Economy of Iceland

Economy of Iceland
Iceland
Rank	129th
Currency	Icelandic króna (ISK)
Fiscal year	calendar year
Trade organisations	WTO, EFTA, OECD, EEA
Statistics
GDP	$12.144 billion (2007 est.)
GDP per capita	$39,600 (2009 est.) (20th)
Inflation (CPI)	2.8% (May 2011) [1]
Population below poverty line	10% (below 60% of the median equivalised disposable income; 2005)
Gini index	28 (2006)
Labour force	181,500 (2007)
Labour force by occupation	agriculture 5.9%, industry 20.6%, services 73.1% (2007)
Unemployment	7.1% (Oct. 2010)
Main industries	fishing; aluminum smelting, ferrosilicon production; geothermal power, tourism
Ease of Doing Business Rank	15th[2]
External
Exports	$4.766 billion f.o.b. (2007)
Export goods	fish and fish products 40%, aluminum and alloys 40%, animal products.
Main export partners	Eurozone 58.9%, UK 14.0%, US 5.6%, Denmark 4.6%, Japan 4.5% (2007)
Imports	$6.175 billion f.o.b. (2007)
Import goods	machinery and equipment, petroleum products, foodstuffs, textiles
Main import partners	Eurozone 32.7%, US 14.4%, Sweden 10.7%, Denmark 8.4%, UK 5.7%, China 5.4%, Japan 5.0%, Norway 4.9% (2007)
Public finances
Public debt	$10.941 billion (2007)
Revenues	$9.744 billion (2007)
Expenses	$8.640 billion; including capital acquisitions of $1.103 billion (2007)
Economic aid	~$20 million (0.24% GDP, 2009 budget)
Credit rating	Standard & Poor's:[3] BBB- (Domestic) BBB- (Foreign) BBB- (T&C Assessment) Outlook: Negative[4] Moody's:[4] Baa3 Outlook: Negative Fitch:[4] BB+ Outlook: Negative
Foreign reserves	US$6.862 billion (April 2011)[5]
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars

The economy of Iceland is small and subject to high volatility. In 2007, gross domestic product was US$12.144bn in total and $38,400 per capita, based on purchasing power parity (PPP) estimates.^[6] The financial crisis of 2007–2010 has produced a decline in GDP and employment, although the magnitude of this decline remains to be determined.

Iceland has a mixed economy with high levels of free trade and government intervention. However, government consumption is less than in other Nordic countries.

In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedom^[7] as well as civil freedoms. As of 2007, Iceland tops the list of nations ranked by Human Development Index^[8] and one of the most egalitarian, according to the calculation provided by the Gini coefficient.^[9]

From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in a sweeping financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund and a range of European countries in November 2008.

History

Main article: Economic history of Iceland

Geography and resources

Iceland occupies a land area of 103,000 square kilometers. It has a 4,790 kilometer coastline and a 200 nautical mile (370.4 km) exclusive economic zone extending over 758,000 square kilometers of water. Approximately 0.7% of Iceland's land is arable, since the island's terrain is mostly mountainous and volcanic.^[10]

Iceland has few proven mineral resources. In the past, deposits of sulphur have been mined, and diatomite (skeletal algae) was extracted from lake Mývatn until recently. That plant has now been closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement. Concrete is widely used as building material, including for all types of residential housing.

By harnessing the abundant hydroelectric and geothermal power sources, Iceland's renewable energy industry provides over 70% of all the nation's primary energy^[11] - proportionally more than any other country^[12] - with 99.9% of Iceland's electricity being generated from renewables. The Icelandic Parliament decided in 1998 to convert vehicle and fishing fleets to hydrogen fuel and consequently Iceland expects to be energy-independent, using 100% renewable energy, by 2050.^[13] As part of this program, the country opened the world's first public hydrogen filling station in 2003. As of 2007, it has about 40 hydrogen-powered vehicles on the road, second only to the U.S. state of California.

