Economy of Iceland
Encyclopedia
The economy of Iceland is small and subject to high volatility. In 2007, gross domestic product
was US$
12.144bn in total and $38,400 per capita
, based on purchasing power parity
(PPP) estimates. The financial crisis of 2007–2010 has produced a decline in GDP and employment, although the magnitude of this decline remains to be determined.
Iceland
has a mixed economy
with high levels of free trade
and government intervention. However, government consumption is less than in other Nordic countries
.
In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedom as well as civil freedoms. As of 2007, Iceland topped the list of nations ranked by Human Development Index
and was one of the most egalitarian, according to the calculation provided by the Gini coefficient.
From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in a sweeping financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund
and a range of European countries in November 2008.
, since the island's terrain is mostly mountainous and volcanic.
Iceland has few proven mineral
resources. In the past, deposits of sulphur have been mined, and diatomite (skeletal algae) was extracted from lake Mývatn
until recently. That plant has now been closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement
. Concrete
is widely used as building material, including for all types of residential housing.
By harnessing the abundant hydroelectric and geothermal power sources, Iceland's renewable energy industry
provides over 70% of all the nation's primary energy
- proportionally more than any other country - with 99.9% of Iceland's electricity
being generated from renewables. The Icelandic Parliament decided in 1998 to convert vehicle and fishing fleets to hydrogen fuel
and consequently Iceland expects to be energy-independent, using 100% renewable energy
, by 2050. As part of this program, the country opened the world's first public hydrogen filling station in 2003. As of 2007, it has about 40 hydrogen-powered vehicles on the road, second only to the U.S. state of California.
By far the largest of the many Icelandic hydroelectric power stations
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.
Recent geological research has improved the likelihood of Iceland having sizable off-shore oil reserves within its 200 mile economic zone
in the seabed
of the Jan Mayen
area.
Aluminium smelting
is the most important power-intensive industry in Iceland. There are currently three plants in operation, with one under construction and two in the planning stage.
Rio Tinto Alcan operates Iceland's first aluminium smelter (plant name: ISAL), in Straumsvík, near the town of Hafnarfjörður
. The plant has been in operation since 1969. Its initial capacity was 33,000 metric tons per year (mtpy) but has since been expanded several times and now has a capacity of about 189,000 mtpy.
The second plant started operations in 1998 and is operated by Norðurál, a wholly owned subsidiary of U.S.-based Century Aluminium Company. It is located in Grundartangi in Western Iceland near the town of Akranes
. Its current capacity is 220,000 mtpy but an expansion to 260,000 mtpy is already underway and is expected to be completed in the last quarter of 2007.
United States-based aluminum manufacturer Alcoa
has become a major investor in Iceland and has a major plant under construction near the town of Reyðarfjördur. The plant, known as Fjarðaál (or "aluminum of the fjord
s") has a capacity of 346,000 mtpy and was put into operation in April 2008. To power the plant, Landsvirkjun built Kárahnjukar
, a 630-megawatt hydropower station. This is an astonishing figure, as prior to this development, the entire nation of Iceland's power usage was in the 300-megawatt range.
According to Alcoa, construction of Fjarðaál entailed no human displacement, no impact on endangered species
, and no danger to commercial fisheries; there will also be no significant effect on reindeer, bird and seal populations. However, the project drew considerable opposition from environmentalist groups such as the World Wide Fund for Nature
, which called on Alcoa to abandon the plan to build Fjarðaál. In addition, Icelandic singer Björk
was a notable early opponent to the plan; protesting the proposed construction, the singer's mother, Hildur Rúna Hauksdóttir, went on a hunger strike
in 2002.
Alcoa is also conducting a feasibility study on the possibility of building a second plant in Iceland near Húsavík
. That plant would have a 250,000 mtpy capacity and was planned to be entirely powered entirely by geothermal power
, however estimates show a potential need for other sources of power. If the decision is made to build the plant, construction would not start before 2010.
Norðurál has signed a memorandum of understanding to purchase electricity for its own aluminum reduction project in Helguvík. The agreement was reached between Norðurál and two Icelandic geothermal power producers, Hitaveita Suðurnesja and Orkuveita Reykjavíkur
. The power supplied will initially support aluminum production of 150,000 mtpy, which will eventually grow to support 250,000 mtpy.
