IMF Executive Board Concludes 2018 Article IV Consultation with Iceland
On November 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded its 2018 Article IV consultation [1] with Iceland.
Strong real GDP growth is expected to continue in 2018, although at around 4 percent the pace will be somewhat slower than in previous years, on the back of moderating tourism growth. The unemployment rate, at 2½ percent, remains well below its long-run average. Despite this, inflation is close to target as a robust supply response to past property price increases and slower tourism growth have reduced pressures from the real estate market. Although the goods trade deficit has increased somewhat, the current account remains in surplus. Over the medium term, growth is expected to taper to about 2½ percent, inflation to remain near target, and the current account surplus to settle at about 2 percent of GDP.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the favorable economic outlook and the dissipation of overheating concerns, noting that past króna appreciation has helped guide growth to more sustainable rates. Other risks have, however, become more evident—strong oil prices, competitive pressures in the airline sector, escalating trade tensions, potentially excessive wage awards, and Brexit—thus underscoring the need for continued prudent macroeconomic and structural policies.
Directors viewed the broadly neutral fiscal stance as appropriate in the near term and supported the authorities’ medium term fiscal plan aimed at further debt reduction. While supporting the focus on infrastructure, healthcare, and education, Directors noted that careful prioritization will be needed to reach the overall budget targets. They advised the authorities to prioritize expenditures based on their medium term effects on growth and productivity, with less reliance on ad hoc revenues such as dividend flows and on a careful assessment of tax reforms.
Directors agreed that monetary policy should remain focused on price stability. The inflation target should reflect households’ spending patterns and be understood by all. Directors advised that foreign exchange intervention should continue to be limited to countering disorderly market conditions, with a strong emphasis on maintaining reserve adequacy. Directors judged Iceland’s external position to be broadly in line with fundamentals and desired policy settings.
Directors supported the creation of an integrated financial supervisor by merging the financial regulator into the central bank, to cover all aspects of the financial sector including pension funds. While the merger should tap into synergies and increase simplicity, efforts should focus on ensuring a smooth transition and maintaining regulatory and operational independence.
Directors welcomed the authorities’ recent decision to halve the special reserve requirement on selected debt inflows with many Directors supporting a gradual lifting as conditions permit, while a few Directors favored an immediate removal. Noting the authorities’ intention to renew the legal basis for the reserve requirement, Directors observed that capital flow management measures can have a useful role to play under certain conditions, although they advised that such measures should not substitute for warranted macroeconomic adjustment.
Directors supported ongoing initiatives to reform the wage bargaining system and anchor it on productivity growth and competitiveness while also increasing public spending on education. They suggested that further tourism development would benefit from a comprehensive strategy, including contingency plans. Directors called for ongoing international efforts to ensure sustainable management of migratory marine species.
[1] 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.
[2] 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 .
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