | 107 | 108 | 123 | 135 | … |
| Terms of trade (average) | 6.8 | 2.7 | 1.5 | -3.7 | -0.7 | -2.3 | -3.0 |
| Money and Credit (end period) | |||||||
| Base money (M0) | 27.8 | 3.0 | 37.9 | -1.7 | -9.2 | 11.8 | 6.2 |
| Broad money (M3) | 5.6 | -4.6 | 5.0 | 7.0 | 6.6 | 7.4 | 8.4 |
| Bank credit to nonfinancial private sector | 3.5 | 4.4 | 9.2 | 11.9 | 2.9 | 10.5 | 3.5 |
| Central bank 7 day term deposit rate 1/ | 5.75 | 5.00 | 4.25 | 4.50 | 3.00 | 0.75 | 0.75 |
| General Government Finances 2/ | |||||||
| Revenue | 43.2 | 59.1 | 45.4 | 44.9 | 41.9 | 42.4 | 40.3 |
| Expenditure | 43.6 | 46.5 | 44.5 | 44.0 | 43.4 | 49.7 | 49.4 |
| Overall balance | -0.4 | 12.5 | 1.0 | 0.9 | -1.5 | -7.3 | -9.1 |
| Structural primary balance | 3.4 | 3.6 | 2.0 | 0.8 | -1.4 | 0.3 | -2.5 |
| Cyclically-adjusted primary balance | 3.8 | 15.0 | 3.3 | 1.6 | -0.7 | -2.4 | -5.8 |
| Gross debt | 97.2 | 79.9 | 69.4 | 61.1 | 68.3 | 79.9 | 80.0 |
| Net debt | 78.0 | 65.2 | 57.9 | 48.6 | 55.4 | 63.8 | 67.2 |
| Balance of Payments | |||||||
| Current account balance | 5.6 | 8.1 | 4.2 | 3.8 | 6.4 | 1.0 | 0.7 |
| of which: services balance | 8.9 | 10.5 | 10.6 | 9.0 | 8.5 | 2.5 | 3.4 |
| Capital and financial account (+ = outflow) | 4.8 | 8.5 | 1.7 | 5.5 | 6.8 | 5.4 | 0.6 |
| of which: direct investment, net (+ = outflow) | -4.0 | -3.5 | -0.7 | 1.7 | 3.1 | 2.5 | 2.3 |
| Gross external debt | 174.8 | 125.1 | 90.3 | 73.3 | 76.5 | 86.0 | 75.4 |
| Central bank reserves ($ bn.) | 5.0 | 7.2 | 6.6 | 6.1 | 6.7 | 6.4 | 5.9 |
For 2021, rate as of end-April.
In 2020, the definition of the general government was expanded to include 24 new entities, of which the largest are the IL Fund and the Student loan Fund.
Title page
ICELAND
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
May 12, 2021
KEY ISSUES
The Icelandic economy has been severely affected by the pandemic. Sharp tourism contraction and containment measures caused real GDP to plummet by 6.6 percent in 2020. A modest recovery will take hold in 2021. Recovery prospects in the tourism sector depend on control of the epidemic and progress in global and domestic vaccine distribution, spelling a challenging outlook with possibly deep medium-term scarring.
Fiscal policy should continue to support the economy for now. Policy buffers accumulated over the last decade provided space for a large fiscal support and accommodated substantial automatic stabilizers. Additional stimulus is planned in 2021 to address still large slack in the economy, mitigate scarring, and provide confidence in the event of downside risks. Medium-term policies should ensure that public debt is firmly on a downward path, while limiting the drag on growth.
Monetary easing has supported confidence and smooth market functioning, but no further easing is needed for now. Policy rate cuts and unconventional monetary policy have provided ample liquidity to the economy. With inflation above the target band and anchored inflation expectations, the CBI now needs to stay on hold. Foreign exchange intervention has helped address disorderly market conditions in the shallow foreign exchange market but should taper off as the economy recovers.
Financial policies should address emerging financial sector risks. Banks’ large capital buffers position them well to support the economy. Close attention should be paid to classification and provisioning for impaired corporate borrowers. Addressing rising risks in the housing market would help avoid overheating and crowding-out of corporate loans. Vigilance in vetting new owners of privatized banks should help ensure high-quality ownership.
Structural reforms should facilitate economic diversification and mitigate scarring. A comprehensive recovery plan should lay the ground for new sources of growth, including by addressing rigidities in the labor and product markets, embracing digitalization, and enhancing human capital. Efforts to revive the tourism sector should focus on health safety and a sustainable business model. Iceland’s environmental sustainability is also critical to preserve traditional sectors and achieve the country’s emission reduction commitments.
Approved By
Philip Gerson (EUR) and Guillaume Chabert (SPR)
A virtual mission took place during March 29–April 16, 2021. The team comprised Iva Petrova (head), Chikako Baba, Jorge Canales-Kriljenko, Nujin Suphaphiphat, and Chun Jin (all EUR). The mission met with Prime Minister Katrín Jakobsdóttir, CBI Governor Ásgeir Jónsson, Minister of Finance Bjarni Benediktsson, Minister of Education Lilja Alfreðsdóttir and other representatives of the public and private sector. Jon Sigurgeirsson (OED) joined the discussions. Indra Mahadewa (EUR) assisted.
Contents
CONTEXT
THE PANDEMIC: POLICY RESPONSES AND OUTCOMES
A. A Robust Policy Response
B. A Deep Recession
OUTLOOK AND RISKS
A. Slow Recovery and Deep Scars
B. Unprecedented Risks to the Outlook
MACROECONOMIC POLICIES: HEALING THE SCARS
A. Fiscal and Public Debt Management Policy
B. Monetary, Exchange Rate, and Reserve Management Policy
C. Macroprudential and Capital Flow Management Policy
D. Financial Sector Oversight
E. Macrostructural Policies
STAFF APPRAISAL
FIGURES
1. COVID-19 Developments
2. Tourism Developments
3. Policy Mix and Key Policy Developments
4. Key Macroeconomic Developments
5. Fiscal Developments and Issues
6. Monetary and Foreign Exchange Market
7. Real Estate Markets
TABLES
1. Selected Economic Indicators, 2015–26
2. Money and Banking, 2015–26
3. Financial Soundness Indicators, 2017Q1–20Q4
4. General Government Operations, 2015–26
5. General Government Financial Balance Sheet, 2015–26
6. Balance of Payments, 2015–26
7. International Investment Position, 2010–20
ANNEXES
I. Policy Measures in Response to the Pandemic
I. Policy Measures in Response to the Pandemic
III. Potential Channels of Economic Scarring
IV. Risk Assessment Matrix
V. General Government Reclassification
VI. Public Sector Debt Sustainability Analysis
VII. External Debt Sustainability Analysis
VIII. Making Collective Bargaining Effective: Options for Reforms
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