If all of the currently proposed expansions and new plants are constructed, the total production capacity of the Icelandic aluminum industry will rise to 1,542,000 mtpy, compared to the current capacity of 400,000 mtpy.
s, Landsbanki
, Kaupþing Bank
and Glitnir
went into administration in early October 2008. The Althing granted the Icelandic Financial Supervisory Authority sweeping powers over banks as its financial system tottered and its currency plunged. Speculation continues about the financial health of the other banks. All of the major banks were 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.
and mutual fund
s 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.
The most important stock market index is the ICEX 15.
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 because of illiquidity.
(EU) and European Free Trade Association
(EFTA) countries, the United States
, and Japan
. The 2005 value of Iceland's exports was $3.215 billion. f.o.b.
The main imports are machinery and equipment, petroleum
products, foodstuffs and textiles. Cement is Iceland's most imported product. The total 2005 value of imports was $4.582 billion. Iceland's primary import partner is Germany
, with 12.6%, followed by the United States, Norway, and Denmark. Most agricultural products are subject to high tariffs; the import of some products, such as uncooked meat, is greatly restricted for phyto-sanitary reasons.
Iceland's relatively liberal trading policy has been strengthened by accession to the European Economic Area
in 1993 and by the Uruguay Round
, which also brought significantly improved market access for Iceland's exports, particularly seafood
products. However, the agricultural sector remains heavily subsidized and protected; some tariff
s range as high as 700%.
The fishing
industry is one of the most important industries. It provides 40% of export
income and employs 7.0% of the workforce; therefore, the state of the economy remains sensitive to world prices for fish products.
The following table should be considered in light of the dramatic depreciation of the currency in 2008 of approximately 50%,
corrected to EUD or USD. Corrected in this manner imports since the 2007 peak have been are negative not positive. See wikipedia's
entry on icelandic krona.
Source: Statistics Iceland
(statice.is)
Since 1988, Iceland's economy has only ended the year with a surplus
four times , in 1993, 1994, 2009 and 2010.
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. Iceland also has bilateral free trade agreements with several countries outside the EEA. The most extensive of these is the Hoyvík Agreement
between Iceland and the Faroe Islands
, this agreement goes even further than the EEA agreement by establishing free trade in agricultural products between the nations. Iceland has a free trade agreement with Mexico on November 27, 2000.
The center-right government plans to continue its generally neo-liberal policies of reducing the budget and current account deficits, limiting foreign borrowing, containing inflation, revising agricultural and fishing policies, diversifying the economy, and privatising state-owned industries.
since the bank's founding in 1961. The exchange rate in 2008 was 78 krónur to the United States dollar, down from 97.43 in 2001. Iceland's Krona went from 60 to the dollar in November 2007 to 147 to the dollar in November 2008.
Monetary policy
is carried out by the Central Bank of Iceland, which maintains a 2.5% inflation target rate, adopted in March 2001.
During the 1970s the oil shocks (1973
and 1979 energy crisis
) hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Iceland experienced moderately strong GDP growth (3% on average) from 1995 to 2004. Growth slowed between 2000 and 2002, but the economy expanded by 4.3% in 2003 and grew by 6.2% in 2004. Growth in 2005 exceeded 6%. Inflation averaged merely 1.5% from 1993–94, and only 1.7% from 1994-95. Inflation over 2006 topped at 8.6%, with a rate of 6.9% as of January 2007. Standard & Poor's
reduced their rating for Iceland to AA- from A+ (long term) in December 2006, following a loosening of fiscal policy by the Icelandic government ahead of the 2007 elections. Foreign debt has risen to more than five times the value of its GDP, and Iceland's Central Bank has raised short-term interest rates to nearly 15% in 2007. Due to the plunging currency against the euro and dollar, in 2008 inflation is speculated to currently be at 20-25%.
and service industries in the 1990s, and new developments in software production, biotechnology
, and financial services
were taking place. The tourism sector
was also expanding, with the recent trends in ecotourism
and whale watching
. However, in 2008, the Icelandic economy entered a deep recession
in correspondence to the global financial crisis. There is even speculation that Iceland is now entering an economic depression
, making it the first economy of the developed world to plunge into depression due to the global recession of 2008. Although Iceland's economy grew 3.3% during the last quarter of 2009, the overall contraction in GDP over 2009 was 6.5%, less than the 10% originally forecasted by the IMF.