By far the largest of the many Icelandic hydroelectric power stations is Kárahnjúkavirkjun (690 MW), which is being constructed in the area north of Vatnajökull. Other stations include Búrfell (270 MW), Hrauneyjarfoss (210 MW), Sigalda (150 MW), Blanda (150 MW), and more. Iceland has explored the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminium and ferro-silicon smelting plants.

Sectors

Manufacturing

The presence of abundant electrical power due to Iceland's geothermal energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export. Manufactured products constituted 36% of all merchandise exports, an increase from the 1997 figure of 22%. Power-intensive products's share of merchandise exports is 21%, compared to 12% in 1997.^[14]

Aluminium

Alcoa's aluminium plant in Reyðarfjörður, Iceland

Aluminium smelting is the most important power-intensive industry in Iceland. There are currently three plants in operation, with one under construction and two in the planning stage.

Rio Tinto Alcan operates Iceland's first aluminium smelter (plant name: ISAL), in Straumsvík, near the town of Hafnarfjörður. The plant has been in operation since 1969. Its initial capacity was 33,000 metric tons per year (mtpy) but has since been expanded several times and now has a capacity of about 189,000 mtpy.

The second plant started operations in 1998 and is operated by Norðurál, a wholly owned subsidiary of U.S.-based Century Aluminium Company. It is located in Grundartangi in Western Iceland near the town of Akranes. Its current capacity is 220,000 mtpy but an expansion to 260,000 mtpy is already underway and is expected to be completed in the last quarter of 2007.^[15]

United States-based aluminum manufacturer Alcoa has become a major investor in Iceland and has a major plant under construction near the town of Reyðarfjördur. The plant, known as Fjarðaál (or "aluminum of the fjords") has a capacity of 346,000 mtpy and was put into operation in April 2008. To power the plant, Landsvirkjun built Kárahnjukar, a 630-megawatt hydropower station. This is an astonishing figure, as prior to this development, the entire nation of Iceland's power usage was in the 300-megawatt range.

According to Alcoa, construction of Fjarðaál entailed no human displacement, no impact on endangered species, and no danger to commercial fisheries; there will also be no significant effect on reindeer, bird and seal populations.^[16] However, the project drew considerable opposition from environmentalist groups such as the World Wide Fund for Nature, which called on Alcoa to abandon the plan to build Fjarðaál. In addition, Icelandic singer Björk was a notable early opponent to the plan; protesting the proposed construction, the singer's mother, Hildur Rúna Hauksdóttir, went on a hunger strike in 2002.^[17]

Alcoa is also conducting a feasibility study on the possibility of building a second plant in Iceland near Húsavík. That plant would have a 250,000 mtpy capacity and was planned to be entirely powered entirely by geothermal power, however estimates show a potential need for other sources of power. If the decision is made to build the plant, construction would not start before 2010.^[18]

Norðurál has signed a memorandum of understanding to purchase electricity for its own aluminum reduction project in Helguvík. The agreement was reached between Norðurál and two Icelandic geothermal power producers, Hitaveita Suðurnesja and Orkuveita Reykjavíkur. The power supplied will initially support aluminum production of 150,000 mtpy, which will eventually grow to support 250,000 mtpy.^[19]

If all of the currently proposed expansions and new plants are constructed, the total production capacity of the Icelandic aluminum industry will rise to 1,542,000 mtpy, compared to the current capacity of 400,000 mtpy.

Finance

See also: 2008–2011 Icelandic financial crisis

Banks

Main article: List of banks in Iceland

The Icelandic banking system played a central role in the financial crisis. The banks expanded aggressively overseas following financial deregulation, acquiring assets far in excess of the country's GDP and therefore of the government's capacity to rescue them in the event of a run. All three major commercial banks, Landsbanki, Kaupþing Bank and Glitnir went into administration in early October 2008. The Althing granted the Icelandic Financial Supervisory Authority sweeping powers over banks as its financial system tottered and its currency plunged.^[20] Speculation continues about the financial health of the other banks.^[21] All of the major banks were publicly listed on Kauphöll Íslands (the Iceland Stock Exchange), though each was either wholly state-owned or merged with previously state-owned banks in the past.

