The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Iceland’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of this review enables the immediate disbursement of an amount equivalent to SDR 140 million (about € 155 million, or US$ 224.58 million), which would bring total disbursements under the program to an amount equivalent to SDR 1,120 million (about € 1.2 billion or US$ 1.8 billion). The Board also approved a request for a modification of end-June performance criteria and the rephasing of access to combine the last two purchases

The 33-month SBA was approved on November 19, 2008 (see Press Release No. 08/296) for an amount equivalent to SDR 1.4 billion (about US$ 2.2 billion) and was subsequently extended to August 31, 2011 (see Press Release No 10/156). The arrangement entails exceptional access to IMF resources, amounting to 1,190 percent of Iceland’s quota.

Iceland is continuing to emerge from the crisis. The economy is gradually recovering, and annual growth is set to turn positive in 2011. Impressive progress has been made in implementing program policies, notably with respect to putting public finances on a sustainable path, stabilizing the exchange rate, and bringing inflation down. The key challenges going forward are to reduce the high level of unemployment, lift capital controls in an orderly manner, accelerate private sector debt restructuring, and strengthen financial sector supervision and regulation.

Following the Executive Board's discussion, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, stated:

“Considerable progress has been made under the Fund-supported program. Policy implementation has remained strong, laying the foundation for a sustainable recovery. Inflation has remained low, although recent pressures from wages, commodity prices, and the exchange rate have increased risks. Risks to growth emanate mainly from delays in investment projects, slow debt restructuring in the private sector, and high unemployment.

“The new strategy to lift capital controls is appropriately cautious. Given the scale of potential outflows, the removal of capital controls must proceed gradually. The authorities’ intention to condition the pace of liberalization on the balance of payments outlook and the stability of the financial system is appropriate. A further build-up of international reserves will be important for the successful implementation of this strategy.

“The authorities are appropriately focused on continuing to pursue a prudent fiscal policy over the medium term. There may be some scope to moderately ease the pace of fiscal adjustment to support the nascent recovery. At the same time, it will be important that the government continues to resist absorbing private sector losses and safeguard public debt sustainability. The strength of asset recovery from the Landsbanki’s estate provides some comfort that contingent liabilities remain contained, although the resolution of the Icesave dispute through legal channels could increase fiscal risks.

“The pace of household and corporate debt restructuring should accelerate. The new measures to provide relief to distressed households and corporates, and reduce the level of nonperforming loans, should be implemented as soon as possible.

“Strengthening the financial sector remains a priority. This would require improving prudential oversight, recapitalizing vulnerable institutions, lowering banks’ funding and liquidity risks, and reducing non-performing loans. Remaining gaps in the legal, regulatory, and supervisory framework should also be addressed.”