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
was US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
12.144bn in total and $38,400 per capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...
, based on purchasing power parity
Purchasing power parity
In economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
(PPP) estimates. The financial crisis of 2007–2010 has produced a decline in GDP and employment, although the magnitude of this decline remains to be determined.
Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
has a mixed economy
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...
with high levels of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
and government intervention. However, government consumption is less than in other Nordic countries
Nordic countries
The Nordic countries make up a region in Northern Europe and the North Atlantic which consists of Denmark, Finland, Iceland, Norway and Sweden and their associated territories, the Faroe Islands, Greenland and Åland...
.
In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedom as well as civil freedoms. As of 2007, Iceland topped the list of nations ranked by Human Development Index
Human Development Index
The Human Development Index is a composite statistic used to rank countries by level of "human development" and separate "very high human development", "high human development", "medium human development", and "low human development" countries...
and was one of the most egalitarian, according to the calculation provided by the Gini coefficient.
From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in a sweeping financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and a range of European countries in November 2008.
Geography and resources
Iceland occupies a land area of 103,000 square kilometers. It has a 4,790 kilometer coastline and a 200 nautical mile (370.4 km) exclusive economic zone extending over 758,000 square kilometers of water. Approximately 0.7% of Iceland's land is arableArable land
In geography and agriculture, arable land is land that can be used for growing crops. It includes all land under temporary crops , temporary meadows for mowing or pasture, land under market and kitchen gardens and land temporarily fallow...
, since the island's terrain is mostly mountainous and volcanic.
Iceland has few proven mineral
Mineral
A mineral is a naturally occurring solid chemical substance formed through biogeochemical processes, having characteristic chemical composition, highly ordered atomic structure, and specific physical properties. By comparison, a rock is an aggregate of minerals and/or mineraloids and does not...
resources. In the past, deposits of sulphur have been mined, and diatomite (skeletal algae) was extracted from lake Mývatn
Mývatn
Mývatn is a shallow eutrophic lake situated in an area of active volcanism in the north of Iceland, not far from Krafla volcano. The lake and its surrounding wetlands have an exceptionally rich fauna of waterbirds, especially ducks...
until recently. That plant has now been closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement
Cement
In the most general sense of the word, a cement is a binder, a substance that sets and hardens independently, and can bind other materials together. The word "cement" traces to the Romans, who used the term opus caementicium to describe masonry resembling modern concrete that was made from crushed...
. Concrete
Concrete
Concrete is a composite construction material, composed of cement and other cementitious materials such as fly ash and slag cement, aggregate , water and chemical admixtures.The word concrete comes from the Latin word...
is widely used as building material, including for all types of residential housing.
By harnessing the abundant hydroelectric and geothermal power sources, Iceland's renewable energy industry
Renewable energy in Iceland
About 81 percent of total primary energy supply in Iceland is derived from domestically produced renewable energy sources. In 2007, geothermal energy provided about 66 percent of primary energy, the share of hydropower was 15 percent, and fossil fuels 19 percent...
provides over 70% of all the nation's primary energy
Primary energy
Primary energy is an energy form found in nature that has not been subjected to any conversion or transformation process. It is energy contained in raw fuels, and other forms of energy received as input to a system...
- proportionally more than any other country - with 99.9% of Iceland's electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
being generated from renewables. The Icelandic Parliament decided in 1998 to convert vehicle and fishing fleets to hydrogen fuel
Hydrogen fuel
An ecologically-friendly fuel which uses electrochemical cells or combusts in internal engines to power vehicles and electric devices. It is also used in the propulsion of spacecraft and can potentially be mass produced and commercialized for passenger vehicles and aircraft.In a flame of pure...
and consequently Iceland expects to be energy-independent, using 100% renewable energy
Renewable energy
Renewable energy is energy which comes from natural resources such as sunlight, wind, rain, tides, and geothermal heat, which are renewable . About 16% of global final energy consumption comes from renewables, with 10% coming from traditional biomass, which is mainly used for heating, and 3.4% from...
