20220626-IMF-Iceland_2022_Article_IV_Consultation_-_Press_Release_and_Staff_Report_78页_1mb

Iceland: 2022 Article IV Consultation Summary

Core Content Overview

The 2022 Article IV consultation with Iceland by the IMF highlights the country's resilience to recent economic shocks, including the pandemic and the war in Ukraine. Despite these challenges, Iceland has maintained macroeconomic stability and a strong financial system, with real GDP growth in 2021 reaching 4.3 percent and inflation rising to 7.4 percent in 2022. The report outlines both the positive outlook and the risks facing the economy, as well as policy recommendations to ensure sustainable recovery.

Main Economic Developments

• GDP Growth:

  • 2021: 4.3% (real GDP)
  • 2022: Projected at 3.6% (real GDP)
  • By 2027: Expected to be 2% below pre-COVID trend

• Inflation:

  • 2021: 4.5% (average)
  • 2022: Projected at 7.4%
  • Expected to return to target by 2025

• Employment and Unemployment:

  • Unemployment rate in 2022: 4.7%
  • Employment growth in 2021: 3.8% (y/y)

• Fiscal Position:

  • Net general government debt: 60% of GDP
  • Net international reserves: 29% of GDP
  • General government deficit in 2021: 8.9% of GDP (0.2% below projections)

• Current Account:

  • 2021: Deficit of 2.8% of GDP
  • Projected to revert to a small surplus by 2022

Key Economic Indicators (2016–2022)

Main Policy Recommendations

Fiscal Policy

• Fiscal Consolidation: Appropriate to restore fiscal buffers and reactivate fiscal rules.
• Windfall Revenues: Should be saved for future needs.
• Structural Reforms: Needed to support long-term economic resilience and reduce housing risks.

Monetary Policy

• Policy Rate Hikes: Continue to guide inflation expectations back to target.
• Liquidity Management: Strengthen to improve monetary policy transmission.
• Housing Price Pressures: Address through policy rate adjustments and liquidity management.

Housing Policy

• Macroprudential Measures: Further tightening of debt service-to-income (DSTI) limits and loan-to-value (LTV) ratios.
• Housing Affordability: Should be addressed through structural measures to increase housing supply and targeted support for low-income households.

Macroeconomic and Structural Policies

• Economic Diversification: Focus on reducing regulatory burdens on start-ups and promoting innovation.
• Labor Market Reforms: Align wage and productivity growth in the upcoming collective bargaining agreement.
• Climate Goals: Achieve through well-balanced fiscal incentives and environmental trade-offs in expanding renewable energy.

Risks and Outlook

Risks

• Global Shocks: War in Ukraine, ongoing pandemic, and potential labor market tensions from collective bargaining negotiations.
• External Imbalances: Potential for higher import prices and slower growth of trading partners.

Outlook

• Moderate Growth: Expected to continue in 2022 and the medium term, with tourism and export-oriented industries as key drivers.
• Inflationary Pressures: Significant in 2022, but expected to ease gradually toward target by 2025.
• Current Account: Projected to move toward a surplus as tourism recovers.
• Output Gap: Positive in 2022, with continued closure over the forecast horizon.

Key Institutional Issues

• CBI's Role: The Central Bank of Iceland (CBI) should continue its monetary tightening and maintain budgetary independence.
• Financial Stability: The merger with the financial regulator has supported stability, but further review of CBI's committees and microprudential powers is needed.
• Pension Funds: Hold significant shares in the mortgage and banking sectors and are major sources of financing for non-financial corporates.
• Ownership and Supervision: Ensure quality ownership and legal protection for supervisors, with careful consideration of potential investors in state-owned banks.

Summary of Main Views

• Resilience: Iceland has shown resilience to recent shocks, with strong recovery in real GDP and employment.
• Inflation: High inflationary pressures are expected to persist in 2022 but are projected to decline toward target by 2025.
• Fiscal and Monetary Policies: Coordinated efforts are essential to restore buffers, manage inflation, and support housing affordability.
• Economic Diversification: Emphasis on innovation and reducing reliance on tourism and traditional industries.
• Climate Commitments: Need for sustainable fiscal incentives and environmental trade-offs to achieve climate goals.

Conclusion

The IMF concluded the 2022 Article IV consultation with Iceland, noting the country's strong position to handle potential shocks. The report highlights the importance of continued policy coordination, fiscal and monetary discipline, and structural reforms to ensure long-term economic stability and growth.