Economic surveys and country surveillance

Economic Survey of Iceland 2013

 

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OECD Economic Surveys: Iceland 2013 | OECD Free preview | Powered by Keepeek Digital Asset Management

Iceland’s economy is recovering at a moderate pace and is now more balanced than before the crisis, although more remains to be done in private-sector deleveraging, reducing non-performing loans and lowering external indebtedness. Economic growth should gain momentum in 2014, led by a large increase in energy-intensive investment. To increase economic growth on a lasting basis and better manage risks, capital controls need to be removed in an orderly fashion, monetary and financial stability arrangements strengthened and the government debt-to-GDP ratio reduced to more prudent levels.

While capital controls enabled Iceland to regain exchange rate stability and hold down real interest rates, they misallocate capital and impede business activity. To minimise these adverse effects, the authorities need to proceed with their programme for the removal of capital controls at a pace that is conditioned upon economic developments. Completing economic rebalancing, strengthening the current account balance, making króna assets more attractive to hold, further improving prudential supervision and regulation and developing a sound monetary strategy that encourages exchange rate stability would go far in helping Iceland to meet the requirements of its programme.

The monetary policy and financial stability frameworks are being strengthened. Monetary policy lacks credibility and inflation expectations are not well anchored. Steps have been taken to strengthen central bank independence, improve coordination with fiscal policy and revamp bank supervision. The authorities are undertaking a modified inflation-targeting approach that uses currency market interventions to smooth the impact of short-term capital flows on the exchange rate. Preparations are also under way to strengthen coordination and communication between financial sector supervisors.

Considerable fiscal consolidation has been achieved but further measures are required. Substantial fiscal consolidation was required in the wake of the crisis to reduce public debt from very high levels and increase investor confidence in Icelandic assets. Approximately two thirds of the former government’s fiscal consolidation plan has been implemented and the government debt-to-GDP ratio has started to fall. Action is needed to ensure that the budget remains on track to reach a surplus of 2% of GDP by 2015, which would put public debt on a path to more prudent levels. Consolidation measures need to be more focused on current expenditures to increase the likelihood that consolidation is sustained. There is scope to reduce expenditure by increasing government efficiency, notably in the areas of education and health care. Passage of the proposed Organic Budget Law would help to strengthen budget discipline.

Iceland Survey 2013 Graph in English

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Natural resource management could be improved to enhance benefits for Icelanders. Electricity capacity has been expanded to power rising exports (mainly aluminium), sometimes without maximising the net benefits to Icelanders. To maximise these benefits, electricity capacity for export should only be developed if long-run marginal costs (including the return on capital) are fully covered, and any resource rents should be taxed. In the fisheries sector, the scheduled increases in the special fisheries resource rent tax should be reduced to levels that the industry can cope with.

How to obtain this publication

 

The complete edition of the Economic Survey of Iceland is available from:

Additional information

For further information please contact the Iceland Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by David Carey and Wendy Dunn under the supervision of Patrick Lenain. Research assistance was provided by Roselyne Jamin.

www.oecd.org/eco/surveys/iceland-2013.htm

 

 

 

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