The Icelandic Government has reached an agreement ad referendum with a mission from the International Monetary Fund (IMF) on a comprehensive stabilisation programme.
We have reached agreement ad referendum with a mission from the IMF on an economic stabilisation programme that could be supported by a stand-by arrangement with the fund. The mission will now return to Washington to get approval of this programme from the IMF’s management. We are confident that the IMF’s management will support the programme and submit it for approval by the IMF’s executive board as soon as possible. The economic programme will be supported by an SDR 1.4 billion (USD 2 billion) loan under a two-year Stand-By-Arrangement. Iceland would be able to draw SDR 560 million (USD 830 million) immediately after the Board approval. It is also expected that an agreement with the IMF will encourage lending from other sources.
Economic Stabilisation Programme Objectives:
The objectives of our programme are as follows:
1. Restore confidence in the Icelandic economy and stabilise the Icelandic krona through a comprehensive and strong macro-economic programme;
2. Restore fiscal sustainability and prepare a strong medium-term fiscal consolidation programme;
3. Implement a sound banking strategy to re-establish a viable banking system to support the Icelandic economy.
The short term stabilisation of the exchange rate is essential in order to get inflation under control and normalise business conditions, particularly with regard to foreign trade. This will be achieved by reintroducing a flexible exchange rate regime backed up by strong foreign currency reserves and the full commitment of the Central Bank of Iceland to apply the means necessary to get the desired results. Given the relatively large depreciation that has already taken place, and the contraction in domestic demand which is expected, there is little doubt that following the initial stabilisation period, a significant currency appreciation is to be expected. However, the exchange rate may show considerable volatility in the beginning, which the programme is designed to address.
Another main objective of our programme is to create sound fiscal strategies given the extraordinary challenge that public finances in Iceland are now facing as a result of the cost of bank restructuring and the inevitable revenue loss as the economy slows down. To obtain the fiscal objectives there will be a need to limit the discretionary relaxation in the current budget proposal and to implement significant tightening of the structural balance in the medium term, which is a necessary precondition for a sustainable growth path of the Icelandic economy.
Finally, our programme aims to facilitate the creation of a sound banking system for Iceland by a series of reforms regarding operational procedures as well as a revision of financial regulation in accordance with international best-practice. This will include, among other things, revised articles of bank insolvency as well as general insolvency rules.
Prime Minister Geir H. Haarde:
“This programme will enable us to secure funding and gain access to the necessary technical expertise required to stabilise the Icelandic krona and to provide support for the development of a healthier financial system. As a result, Iceland will commit to a sustainable long-term economic policy, and a plan for the recovery of the Icelandic economy. A thorough review of the Icelandic banking regulatory framework will also form part of this programme,” said Prime Minister Geir H. Haarde.
Prime Minister Geir H. Haarde added:
“With our announcement today of our intention to cooperate with the IMF, Iceland is now in a much better position to establish a sound economic and financial base for the country. We would like to thank all those who have assisted us in these dark days and we now have grounds for a more optimistic view of the future.”
Foreign Minister, Ingibjörg Sólrún Gísladóttir:
”The Icelandic government has taken decisive measures and is working hard to solve the problems it is facing. We realise that the immediate future remains challenging due to the global financial crisis but I am convinced that international cooperation and solidarity is essential for us to recover, reform and regain Iceland’s good reputation abroad. We are confident that the prospective support of the IMF will provide the necessary impetus for some of our friends and allies in the international system to contribute to the reconstruction of the Icelandic financial system.”