Around the turn of the millennium, Iceland
was rapidly transformed from a fishing nation to an
international player in the banking and finance sector.
In the context of the global financial crisis in 2008,
an acute banking crisis arose in the small country and
the air went completely out of the Icelandic economy.
Today, Iceland is back on its feet thanks to high
revenues from fishing and tourism.
Fishing has long dominated Icelandic exports, making
the country's economy vulnerable to fluctuating access
to fish and varying prices of catches. Up to 2000,
fishing accounted for about 75 percent of export
Major imports by Iceland, covering a full list of top products imported by the country and trade value for each product category.
In 1994 Iceland joined the EEA agreement (see below),
which meant, among other things, increased freedom of
movement for capital and people. As a result, the
Icelandic market became more interesting for foreign
investors. In addition, from the late 1990s, Icelandic
finance companies, banks and venture capitalists began
to acquire companies in the UK, Scandinavia and the US.
Investments grew rapidly and, together with
successful investments in expanded hydropower and
aluminum production, the growing financial sector meant
that Iceland became less and less dependent on fishing.
Today, the fishing and aluminum industries account for
approximately the same amount of export value.
The large foreign investment in aluminum production,
in turn, generated other industrial investments. Iceland
became successful in computer technology, bio and
genetic engineering and pharmaceutical manufacturing.
The service sector also grew strongly, especially the
Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including ISL which represents the country of Iceland.
Between 2003 and 2006, Iceland's gross domestic
product (GDP) increased on average by 4-5 percent
annually. The economic upswing drove up consumption and
inflation, which a few months before the bank collapse
was 14 percent on an annual basis. Food prices were the
highest in Europe, more than 60 percent higher than the
Investments in the financial sector had grown so
rapidly that in 2007 they were ten times larger than
Iceland's entire GDP. The deregulation and easing of the
credit rules had meant that the size of the banks had
doubled over the period 2001-2008. Foreign debt
increased from 100 percent of GDP in 2002 to 500 per
cent in 2007, of which most of the debt was money
borrowed by the banks.
During the first half of 2008, the value of the
Icelandic krona began to fall sharply, which meant that
many of the country's companies had financial problems.
When the international financial crisis broke out in the
autumn of 2008, the Icelandic financial bubble burst.
The three major banks Kaupthing (Kaupŝing), Landsbanki
and Glitnir suddenly suffered from liquidity when the
global loan market was strangled. They were forced to
sell foreign assets. Prices in the Icelandic real estate
market fell and the banks sat with unsecured housing
The Icelandic currency continued to plummet. Between
August 2008 and November 2009, the krona lost half its
value. Thanks to a new law, the Financial Supervisory
Authority was given the opportunity to intervene in the
banks' operations, force them to merge or file for
bankruptcy. In October, the state took over the three
major banks and their assets were written down by five
times Iceland's GDP. The state guaranteed the Icelandic
customers their savings. However, this did not apply to
foreign savers, which had serious consequences for
Iceland in connection with the so-called Icesave
business (see Modern history).
In connection with the state takeover of the major
banks, 90 percent of the country's entire financial
sector, including smaller banks, insurance companies,
investment companies, etc. collapsed, and the
construction industry also hit hard and halved in size
between 2007 and 2013.
Iceland applies for support loans
In October 2008, Iceland was forced to apply for a
loan from the International Monetary Fund (IMF). It was
the first time in 32 years that a western country had to
turn to the IMF for help. The IMF paid out EUR 1.6
billion in various rounds. The loan terms were both
severe budget cuts and tax increases.
Iceland also borrowed EUR 1.8 billion from Sweden and
other Nordic countries. Government debt increased from
30 percent of GDP just before the crisis to around 130
per cent of GDP.
Iceland now entered an economic depression. The
country's GDP shrank by almost 7 percent in 2009 and by
4 percent the following year. A wave of corporate
bankruptcies led to unemployment rising to a record
level of over 9 percent. The Icelandic public also
suffered from the crisis years, when taxes were
increased, the savings decreased in value as did the
value of, for example, housing. However, the government
tried to protect the most vulnerable, including through
special support for indebted households.
The economy is turning upwards
But unlike crisis-hit countries in the euro zone,
Iceland had its "foreign exchange arms". When the
króna's value fell dramatically against other
currencies, it hit hard on the Icelanders in the form of
sharply reduced real wages, but at the same time it
restored Icelandic competitiveness. In autumn 2010, GDP
began to grow again and unemployment fell. A weighty
reason was that tourism increased when it became cheaper
to visit Iceland.
When the economy turned upwards, the financial market
reacted positively and in 2012 Icelandic government
bonds could be resold. This meant that Iceland could pay
off large parts of its loans to the IMF and the Nordic
countries in advance. In 2013, the credit rating agency
raised Moody's Iceland's credit rating from negative to
stable. In the same year, government debt was down to 73
per cent of GDP (compared with 130 percent in 2008).
Even after 2014, Iceland has experienced some growth
and moderate inflation. In 2015, unemployment had fallen
to just over 4 percent. According to official
statistics, Iceland's GDP in March 2015 was again at the
same level as before the financial crisis.
In June of the same year, the government announced
that the capital controls introduced in 2008 that
prevented foreign companies from bringing capital out of
Iceland would be phased out. This prompted Standard &
Poor's credit rating agency to raise Iceland's credit
rating another snap in early 2016. In recent years,
capital controls have been inhibiting for Icelandic
companies with interests abroad and a deterrent for
foreign companies wishing to invest in Iceland.
The fishing nations around the Arctic agreed at the
end of 2017 to stop all commercial fishing in the Arctic
waters for the time being. In line with global warming,
fish stocks have decreased in size and fishing hours
have begun to take new paths. During the stop, the
nations will conduct joint research to find out more
about the ecosystems in the area in order to eventually
be able to resume fishing. The agreement includes
Canada, the EU, China, Denmark (Greenland and the Faroe
Islands), Iceland, Japan, Norway, South Korea, Russia
and the USA.
Iceland, the EEA and the EU
Iceland has been a member of the EEA agreement since
1994, which provides access to the EU's internal market
and relatively good conditions for Icelandic fish
exports. Iceland's main argument against EU membership
is the fear of losing control over fishing waters. The
country joined the free trade area Efta in 1970, but it
has lost significance as most members now join the EU.
EFTA currently has only four members: Iceland, Norway,
Switzerland and Liechtenstein. In business, there are
votes that have long spoken for Iceland joining both the
EU and the monetary union EMU, but among the general
public opinion the majority is opposed to this.
FACTS - FINANCE
GDP per person
US $ 73,202 (2018)
US $ 25,882 million (2018)
4.6 percent (2018)
Agriculture's share of GDP
4.6 percent (2016)
Manufacturing industry's share of GDP
9.4 percent (2016)
The service sector's share of GDP
63.8 percent (2016)
2.8 percent (2019)
Government debt's share of GDP
37.6 percent (2018)