, by 2050. As part of this program, the country opened the world's first public hydrogen filling station in 2003. As of 2007, it has about 40 hydrogen-powered vehicles on the road, second only to the U.S. state of California.
By far the largest of the many Icelandic hydroelectric power stations
Icelandic hydroelectric power stations
Over 80% of electricity in Iceland is generated in hydroelectric power stations. While geothermal energy is used for heating , the hydroelectric power stations, historically all run by Landsvirkjun, are central to the existence of Iceland as an industrialized country.The largest power station by...
is Kárahnjúkavirkjun (690 MW), which is being constructed in the area north of Vatnajökull
Vatnajökull
Vatnajökull is the largest glacier in Iceland. It is located in the south-east of the island, covering more than 8% of the country.-Size:With an area of 8,100 km², Vatnajökull is the largest ice cap in Europe by volume and the second largest in area Vatnajökull is the largest glacier in...
. 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.
Recent geological research has improved the likelihood of Iceland having sizable off-shore oil reserves within its 200 mile economic zone
Exclusive Economic Zone
Under the law of the sea, an exclusive economic zone is a seazone over which a state has special rights over the exploration and use of marine resources, including production of energy from water and wind. It stretches from the seaward edge of the state's territorial sea out to 200 nautical...
in the seabed
Seabed
The seabed is the bottom of the ocean.- Ocean structure :Most of the oceans have a common structure, created by common physical phenomena, mainly from tectonic movement, and sediment from various sources...
of the Jan Mayen
Jan Mayen
Jan Mayen Island is a volcanic island in the Arctic Ocean and part of the Kingdom of Norway. It is long and 373 km2 in area, partly covered by glaciers . It has two parts: larger northeast Nord-Jan and smaller Sør-Jan, linked by an isthmus wide...
area.
Manufacturing
The presence of abundant electrical power due to Iceland's geothermal energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export. Manufactured products constituted 36% of all merchandise exports, an increase from the 1997 figure of 22%. Power-intensive products's share of merchandise exports is 21%, compared to 12% in 1997.Aluminium
Aluminium smelting
Aluminium smelting is the process of extracting aluminium from its oxide alumina, generally by the Hall-Héroult process. Alumina is extracted from the ore Bauxite by means of the Bayer process at an alumina refinery....
is the most important power-intensive industry in Iceland. There are currently three plants in operation, with one under construction and two in the planning stage.
Rio Tinto Alcan operates Iceland's first aluminium smelter (plant name: ISAL), in Straumsvík, near the town of Hafnarfjörður
Hafnarfjörður
Hafnarfjörður is a port town and municipality located on the south-west coast of Iceland, about 10 km south of Reykjavík....
. The plant has been in operation since 1969. Its initial capacity was 33,000 metric tons per year (mtpy) but has since been expanded several times and now has a capacity of about 189,000 mtpy.
The second plant started operations in 1998 and is operated by Norðurál, a wholly owned subsidiary of U.S.-based Century Aluminium Company. It is located in Grundartangi in Western Iceland near the town of Akranes
Akranes
Akranes is a port town and municipality located on the west coast of Iceland.It is the ninth most populous town in Iceland after Mosfellsbær and Árborg with a population of 6,623 people...
. Its current capacity is 220,000 mtpy but an expansion to 260,000 mtpy is already underway and is expected to be completed in the last quarter of 2007.
United States-based aluminum manufacturer Alcoa
Alcoa
Alcoa Inc. is the world's third largest producer of aluminum, behind Rio Tinto Alcan and Rusal. From its operational headquarters in Pittsburgh, Pennsylvania, Alcoa conducts operations in 31 countries...
has become a major investor in Iceland and has a major plant under construction near the town of Reyðarfjördur. The plant, known as Fjarðaál (or "aluminum of the fjord
Fjord
Geologically, a fjord is a long, narrow inlet with steep sides or cliffs, created in a valley carved by glacial activity.-Formation:A fjord is formed when a glacier cuts a U-shaped valley by abrasion of the surrounding bedrock. Glacial melting is accompanied by rebound of Earth's crust as the ice...
s") has a capacity of 346,000 mtpy and was put into operation in April 2008. To power the plant, Landsvirkjun built Kárahnjukar
Kárahnjúkar Hydropower Project
Kárahnjúkar Hydropower Plant is a hydroelectric power plant in eastern Iceland designed to produce 4,600 GWh annually for Alcoa's Fjardaál aluminum smelter to the east in Reyðarfjörður. The project, named after nearby Mount Kárahnjúkur, involves damming the Jökulsá á Dal River and the Jökulsá...
