Iceland takes decisive action with the launch of an economic stabilisation plan in conjunction with the IMF
Reykjavik, Iceland – 24 October 2008– The Icelandic Government has reached an agreement ad referendum with a mission from the International Monetary Fund (IMF) on a comprehensive stabilisation program.
We have reached agreement ad referendum with a mission from the IMF on an economic stabilisation program that could be supported by a stand-by arrangement with the fund. The mission will now return to Washington to get approval of this program from the IMF‘s management. We are confident that the IMF‘s management will support the program and submit it for approval by the IMF‘s excecutive board as soon as possible. The economic program will be supported by an SDR 1.4 billion (USD 2 billion) loan under a two-year Stand-By-Arrangement. Iceland would be able to draw SDR 560 million (USD 830 million) immediately after the Board approval. It is also expected that an agreement with the IMF will encourage lending from other sources.
Economic Stabilisation Program Objectives:
The objectives of our program are as follows:
- Restore confidence in the Icelandic economy and stabilise the Icelandic krona through a comprehensive and strong macro-economic program;
- Restore fiscal sustainability and prepare a strong medium-term fiscal consolidation program;
- mplement a sound banking strategy to re-establish a viable banking system to support the Icelandic economy.
The short term stabilisation of the exchange rate is essential in order to get inflation under control and normalise business conditions, particularly with regard to foreign trade. This will be achieved by reintroducing a flexible exchange rate regime backed up by strong foreign currency reserves and the full commitment of the Central Bank of Iceland to apply the means necessary to get the desired results. Given the relatively large depreciation that has already taken place, and the contraction in domestic demand which is expected, there is little doubt that following the initial stabilisation period, a significant currency appreciation is to be expected. However, the exchange rate may show considerable volatility in the beginning, which the program is designed to address.
Another main objective of our program is to create sound fiscal strategies given the extraordinary challenge that public finances in Iceland are now facing as a result of the cost of bank restructuring and the inevitable revenue loss as the economy slows down. To obtain the fiscal objectives there will be a need to limit the discretionary relaxation in the current budget proposal and to implement significant tightening of the structural balance in the medium term, which is a necessary precondition for a sustainable growth path of the Icelandic economy.
Finally, our program aims to facilitate the creation of a sound banking system for Iceland by a series of reforms regarding operational procedures as well as a revision of financial regulation in accordance with international best-practice. This will include, among other things, revised articles of bank insolvency as well as general insolvency rules.
Prime Minister Geir H. Haarde:
“This program will enable us to secure funding and gain access to the necessary technical expertise required to stabilise the Icelandic krona and to provide support for the development of a healthier financial system. As a result, Iceland will commit to a sustainable long-term economic policy, and a plan for the recovery of the Icelandic economy. A thorough review of the Icelandic banking regulatory framework will also form part of this program,” said Prime Minister Geir H. Haarde.
Prime Minister Geir H. Haarde added:
“With our announcement today of our intention to cooperate with the IMF, Iceland is now in a much better position to establish a sound economic and financial base for the country. We would like to thank all those who have assisted us in these dark days and we now have grounds for a more optimistic view of the future.”
Foreign Minister, Ingibjörg Sólrún Gísladóttir:
”The Icelandic government has taken decisive measures and is working hard to solve the problems it is facing. We realize that the immediate future remains challenging due to the global financial crisis but I am convinced that international cooperation and solidarity is essential for us to recover, reform and regain Icelands good reputation abroad. We are confident that the prospective support of the IMF will provide the necessary impetus for some of our friends and allies in the international system to contribute to the reconstruction of the Icelandic financial system”, added Foreign Minister, Ingibjörg Sólrún Gísladóttir.”
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Background on Prime Minister Geir H. Haarde
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Background about Iceland
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Iceland in short:
Iceland is an island of 103.000 km2 (39,756 sq.miles), with only 320.000 inhabitants, is about one-third larger than Scotland or Ireland. Its highest peak, Hvannadalshnjúkur, rises to 2.119 m and over 11 per cent of the country is covered by glaciers, including Vatnajökull, the largest in Europe.
Energy: Situated on the Mid-Atlantic Ridge, Iceland is a hot spot of volcanic and geothermal activity: 30 post-glacial volcanoes have erupted in the past two centuries, and natural hot water supplies much of the population with cheap, pollution-free heating. Rivers, too, are harnessed to provide inexpensive hydroelectric power.
People: Of the 320.000 citizen, more than half live in the capital Reykjavík and its neighbouring towns in the southwest. Keflavík International Airport is located about 50 km from the capital.
Language: Iceland was settled by Nordic people in the 9th century - tradition says that the first permanent settler was Ingólfur Arnarson, a Norwegian Viking who made his home where Reykjavík now stands. The Icelanders still speak the language of the Vikings, although modern Icelandic has undergone changes of pronunciation and, of course, of vocabulary! Iceland is alone in upholding another Norse tradtion, i.e. the custom of using patronymics rather than surnames; and Icelander´s christian name is followed by his or her father´s name and the suffix -son or -dóttir, e.g. Guðrún Pétursdóttir (Guðrún, daughter of Pétur). Members of a family can therefore have many different "surnames", which sometimes causes confusion to foreigners!
History: In 930, the Icelandic settlers founded one of the world´s first republican governments; the Old Commonwealth Age, described in the classic Icelandic Sagas, lasted until 1262, when Iceland lost its independence, and in 1944 the present republic was founded. The country is governed by the Althing (parliament), whose 63 members are elected every four years. four-yearly elections are also held for the presidency; President Ólafur Ragnar Grímsson was elected in June 1996 to succeed Vigdís Finnbogadóttir, and was re-elected in June 2000. The head of state plays no part in day-to-day politics.
Economy: Icelandhas all the characteristics of a modern welfare state. National income per capita was somewhat above the EU average in 2007. Iceland has largely built on its comparative advantages in abundant marine and energy resources although the main driver of economic growth recently has been services with two-thirds of the working population employed in the service sector, both public and private. Fish and other marine products were the mainstay of an export oriented economy until early 2008, when exports of aluminium smelting products emerged as the largest single export product accounting for 40% of total export revenue. Export of services such as tourism have also been growing and account for almost one-fifth of total export revenue. Iceland is a member of the European Fee Trade Association (EFTA) and the European Economic Area (EEC).
Health: Life expectancy, at 81.3 years for women and 76.4 for men, is one of the highest in the world, and a comprehensive state health-care system aims to keep it that way.
Reykjavik, 24 October 2008