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Published by: Andres Rodriguez Seijo on Dec 10, 2011
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© 2011 International Monetary Fund
August 2011IMF Country Report No. 11/263 August 16, 2011 August 26, 2011 August 16, 2011July 1, 2011 January 29, 2001
Iceland: Sixth Review Under the SBA and Proposal for Post-Program Monitoring— Staff Report; Staff Statement; Press Release on the Executive Board Discussion; andStatement by the Executive Director for Iceland.
In the context of the Iceland: sixth review under the stand-by arrangement and proposal for post- program monitoring, the following documents have been released and are included in this package:
 
The staff report for the Iceland: Sixth Review Under the SBA and Proposal for Post-ProgramMonitoring, prepared by a staff team of the IMF, following discussions that ended onJune 30, 2011, with the officials of Iceland on economic developments and policies. Based oninformation available at the time of these discussions, the staff report was completed onAugust 16, 2011. The views expressed in the staff report are those of the staff team and donot necessarily reflect the views of the Executive Board of the IMF.
 
A staff statement of August 22, 2011 updating information on recent developments.
 
A Press Release summarizing the views of the Executive Board as expressed during itsAugust 26, 2011 discussion of the staff report that completed the request and/or review.
 
A statement by the Executive Director for Iceland.The documents listed below have been or will be separately released.Letter of Intent sent to the IMF by the authorities of Iceland*Technical Memorandum of Understanding**Also included in Staff ReportThe policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
th
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.org
International Monetary FundWashington, D.C.
 
 INTERNATIONAL MONETARY FUNDICELAND
Sixth Review Under the Stand-By Arrangement and Proposal for Post-ProgramMonitoring
Prepared by the European Department in Consultation with Other DepartmentsApproved by Poul M. Thomsen and James Roaf August 16, 2011
 
Stand-By Arrangement:
A SBA in an amount equivalent to SDR 1.4 billion($2.2 billion, 1190 percent of quota) was approved by the Executive Board on November 19, 2008 (Country Report No. 08/362). A first purchase of SDR 560 millionwas made following the Board meeting. Second, third, fourth, fifth, and sixth purchases, totaling SDR 560 million, were made following completion of the first,second, third, fourth, and fifth reviews. The seventh and final purchase, equivalent toSDR 280 million, would become available upon completion of the sixth review. TheArrangement expires on August 31, 2011.
 
Status
. The program is on track, and all end-June performance criteria were met.
 
Summary
. Iceland’s Fund-supported program has been a success, and programobjectives have been met. The economic recovery is tentative. Moderate growth isexpected in 2011, but unemployment remains high and inflation is rising on the back of high commodity prices. Program discussions focused on the revised medium-termfiscal consolidation path. The authorities and staff agreed that there was scope to easethe pace of consolidation over the medium term, given the strong fiscal adjustmentundertaken to date and the favorable public debt dynamics
.
The fiscal target for 2011was also modestly eased. These modifications use up the existing scope for fiscaleasing and it will be critical that the revised plan is adhered to. On monetary policy,there has been an appropriate shift to a tightening bias reflecting inflation risks, the fallin real interest rates, and the need to gradually normalize the risk-adjusted policy rate ascapital controls are lifted
.
The initial steps of the capital account liberalization strategyare being implemented as planned. On private sector debt, the pace of restructuringfinally appears to be accelerating, but efforts must continue until the process is broughtto a close. Recapitalization of Iceland’s core banking system has been completed. Work on reducing remaining vulnerabilities and strengthening prudential regulations andsupervision is ongoing, and efforts should be sustained. Financing assurances are in place, and Iceland’s Nordic partners and Poland have extended their lending facilitiesuntil end-2011.
 
 
Discussions.
See Fund Relations Appendix.
 
 
2
 
Contents PageI.
 
Context .................................................................................................................................4II.
 
Recent Economic Developments .........................................................................................4III.
 
Outlook ................................................................................................................................6IV.
 
Policy Discussions .............................................................................................................10A.
 
Fiscal Policy ...........................................................................................................11B.
 
Monetary Policy and Capital Controls ...................................................................14C.
 
Financial Sector Policies ........................................................................................18D.
 
Private Sector Debt Restructuring .........................................................................20E.
 
Program Modalities ................................................................................................22V.
 
Staff Appraisal ...................................................................................................................24Tables1.
 
Selected Economic Indicators, 2005–11 ............................................................................272.
 
Money and Banking ...........................................................................................................283.
 
Medium-Term Projections, 2008–16 .................................................................................294.
 
Balance of Payments, 2008–16 ..........................................................................................305.
 
General Government Operations, 2008–16 .......................................................................316.
 
Central Government Operations, 2008–16 ........................................................................327.
 
Estimated Impact of 2011 Fiscal Measures .......................................................................338.
 
Reforms of the Fiscal Framework ......................................................................................349.
 
Status of the Financial Sector ............................................................................................3610.
 
Access and Phasing Under the Stand-By Arrangement, 2008–11 .....................................3711.
 
External Financing Requirements and Sources, 2010–16 .................................................3812.
 
Indicators of Fund Credit, 2008–16 ...................................................................................39Figures1.
 
Recent Developments in Demand and Labor ......................................................................52.
 
Price and Exchange Rate Developments .............................................................................73.
 
Financial and Credit Market Developments ........................................................................84.
 
Monetary Policy Operations and Liquidity Management ..................................................165.
 
Indicators of Monetary Policy Stance ................................................................................176.
 
Private Sector Debt Restructuring .....................................................................................21

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