Medium-term Economic Outlook Strong for Iceland
An IMF mission visited Iceland in May for consultations with representatives from the Icelandic Government and the private sector.
Introduction
1. The medium-term outlook for the Icelandic economy remains enviable. Institutions and policy frameworks are strong. Markets are open and flexible, and the skillful management of the country’s natural endowments has diversified the economy and helped to ensure sustainability. Further, these factors are combined within a culture of entrepreneurial dynamism that has led to economic outcomes that belie the country’s small size.
2. However, at the current juncture, mounting macroeconomic imbalances are concerns that policymakers must promptly address. The level of excess demand, high and rising inflation, the large current account deficit, and highly leveraged households and firms, particularly banks, are generating financial market turbulence that threatens near-term stability. Looking back, these circumstances could have been mitigated by more coordinated policy actions that would have implied a tighter fiscal stance and reform of the Housing Financing Fund.