Third Review of Iceland’s Economic Recovery Programme approved by IMF Executive Board

The Executive Board of the International Monetary Fund (IMF) today approved the third review of the Economic Recovery Programme agreed by the IMF and the Icelandic government. This opens the way for disbursement of the third tranche of the Fund’s loan provided to the Icelandic government which amounts to around ISK 19 billion. In addition, loans from Poland and Nordic countries are also expected to be forthcoming following the review.

(text from the Icelandic Ministry of Economic Affairs)

Upon the conclusion of the review, the Icelandic government sent the IMF a new Letter of Intent, describing Iceland’s economic policy. It lays out the basis for economic recovery and describes the considerable progress made since the collapse. The improved fiscal balance has become evident in growing trust, ISK appreciation and greater economic stability since the end of 2009. Unemployment is expected to have peaked, inflation is dropping rapidly and positive economic growth is expected in the latter half of 2010 according to forecasts. Although public debt is relatively high, it is considered to be sustainable. The fiscal deficit as a ratio of GDP of 14% at mid-2009 is forecast to decrease to 9% in 2010. Furthermore, credit default swap (CDS) spreads on Treasury debt have dropped to around 300 bps.

The government’s economic strategy is based on four main pillars. Firstly, major effort is devoted to rebuilding a solid financial system which can fulfil the needs of household and corporate customers. Secondly, the financial position of the Treasury and the public sector needs to be reinforced and here the autumn budget will play a key role. In the third place, further steps need to be taken in relaxing capital account controls and determining the outlines of long-term monetary policy. Fourthly, mitigation of household and corporate debt must be ensured with the active participation of credit institutions. The verdict recently pronounced by the Supreme Court and proposed legislation concerning foreign-denominated credit will ensure a fair outcome in this respect and expedite debt restructuring. The objectives of the economic programme are to ensure sustainable growth and long-term economic opportunities.

“Today’s approval is a very significant statement of trust in the Icelandic economy and recognition that we have been successful in achieving our stated objectives,” says Árni Páll Árnason, Minister of Economic Affairs. “We welcome the expeditious approval of the review and look forward to dealing with the next urgent tasks on our agenda which have been defined through our very effective co-operation with the IMF’s experts. Our goal remains to resolve the consequences of the banks’ collapse by the end of the programme period by laying a solid foundation for steady and sustainable growth in the long-term.”