Stock market

Because of the persistent inflation, historical reliance on fish production and the long-standing public ownership of the commercial banks, equity markets were slow to develop. Kauphöll Íslands, the Iceland Stock Exchange (better known as ICEX), was created in 1985. Trading in Icelandic T-Bonds began in 1986 and trading in equities commenced in 1990. All domestic trading in Icelandic equities, bonds and mutual funds takes place on the ICEX.

The ICEX has used electronic trading systems since its creation. Since 2000, SAXESS, the joint trading system of the NOREX alliance, has been used. There are currently two equities markets on the ICEX. The Main Market is the larger and better known of the two. The Alternative Market is a less regulated over-the-counter market. Because of the small size of the market, trading is illiquid in comparison with larger markets. A variety of firms across all sectors of the Icelandic economy are listed on the ICEX.

The most important stock market index is the ICEX 15.

Other financial markets

Historically, investors tended to be reluctant to hold Icelandic bonds because of the persistence of high inflation and the volatility of the Króna. What did exist was largely limited to bonds offered by the central government. The bond market on the ICEX has boomed in recent years, however, largely because of the resale of mortgages as housing bonds.

A mutual fund market exists on the ICEX in theory, but no funds are currently listed. A small derivatives market formerly existed, but was closed in 1999 because of illiquidity.

External trade

Iceland's economy is highly export-driven. Marine products account for the majority of goods exports. Other important exports include aluminum, ferro-silicon alloys, machinery and electronic equipment for the fishing industry, software, woollen goods. Most of Iceland's exports go to the European Union (EU) and European Free Trade Association (EFTA) countries, the United States, and Japan. The 2005 value of Iceland's exports was $3.215 billion. f.o.b.^[22]

The main imports are machinery and equipment, petroleum products, foodstuffs and textiles. Cement is Iceland's most imported product. The total 2005 value of imports was $4.582 billion. Iceland's primary import partner is Germany, with 12.6%, followed by the United States, Norway, and Denmark. Most agricultural products are subject to high tariffs; the import of some products, such as uncooked meat, is greatly restricted for phyto-sanitary reasons.^[22][23]

Iceland's relatively liberal trading policy has been strengthened by accession to the European Economic Area in 1993 and by the Uruguay Round, which also brought significantly improved market access for Iceland's exports, particularly seafood products. However, the agricultural sector remains heavily subsidized and protected; some tariffs range as high as 700%.

The fishing industry is one of the most important industries. It provides 40% of export income and employs 7.0% of the workforce; therefore, the state of the economy remains sensitive to world prices for fish products.^[22]

Imports Year Millions (ISK) Change 1988 68,723.2 0.00% 1989 80,599.4 17.28% 1990 96,620.7 19.88% 1991 104,129.1 7.77% 1992 96,895.3 -6.95% 1993 91,306.6 -5.77% 1994 102,541.3 12.30% 1995 113,613.6 10.80% 1996 135,994.5 19.70% 1997 143,226.6 5.32% 1998 176,072.1 22.93% 1999 182,321.5 3.55% Source: Statistics Iceland (statice.is) Year Millions (ISK) Change 2000 203,222.1 11.46% 2001 220,874.0 8.69% 2002 207,607.5 -6.01% 2003 216,525.1 4.30% 2004 260,430.8 20.28% 2005 313,854.6 20.51% 2006 432,106.3 37.68% 2007 429,468.9 -0.61% 2008 514,739.3 19.85% 2009 446,128.2 -13.33% 2010 478,571.8 7.27%

Exports Year Millions (ISK) Change 1988 61,667.0 0.00% 1989 80,071.7 29.85% 1990 92,625.1 15.68% 1991 91,560.4 -1.15% 1992 87,832.8 -4.07% 1993 94,657.6 7.77% 1994 112,653.8 19.01% 1995 116,606.7 3.51% 1996 126,303.8 8.32% 1997 131,213.2 3.89% 1998 136,592.0 4.10% 1999 144,928.1 6.10% Year Millions (ISK) Change 2000 149,272.8 3.00% 2001 196,582.2 31.69% 2002 204,303.0 3.93% 2003 182,580.0 -10.63% 2004 202,373.0 10.84% 2005 194,355.3 -3.96% 2006 242,740.0 24.89% 2007 305,095.8 25.69% 2008 466,859.5 53.02% 2009 500,854.5 7.28% 2010 560,647.0 11.94%

Since 1988, Iceland's economy has only ended the year with a surplus four times , in 1993, 1994, 2009 and 2010.