, a 630-megawatt hydropower station. This is an astonishing figure, as prior to this development, the entire nation of Iceland's power usage was in the 300-megawatt range.
According to Alcoa, construction of Fjarðaál entailed no human displacement, no impact on endangered species
Endangered species
An endangered species is a population of organisms which is at risk of becoming extinct because it is either few in numbers, or threatened by changing environmental or predation parameters...
, and no danger to commercial fisheries; there will also be no significant effect on reindeer, bird and seal populations. However, the project drew considerable opposition from environmentalist groups such as the World Wide Fund for Nature
World Wide Fund for Nature
The World Wide Fund for Nature is an international non-governmental organization working on issues regarding the conservation, research and restoration of the environment, formerly named the World Wildlife Fund, which remains its official name in Canada and the United States...
, which called on Alcoa to abandon the plan to build Fjarðaál. In addition, Icelandic singer Björk
Björk
Björk Guðmundsdóttir , known as Björk , is an Icelandic singer-songwriter. Her eclectic musical style has achieved popular acknowledgement and popularity within many musical genres, such as rock, jazz, electronic dance music, classical and folk...
was a notable early opponent to the plan; protesting the proposed construction, the singer's mother, Hildur Rúna Hauksdóttir, went on a hunger strike
Hunger strike
A hunger strike is a method of non-violent resistance or pressure in which participants fast as an act of political protest, or to provoke feelings of guilt in others, usually with the objective to achieve a specific goal, such as a policy change. Most hunger strikers will take liquids but not...
in 2002.
Alcoa is also conducting a feasibility study on the possibility of building a second plant in Iceland near Húsavík
Húsavík
Húsavík is a town in Norðurþing municipality on the north coast of Iceland on the shores of Skjálfandi bay with 2,237 inhabitants.-Overview:The income of the inhabitants is derived from tourism and fishing, as well as retail and small industry...
. That plant would have a 250,000 mtpy capacity and was planned to be entirely powered entirely by geothermal power
Geothermal power
Geothermal energy is thermal energy generated and stored in the Earth. Thermal energy is the energy that determines the temperature of matter. Earth's geothermal energy originates from the original formation of the planet and from radioactive decay of minerals...
, however estimates show a potential need for other sources of power. If the decision is made to build the plant, construction would not start before 2010.
Norðurál has signed a memorandum of understanding to purchase electricity for its own aluminum reduction project in Helguvík. The agreement was reached between Norðurál and two Icelandic geothermal power producers, Hitaveita Suðurnesja and Orkuveita Reykjavíkur
Orkuveita Reykjavíkur
Orkuveita Reykjavíkur is an Icelandic utility company that provides electricity, geothermal water for heating, and cold water for consumption and fire fighting. It also operates a data-utility network and waste-treatment facilities. The company's service area extends to 20 communities in the...
. The power supplied will initially support aluminum production of 150,000 mtpy, which will eventually grow to support 250,000 mtpy.
If all of the currently proposed expansions and new plants are constructed, the total production capacity of the Icelandic aluminum industry will rise to 1,542,000 mtpy, compared to the current capacity of 400,000 mtpy.
Banks
The Icelandic banking system played a central role in the financial crisis. The banks expanded aggressively overseas following financial deregulation, acquiring assets far in excess of the country's GDP and therefore of the government's capacity to rescue them in the event of a run. All three major commercial bankCommercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
s, Landsbanki
Landsbanki
Landsbanki, also commonly known as Landsbankinn in Iceland, is a private Icelandic bank with international operations...
