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

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

Upon the conclusion of the review, the Icelandic government sent the IMF a new Letter of Intent, describing Iceland’s economic policy. The Letter addresses that an economic recovery is gradually taking hold, apparent by the continued stability of the krona, a declining debt path, and falling inflation. Trade surpluses have allowed authorities to begin purchases of foreign currency to bolster reserves. Recent indicators suggest that demand is slowly picking up, and growth is expected to turn positive in 2011.

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. The recently passed budget for 2011 is a key factor and a stronger primary balance than expected will be delivered. 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. New legislation on foreign denominated loans and an agreement between the government, financial institutions and pension funds regarding measures for household debt relief lay the foundation for the debt restructuring that now must be accelerated. Furthermore, an agreement has been reached regarding a new framework for accelerating voluntary debt restructuring of small and medium enterprises. The objectives of the economic programme are to ensure sustainable growth and long-term economic opportunities.

“The approval of the Review is an important milestone,” said Árni Páll Árnason, Minister of Economic Affairs. “We appreciate the positive feedback from the Fund regarding the disciplined austerity measures put forth by the government and our handling of economic policy. By accelerating private debt restructuring we pave the way for economic recovery in the coming months and further strengthen the financial sector.”

(Icelandic Ministry of Economic Affairs press release)