Economic agreements and policies

Iceland became a full European Free Trade Association member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area, effective January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries. However, the government of Iceland remains opposed to EU membership, primarily because of Icelanders' concern about losing control over their fishing resources. Iceland also has bilateral free trade agreements with several countries outside the EEA. The most extensive of these is the Hoyvík Agreement between Iceland and the Faroe Islands, this agreement goes even further than the EEA agreement by establishing free trade in agricultural products between the nations. Iceland has a free trade agreement with Mexico on November 27, 2000.

The center-right government plans to continue its generally neo-liberal policies of reducing the budget and current account deficits, limiting foreign borrowing, containing inflation, revising agricultural and fishing policies, diversifying the economy, and privatising state-owned industries.

Currency and monetary policy

Main article: Icelandic króna

The currency of Iceland is the króna (plural: krónur), issued exclusively by the Central Bank of Iceland since the bank's founding in 1961.^[24] The exchange rate in 2008 was 78 krónur to the United States dollar, down from 97.43 in 2001.^[22] Iceland's Krona went from 60 to the dollar in November 2007 to 147 to the dollar in November 2008.

Monetary policy is carried out by the Central Bank of Iceland, which maintains a 2.5% inflation target rate, adopted in March 2001.^[25]

During the 1970s the oil shocks (1973 and 1979 energy crisis) hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Iceland experienced moderately strong GDP growth (3% on average) from 1995 to 2004. Growth slowed between 2000 and 2002, but the economy expanded by 4.3% in 2003 and grew by 6.2% in 2004. Growth in 2005 exceeded 6%. Inflation averaged merely 1.5% from 1993–94, and only 1.7% from 1994-95. Inflation over 2006 topped at 8.6%, with a rate of 6.9% as of January 2007. Standard & Poor's reduced their rating for Iceland to AA- from A+ (long term) in December 2006, following a loosening of fiscal policy by the Icelandic government ahead of the 2007 elections.^[26][27] Foreign debt has risen to more than five times the value of its GDP, and Iceland's Central Bank has raised short-term interest rates to nearly 15% in 2007. Due to the plunging currency against the euro and dollar, in 2008 inflation is speculated to currently be at 20-25%.

Growth

Iceland's economy had been diversifying into manufacturing and service industries in the 1990s, and new developments in software production, biotechnology, and financial services were taking place. The tourism sector was also expanding, with the recent trends in ecotourism and whale watching. However, in 2008, the Icelandic economy entered a deep recession in correspondence to the global financial crisis. There is even speculation that Iceland is now entering an economic depression, making it the first economy of the developed world to plunge into depression due to the global recession of 2008. Although Iceland's economy grew 3.3% during the last quarter of 2009, the overall contraction in GDP over 2009 was 6.5%, less than the 10% originally forecasted by the IMF.^[28][29]