, Kaupþing Bank
Kaupthing Bank
Kaupthing Bank was an international Icelandic bank, headquartered in Reykjavík, Iceland. It was formed by the merger of Kaupthing and Búnaðarbanki Íslands in 2003 and was the largest bank in Iceland....
and Glitnir
Glitnir (bank)
Glitnir was an international Icelandic bank. It was created by the state-directed merger of the country's three privately held banks - Alþýðubanki , Verzlunarbanki and Iðnaðarbanki - and one failing publicly held bank - Útvegsbanki - to form Íslandsbanki in 1990...
went into administration in early October 2008. The Althing granted the Icelandic Financial Supervisory Authority sweeping powers over banks as its financial system tottered and its currency plunged. Speculation continues about the financial health of the other banks. All of the major banks were 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.
Stock market
Because of the persistent 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, bondsBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
and mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s 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
NOREX
In 1997, the Copenhagen Stock Exchange and the Stockholm Stock Exchange initiated formalized cooperation through NOREX, with the purpose of establishing a joint Nordic securities market...
alliance, has been used. There are currently two equities markets on the ICEX. The Main
ICEX Main
The ICEX Main List is an equity index fund which tracks the Main List of the Iceland Stock Exchange Ltd. .-External links:*...
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.
The most important stock market index is the ICEX 15.
Other financial markets
Historically, investors tended to be reluctant to hold Icelandic bonds because of the persistence of high inflation and the volatility of the 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 because of the resale of mortgages as housing bonds.A mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
market exists on the ICEX in theory, but no funds are currently listed. A small derivatives market
Derivatives market
The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets....
formerly existed, but was closed in 1999 because of illiquidity.
External trade
Iceland's economy is highly export-driven. Marine products account for the majority of goods exports. Other important exports include aluminum, ferro-silicon alloys, machinery and electronic equipment for the fishing industry, software, woollen goods. Most of Iceland's exports go to the European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
(EU) and European Free Trade Association
European Free Trade Association
The European Free Trade Association or EFTA is a free trade organisation between four European countries that operates parallel to, and is linked to, the European Union . EFTA was established on 3 May 1960 as a trade bloc-alternative for European states who were either unable to, or chose not to,...
(EFTA) countries, the United States
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
, and Japan
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
. The 2005 value of Iceland's exports was $3.215 billion. f.o.b.
The main imports are machinery and equipment, petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
products, foodstuffs and textiles. Cement is Iceland's most imported product. The total 2005 value of imports was $4.582 billion. Iceland's primary import partner is Germany
Economy of Germany
Germany is the largest national economy in Europe, the fourth-largest by nominal GDP in the world, and fifth by GDP in 2008. Since the age of industrialisation, the country has been a driver, innovator, and beneficiary of an ever more globalised economy...
, with 12.6%, followed by the United States, Norway, and Denmark. Most agricultural products are subject to high tariffs; the import of some products, such as uncooked meat, is greatly restricted for phyto-sanitary reasons.
Iceland's relatively liberal trading policy has been strengthened by accession to the European Economic Area
European Economic Area
The European Economic Area was established on 1 January 1994 following an agreement between the member states of the European Free Trade Association and the European Community, later the European Union . Specifically, it allows Iceland, Liechtenstein and Norway to participate in the EU's Internal...
in 1993 and by the Uruguay Round
Uruguay Round
The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...
, which also brought significantly improved market access for Iceland's exports, particularly seafood
Seafood
Seafood is any form of marine life regarded as food by humans. Seafoods include fish, molluscs , crustaceans , echinoderms . Edible sea plants, such as some seaweeds and microalgae, are also seafood, and are widely eaten around the world, especially in Asia...
products. However, the agricultural sector remains heavily subsidized and protected; some tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s range as high as 700%.
The fishing
Fishing
Fishing is the activity of trying to catch wild fish. Fish are normally caught in the wild. Techniques for catching fish include hand gathering, spearing, netting, angling and trapping....
industry is one of the most important industries. It provides 40% of export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
income and employs 7.0% of the workforce; therefore, the state of the economy remains sensitive to world prices for fish products.
The following table should be considered in light of the dramatic depreciation of the currency in 2008 of approximately 50%,
corrected to EUD or USD. Corrected in this manner imports since the 2007 peak have been are negative not positive. See wikipedia's
entry on icelandic krona.
