Economy of Iceland

Iceland's small economy is heavily dependent on fishing and related industries, which account for more than 60% of export earnings. The state of the economy is heavily dependent on conditions in markets for marine products.

Contents

1 Imports and exports 2 Inflation 3 Resources and energy 4 Transportation 5 Economic agreements and policies 6 Banks 7 Stock Market 8 Other Financial Markets 9 Growth 10 Statistics 11 See Also 12 External links

Imports and exports

Marine products account for more than 60% of Iceland's total export earnings. Other important exports include aluminium, ferro-silicon, equipment and electronic machinery for fishing and fish processing, and woollen goods. Foreign trade plays an important role in the Icelandic economy. Exports and imports each account for one-third of GDP. Most of Iceland's exports go to the EU and EFTA countries, the United States, and Japan.

Iceland's relatively liberal trading policy has been strengthened by accession to the European Economic Area in 1993 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland's exports, particularly seafood products. However, the agricultural sector remains heavily subsidized and protected; some tariffs range as high as 700%.

Inflation

Iceland's economy is prone to inflation but remains rather broad-based and highly export-driven. During the 1970s the oil shocks hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Since then, inflation has dramatically fallen, and the current government is committed to tight fiscal measures. The current unemployment rate stands at a record low 1%. Iceland's economy has experienced moderately strong GDP growth (3%) for the past 3 years. Inflation averaged merely 1.5% from 1993-94, and only 1.7% from 1994-95. Increasing economic activity is predicted again for 2003, and inflation projections for 2002 are 4%.

Resources and energy

Iceland has few proven mineral resources, although deposits of diatomite (skeletal algae) are being developed. The only natural resource conversion in Iceland is the manufacture of cement. Most buildings are concrete with expensive imported wood used sparingly when necessary.

Abundant hydroelectric and geothermal power sources are gradually being harnessed, and in 1991 80% of the population enjoyed geothermal heating. The hydroelectric power is harnessed by the many Icelandic hydroelectric power stations. By far the largest is Kárahnjúkavirkjun (690 MW), which is being constructed in the area north of Vatnajökull. Other stations include Búrfell (270 MW), Hrauneyjarfoss (210 MW), Sigalda (150 MW), Blanda (150 MW), and more. Iceland has explored the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminium and ferro-silicon smelting plants. Nordurál Aluminum is a wholly owned $180 million investment by Columbia Ventures of Washington State. The plant employs over 150 people and accounted for a 1% growth rate in Iceland's 1998 GDP.

Transportation

The main form of transportation in Iceland is the national road system, connecting most of the population centers. Organized road building began in the 1900s and has greatly expanded since 1980. The main highway, Þjóðvegur 1, is a circular road that runs along the coast almost completely around Iceland, leaving out only Vestfirðir. Þjóðvegur 1 lies through most of the main urban centers in Iceland, but there are also many smaller roads to smaller towns and villages, including some mountain roads in the Icelandic Highlands.

Regular air and sea service connects Reykjavík with the other main urban centers. In addition, airlines schedule flights from Iceland to Europe and North America. The national airline, Icelandair, is one of the country's largest employers. Domestic air travel remains important for those that need to travel frequently between different parts of the country, but coastal sea travel is reserved only for transportation of goods and even so, it is giving way to transportation by trucks.

Iceland has no railroads.

Economic agreements and policies

Iceland became a full European Free Trade Association member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area, effective January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries. However, the government of Iceland remains opposed to EU membership, primarily because of Icelanders' concern about losing control over their fishing resources.

The center-right government of Iceland plans to continue its policies of reducing the budget and current account deficits, limiting foreign borrowing, containing inflation, revising agricultural and fishing policies, diversifying the economy, and privatizing state-owned industries.

Banks

Iceland currently has three major commercial banks - Íslandsbanki (Bank of Iceland), Landsbanki Íslands (National Bank of Iceland) and KB Banki (Kaupthing Bank) - and a fourth, Sparisjóðabanki Íslands (Icebank), which serves as the clearinghouse for the 29 locally run savings banks. All of the major banks are publicly listed on Kauphöll Íslands (the Iceland Stock Exchange), though each was either wholly state-owned or merged with previously state-owned banks in the past.

The banks are competitive and each has branches and ATMs across Iceland. Each of the three major banks usually holds about a quarter of the total deposits, with the remaining share held by the savings banks and a small Postal Giro system. Because of the persistence of high inflation, most deposits are held in time (savings) deposits and currency-linked accounts rather than demand (checking) deposits.

Each of the major Icelandic commercial banks has offices in various American and European banking centers, but no foreign bank currently operates in Iceland due to the long distances and small market. The commercial banks have become much more aggressive in their lending since the liberalization of interest rates in 1986.