See also

• Economy of Europe

Notes

1. ^ http://www.sedlabanki.is/?PageID=179
2. ^ "Doing Business in Iceland 2010". World Bank. http://www.doingbusiness.org/ExploreEconomies/?economyid=88. Retrieved 2010-08-18. 
3. ^ "Sovereigns rating list". Standard & Poor's. http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/eu/?subSectorCode=39. Retrieved 26 May 2011. 
4. ^ ^{a b c} Rogers, Simon; Sedghi, Ami (15 April 2011). "How Fitch, Moody's and S&P rate each country's credit rating". The Guardian. http://www.guardian.co.uk/news/datablog/2010/apr/30/credit-ratings-country-fitch-moodys-standard. Retrieved 31 May 2011. 
5. ^ "International Reserves and Foreign Currency Liquidity - ICELAND". International Monetary Fund. 18 May 2011. http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/isl/eng/curisl.htm. Retrieved 31 May 2011. 
6. ^ Source: Statistics Iceland.
7. ^ Iceland: One of the world´s most free economies, Invest in Iceland Agency
8. ^ Human Development Index
9. ^ Human Development Report 2007/2008 - Inequality measures, ratio of richest 10% to poorest 10%
10. ^ "The Economy of Iceland". The Central Bank of Iceland. http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=3363. Retrieved 2006-06-22. 
11. ^ Gross energy consumption by source 1987–2005, Statistics Iceland, accessed 2007-05-14
12. ^ Presentation to the International Partnership for the Hydrogen Economy, Icelandic Ministry of Industry and Commerce & Ministry for Foreign Affairs, published January 2005, accessed 2007-05-14
13. ^ Powering The Plains, South Dakota Public Utilities Commission, published 2003, accessed 2007-05-14
14. ^ "Economy of Iceland". Central Bank of Iceland. p. 23. http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=3363. Retrieved 2006-06-22. 
15. ^ "Viðbótarstækkun Norðuráls flýtt". Norðurál. April 3, 2006. Archived from the original on 2006-05-05. http://web.archive.org/web/20060505160737/http://nordural.is/default.asp?sid_id=1878&tre_rod=001. Retrieved 2006-06-22. 
16. ^ "Fjarðaál Overview". Alcoa Aluminum. http://www.alcoa.com/iceland/en/alcoa_iceland/fjardaal_background.asp. Retrieved 2006-06-22. 
17. ^ "Bjork's mother on hunger strike". BBC News. October 17, 2002. http://news.bbc.co.uk/2/hi/entertainment/2336349.stm. Retrieved 2006-06-22. 
18. ^ "Alcoa, Government of Iceland and Municipality of Húsavík Sign Memorandum of Understanding". Alcoa. May 17, 2006. http://www.alcoa.com/iceland/en/news/whats_new/2006/2006_05_mou.asp. Retrieved 2006-06-22. 
19. ^ "Century Aluminum Company Icelandic Subsidiary Signs Energy MOU for Helguvik Greenfield Smelter". Nordural. June 2, 2006. http://www.nordural.is/Default.asp?Sid_Id=1879&tId=2&Tre_Rod=002. Retrieved 2006-06-22. ^{[dead link]}
20. ^ Iceland takes over 2nd biggest bank, Russia hovers, eleconomista.es (7 October 2008)
21. ^ Goodman, Matthew (2008-10-05). "Icelands Kaupthing seeks to calm fears on finances". The Times (London). http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4883097.ece. Retrieved 2010-05-01. 
22. ^ ^{a b c d} "The World Factbook - Iceland - Economy". Central Intelligence Agency. https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html. Retrieved 2006-06-21. 
23. ^ "Country Commercial Guide - Iceland". United States Commercial Service. Archived from the original on 2006-06-15. http://web.archive.org/web/20060615140041/http://www.buyusa.gov/iceland/en/86.html#_section4. Retrieved 2006-06-21. 
24. ^ "Notes and Coin". Central Bank of Iceland. http://www.sedlabanki.is/?PageID=187. Retrieved 2006-06-21. 
25. ^ "The Economy of Iceland". The Central Bank of Iceland. p. 9. http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=3363. Retrieved 2006-06-22. 
26. ^ http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=4904
27. ^ "Vanishing vigilantes". The Economist. 2007-07-19. http://www.economist.com/finance/displaystory.cfm?story_id=9516621. 
28. ^ Iceland scowls at UK after crisis, BBC, December 16, 2008.
29. ^ Iceland set to vote on debt repayment after talks fail, BBC, March 5, 2010.

External links

• OECD's Iceland country Web site
• OECD Economic Survey of Iceland
• Icelandic Bureau of Statistics
• Iceland Stock Exchange (ICEX)
• Integrated financial services in Iceland
• Iceland Country Exports Profile
• Exploding Range Rovers Tell Iceland's Story NPR, March 19, 2009
• Wall Street on the Tundra by Michael Lewis, Vanity Fair, April 2009 issue