IMF Executive Board Concludes 2022 Article IV Consultation with Iceland

New Delhi :On June 15, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Iceland and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

Iceland has weathered recent shocks to the economy relatively well. Well-designed policy measures and a solid health system eased the impact of the pandemic, allowing real GDP and employment to recover strongly. Robust domestic demand and favorable terms of trade boosted output growth to 4.3 percent in 2021, despite slower recovery in tourism. With net general government debt of 60 percent of GDP, international reserves of 29 percent of GDP, and a sound banking system, the Icelandic economy remains well positioned to handle potential negative shocks, including from the global impact of the war in Ukraine.

Growth is expected to remain moderate in 2022 and the medium term. In 2022, GDP growth is projected at 3.6 percent while average inflation is projected to reach 7.4 percent. Over the medium term, export-oriented industries are expected to be the main source of growth, while private consumption growth is expected to moderate with the tightening of monetary and fiscal policies. By 2027, real GDP is expected to reach a level about 2 percent below its pre-COVID trend. Inflation is projected to gradually fall back to target by 2025, steered by the ongoing monetary policy tightening. The current account is projected to revert to a surplus as tourism continues to recover. Risks to the recovery arise from the war in Ukraine, the pandemic, and a potential impasse in the negotiations for a new collective bargaining agreement that could result in labor market tensions and economic dislocation. On the upside, tourism and new innovative industries could help the economy recover faster.

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