Imports
| Year | Millions (ISK) | Change |
|---|---|---|
| 1988 | 68,723.2 | 0.00% |
| 1989 | 80,599.4 | 17.28% |
| 1990 | 96,620.7 | 19.88% |
| 1991 | 104,129.1 | 7.77% |
| 1992 | 96,895.3 | -6.95% |
| 1993 | 91,306.6 | -5.77% |
| 1994 | 102,541.3 | 12.30% |
| 1995 | 113,613.6 | 10.80% |
| 1996 | 135,994.5 | 19.70% |
| 1997 | 143,226.6 | 5.32% |
| 1998 | 176,072.1 | 22.93% |
| 1999 | 182,321.5 | 3.55% |
Source: Statistics Iceland
Statistics Iceland
Statistics Iceland is the main official institute providing statistics on the nation of Iceland.- External links :* *...
(statice.is)
| Year | Millions (ISK) | Change |
|---|---|---|
| 2000 | 203,222.1 | 11.46% |
| 2001 | 220,874.0 | 8.69% |
| 2002 | 207,607.5 | -6.01% |
| 2003 | 216,525.1 | 4.30% |
| 2004 | 260,430.8 | 20.28% |
| 2005 | 313,854.6 | 20.51% |
| 2006 | 432,106.3 | 37.68% |
| 2007 | 429,468.9 | -0.61% |
| 2008 | 514,739.3 | 19.85% |
| 2009 | 446,128.2 | -13.33% |
| 2010 | 478,571.8 | 7.27% |
Exports
| Year | Millions (ISK) | Change |
|---|---|---|
| 1988 | 61,667.0 | 0.00% |
| 1989 | 80,071.7 | 29.85% |
| 1990 | 92,625.1 | 15.68% |
| 1991 | 91,560.4 | -1.15% |
| 1992 | 87,832.8 | -4.07% |
| 1993 | 94,657.6 | 7.77% |
| 1994 | 112,653.8 | 19.01% |
| 1995 | 116,606.7 | 3.51% |
| 1996 | 126,303.8 | 8.32% |
| 1997 | 131,213.2 | 3.89% |
| 1998 | 136,592.0 | 4.10% |
| 1999 | 144,928.1 | 6.10% |
| Year | Millions (ISK) | Change |
|---|---|---|
| 2000 | 149,272.8 | 3.00% |
| 2001 | 196,582.2 | 31.69% |
| 2002 | 204,303.0 | 3.93% |
| 2003 | 182,580.0 | -10.63% |
| 2004 | 202,373.0 | 10.84% |
| 2005 | 194,355.3 | -3.96% |
| 2006 | 242,740.0 | 24.89% |
| 2007 | 305,095.8 | 25.69% |
| 2008 | 466,859.5 | 53.02% |
| 2009 | 500,854.5 | 7.28% |
| 2010 | 560,647.0 | 11.94% |
Since 1988, Iceland's economy has only ended the year with a surplus
Surplus
Surplus means when there is more supply than demand, as in extra resources.Surplus may refer to: dumd* "The Surplus", an episode of The Office* Surplus: Terrorized into Being Consumers, a documentary film...
four times , in 1993, 1994, 2009 and 2010.
Economic agreements and policies
Iceland became a full European Free Trade AssociationEuropean Free Trade Association
The European Free Trade Association or EFTA is a free trade organisation between four European countries that operates parallel to, and is linked to, the European Union . EFTA was established on 3 May 1960 as a trade bloc-alternative for European states who were either unable to, or chose not to,...
member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area
European Economic Area
The European Economic Area was established on 1 January 1994 following an agreement between the member states of the European Free Trade Association and the European Community, later the European Union . Specifically, it allows Iceland, Liechtenstein and Norway to participate in the EU's Internal...
, effective January 1, 1994, there is basically free cross-border movement of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, labor, goods, and services between Iceland, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, 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. Iceland also has bilateral free trade agreements with several countries outside the EEA. The most extensive of these is the Hoyvík Agreement
Hoyvík Agreement
The Hoyvík Agreement is a free trade agreement between the Faroe Islands and Iceland that was signed 31 August 2005 in the town of Hoyvík in the Faroe Islands....
between Iceland and the Faroe Islands
Faroe Islands
The Faroe Islands are an island group situated between the Norwegian Sea and the North Atlantic Ocean, approximately halfway between Scotland and Iceland. The Faroe Islands are a self-governing territory within the Kingdom of Denmark, along with Denmark proper and Greenland...