Stock Market

Because of the persistence inflation, historical reliance on fish production and the long-standing public ownership of the commercial banks, equity markets were slow to develop. Kauphöll Íslands, the Iceland Stock Exchange (better known as ICEX), was created in 1985. Trading in Icelandic T-Bonds began in 1986 and trading in equities commenced in 1990. All domestic trading in Icelandic equities, bonds and mutual funds takes place on the ICEX.

The ICEX has used electronic trading systems since its creation. Since 2000, SAXESS, the joint trading system of the NOREX alliance, has been used. There are currently two equities markets on the ICEX. The Main Market is the larger and better known of the two. The Alternative Market is a less regulated over-the-counter market. Because of the small size of the market, trading is illiquid in comparison with larger markets. A variety of firms across all sectors of the Icelandic economy are listed on the ICEX.

Other Financial Markets

Historically, investors tended to be reticent to hold Icelandic bonds due to the persistence of high inflation and the volatility of the Icelandic Króna. What did exist was largely limited to bonds offered by the central government. The bond market on the ICEX has boomed in recent years, however, largely due to the resale of mortgages as housing bonds.

A mutual fund market exists on the ICEX in theory, but no funds are currently listed. A small derivatives market formerly existed, but was closed in 1999 due to illiquidity.

Growth

Iceland's economy has been diversifying into manufacturing and service industries in the last decade, and new developments in software production, biotechnology, and financial services are taking place. The tourism sector is also expanding, with the recent trends in ecotourism and whale-watching. Growth has slowed between 2000 and 2002, but is expected to pick up in the future.

Statistics

GDP: purchasing power parity - $8.678 billion (8.678 G$) (2003 est.)

GDP - real growth rate: 6.0% (2004 est.)

GDP - per capita: purchasing power parity - $30,900 (2003 est.)

GDP - composition by sector:
agriculture: 14% (includes fishing 12%)
industry: 21%
services: 65% (2001 est.)

Population below poverty line: NA%

Household income or consumption by percentage share:
lowest 10%: NA%
highest 10%: NA%

Inflation rate (consumer prices): 2.1% (2003 est.)

Labor force: 160,000 (2003)

Labor force - by occupation: agriculture 5.1%, fishing and fish processing 11.8%, manufacturing 12.9%, construction 10.7%, other services 59.5% (1999)

Unemployment rate: 2.6% (2004 est.)

Budget:
revenues: $4.205 billion
expenditures: $4.405 billion, including capital expenditures of $467 million (2003)

Public debt 41.5% of GDP (2003)

Industries: fish processing; aluminum smelting, ferrosilicon production, geothermal power; tourism

Industrial production growth rate: 8.1% (2003 est.)

Electricity - production: 7.894 TWh (2001)

Electricity - production by source:
fossil fuel: 0.1%
hydro: 82.5%
nuclear: 0%
other: 17.5% (2001)

Electricity - consumption: 7.341 TWh (2001)

Electricity - exports: 0 kWh (2001)

Electricity - imports: 0 kWh (2001)

Agriculture - products: potatoes, turnips, cattle, sheep, fish, chicken, pork

Exports: $2.379 billion f.o.b. (2003)

Exports - commodities: fish and fish products 70%, animal products, aluminum, diatomite and ferrosilicon

Exports - partners: Germany 17.4%, UK 17.4%, Netherlands 11.2%, US 9.8%, Spain 6.3%, Denmark 5%, Norway 4.5%, France 4% (2003)

Imports: $2.59 billion (2003)

Imports - commodities: machinery and equipment, petroleum products; foodstuffs, textiles

Imports - partners: Germany 11.8%, Denmark 8%, US 7.5%, UK 7.5%, Norway 7%, Sweden 6.5%, Netherlands 6.2%, Italy 4.7% (2002)

Debt - external: $2.6 billion (1999)

Economic aid - recipient: $NA

Currency: 1 Icelandic Króna (ISK) = 100 aurar (aurar is plural; singular eyrir)

Exchange rates: Icelandic Krónur (ISK) per US$1 - 91.66 (2002), 97.42 (2001), 78.62 (2000), 72.352 (1999), 70.958 (1998), 70.904 (1997), 66.500 (1996), 64.692 (1995)

Fiscal year: calendar year

See Also

• Economy of Europe

External links

• Economic figures updated regularly can be found on the official website of the Icelandic Bureau of Statistics - http://www.statice.is
• Kauphöll Íslands (Iceland Stock Exchange - ICEX) - http://www.icex.is
• Iceland Country Profile on the link2exports website (http://www.link2exports.co.uk/marketprofiles/regions.asp?lsid=1458/)

European Free Trade Association (EFTA)

Iceland | Liechtenstein | Norway | Switzerland

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