Iceland's Recovery: Can the Lessons Be Applied Elsewhere?

International conference to look at lessons learned in Iceland and challenges ahead

Modest recovery under way, with declining unemployment

$2.1 billion IMF-supported program expired in August this year

To take stock of Iceland’s crisis and recovery, the IMF and the Icelandic government are co-hosting a conference on October 27 that will see prominent economists such as Nobel Prize winner Paul Krugman and international economists Willem Buiter and Simon Johnson debate civil society, academics and IMF officials on whether the lessons learned can be applied elsewhere.

Key to Iceland’s recovery was an IMF-supported program worth $2.1 billion that was agreed in November 2008, shortly after the country’s three main banks collapsed in spectacular fashion. The program included controversial measures such as capital controls and a decision not to tighten fiscal policy during the first year. It also sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses.

“The dynamic cooperation with the IMF helped preserve the Nordic welfare model in my country,” Minister of Economic Affairs Árni Páll Árnason said ahead of the conference.

In an interview, the IMF’s mission chief for Iceland, Julie Kozack, takes stock of what the program achieved, and discusses the challenges still ahead for Iceland as it seeks to rebuild its economy.

IMF Survey online: Iceland’s program with the IMF expired in August this year, ending three years of close cooperation. What do you regard as the main achievements of the program?

Kozack: The program had three objectives: to stabilize the exchange rate, put the public finances on a sustainable path, and restructure the financial system. All three of these objectives were met by the time the program expired. This was really an enormous achievement, given the severity and depth of the crisis that Iceland faced at the time.

The exchange rate had depreciated sharply in the run-up to the crisis, and there was a deep concern that it would plummet in a disorderly way. This is why capital controls were imposed.

The government had to use its balance sheet to recapitalize the banks and rebuild the financial system. This meant that public debt became very high. Therefore, public finances needed to be restored. During the past couple of years, the government has taken a number of fiscal measures that have put the country’s finances back on a sustainable...