Press Release No. 10/367

Press Release: IMF Completes Third Review Under Stand-By Arrangement for Iceland, Concludes 2010 Article IV Consultation

September 29, 2010

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Iceland’s economic performance under a program supported by a Stand-By Arrangement (SBA).

The completion of this review enables the immediate disbursement of an amount equivalent to SDR 105 million, which would bring total disbursements under the program to an amount equivalent to SDR 875 million (about € 997.9 million or US$ 1.36 billion).

The 33-month SBA was approved on November 19, 2008 (see Press Release No. 08/296) for an amount equivalent to SDR 1.4 billion (about US$2.17 billion) and was subsequently extended to August 31, 2011 (see Press release No 10/156). The arrangement entails exceptional access to IMF resources, amounting to 1,190 percent of Iceland’s quota.

A Public Information Notice on the Executive Director’s assessment of the 2010 Article IV consultation with Iceland will be released separately.

Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Chair, stated:

“Iceland has made impressive progress under its Fund-supported program, reflecting the authorities’ strong policy implementation and readiness to adapt policies when warranted. While the economy still faces headwinds, a rebound in growth is on the horizon, with the mildly undervalued krona and planned investment projects lending support to economic activity. The downward trend in inflation should continue, supported by the stable krona.

“The authorities have made progress towards restoring the financial system. Recent legal uncertainty about banks’ foreign exchange linked loans and their capital has diminished, and a framework is in place to ensure that capital requirements will be met. The revised framework for household and corporate debt restructuring will be helpful and the relief this provides to borrowers should support the economy.

“There has been considerable progress towards consolidating the fiscal position. The 2011 budget marks a milestone, with the general government projected to return to a primary surplus. Given the robust projected public debt dynamics, there may be scope in future to moderately scale back the targeted adjustment if financial sector contingent liabilities prove contained.

“Rebuilding Iceland’s international reserves is a priority. This will pave the way for capital account liberalization and the country’s reintegration into global financial markets. The careful monetary policy strategy adopted by the central bank, including the newly introduced foreign exchange purchase auctions, is delivering results and should be continued.

“In the medium term, strengthening Iceland’s policy framework will be critical. The authorities have improved budget planning and execution significantly and have legislated a stronger framework for bank regulation and supervision. Important steps ahead include reform of the local government fiscal framework and implementation of the financial sector supervisory reforms.”