Iceland Economy Facts
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 earnings.
- Countryaah.com: 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 tourism industry.
- 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. Check findjobdescriptions to learn more about 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 EU average.
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 (Kaupþing), 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 loans.
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)