, this agreement goes even further than the EEA agreement by establishing free trade in agricultural products between the nations. Iceland has a free trade agreement with Mexico on November 27, 2000.
The center-right government plans to continue its generally neo-liberal policies of reducing the budget and current account deficits, limiting foreign borrowing, containing inflation, revising agricultural and fishing policies, diversifying the economy, and privatising state-owned industries.
Currency and monetary policy
The currency of Iceland is the króna (plural: krónur), issued exclusively by the Central Bank of IcelandCentral Bank of Iceland
The Central Bank of Iceland is the central bank or reserve bank of Iceland. It has served in this capacity since 1961, when it was created by an act of the Alþingi out of the central banking department of Landsbanki Íslands, which had had the sole right of note issuance since 1927 and had...
since the bank's founding in 1961. The exchange rate in 2008 was 78 krónur to the United States dollar, down from 97.43 in 2001. Iceland's Krona went from 60 to the dollar in November 2007 to 147 to the dollar in November 2008.
Monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
is carried out by the Central Bank of Iceland, which maintains a 2.5% inflation target rate, adopted in March 2001.
During the 1970s the oil shocks (1973
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and 1979 energy crisis
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
) hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Iceland experienced moderately strong GDP growth (3% on average) from 1995 to 2004. Growth slowed between 2000 and 2002, but the economy expanded by 4.3% in 2003 and grew by 6.2% in 2004. Growth in 2005 exceeded 6%. Inflation averaged merely 1.5% from 1993–94, and only 1.7% from 1994-95. Inflation over 2006 topped at 8.6%, with a rate of 6.9% as of January 2007. Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
reduced their rating for Iceland to AA- from A+ (long term) in December 2006, following a loosening of fiscal policy by the Icelandic government ahead of the 2007 elections. Foreign debt has risen to more than five times the value of its GDP, and Iceland's Central Bank has raised short-term interest rates to nearly 15% in 2007. Due to the plunging currency against the euro and dollar, in 2008 inflation is speculated to currently be at 20-25%.
Growth
Iceland's economy had been diversifying into manufacturingManufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
and service industries in the 1990s, and new developments in software production, biotechnology
Biotechnology
Biotechnology is a field of applied biology that involves the use of living organisms and bioprocesses in engineering, technology, medicine and other fields requiring bioproducts. Biotechnology also utilizes these products for manufacturing purpose...
, and financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
were taking place. The tourism sector
Tourism in Iceland
Tourism in Iceland has become a more significant part of the national economy. The tourism industry was estimated to contribute to 4.1% of the country's GNP as of 2006.In 2010, 500,000 tourists visited Iceland.-History:...
was also expanding, with the recent trends in ecotourism
Ecotourism
Ecotourism is a form of tourism visiting fragile, pristine, and usually protected areas, intended as a low impact and often small scale alternative to standard commercial tourism...
and whale watching
Whale watching
Whale watching is the practice of observing whales and other cetaceans in their natural habitat. Whales are watched most commonly for recreation but the activity can also serve scientific or educational purposes. A 2009 study, prepared for IFAW, estimated that 13 million people went whale watching...
. However, in 2008, the Icelandic economy entered a deep recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in correspondence to the global financial crisis. There is even speculation that Iceland is now entering an economic depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
, making it the first economy of the developed world to plunge into depression due to the global recession of 2008. Although Iceland's economy grew 3.3% during the last quarter of 2009, the overall contraction in GDP over 2009 was 6.5%, less than the 10% originally forecasted by the IMF.
External links
- OECD's Iceland country Web site
- OECD Economic Survey of Iceland
- Icelandic Bureau of Statistics
- Iceland Stock Exchange (ICEX)
- Integrated financial services in Iceland
- Iceland Country Exports Profile
- Exploding Range Rovers Tell Iceland's Story NPR, March 19, 2009
- Wall Street on the Tundra by Michael Lewis, Vanity Fair, April 2009 issue