Iceland Makes Strong Recovery from 2008 Financial Crisis

  • Macroeconomic conditions at their best since the crisis
  • Recovery achieved without compromising welfare model
  • Full re-integration with global financial markets remains a key challenge
  • In an interview with IMF Survey, Peter Dohlman, IMF Mission Chief for Iceland, explained what sets Iceland apart from other countries having experienced the financial crisis.

    IMF Survey : Iceland was in a state of collapse in 2008 but is now back on its feet and has become a success story. Can you give us a sense of Iceland’s economic picture today?

    Dohlman: Overall, macroeconomic conditions in Iceland are now at their best since the 2008/9 crisis. Iceland has been one of the top economic performers in Europe over the past several years in terms of economic growth and has one of the lowest unemployment rates. A particular bright spot for Iceland has been the booming tourism industry, which has also contributed to a strong current account surplus.

    Other indicators of Iceland’s successful trajectory are its low inflation, stable exchange rate, and ready market access. Iceland’s strong balance of payments has allowed it to repay early all of its Nordic loans and much of its IMF loans while maintaining adequate foreign exchange reserves.

    There are of course some important remaining vulnerabilities and risks. Public and external debt ratios are still high, though on a downward sustainable path. The prospect of funds exiting quickly and disrupting external stability in the absence of capital controls is still a potential and important vulnerability. Downside risks emanate from significant wage pressures and an uncertain external environment, including risks of slower demand and deflationary pressures from trading partners.

    IMF Survey : What are some of the main factors behind Iceland’s remarkable recovery?

    Dohlman: Iceland has of course made good use of its natural resources, including the traditional fishing industry, but also the energy sector and most recently tourism. Iceland’s geothermal clean energy has attracted energy-intensive industries, including in recent years data storage centers and silica plants. Since 2010, Iceland’s tourism industry has boomed with promising prospects.

    Iceland’s recovery can also be explained by sound policies. The quick restoration of the domestic banking system and early steps to facilitate domestic debt restructuring were important. Steady fiscal adjustment, while carefully preserving its Nordic welfare model...

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