Assessment and Recommendations

A shift in policies towards achieving financial stability and market liberalisation in the early 1990s contributed to the strong growth of the Icelandic economy seen since the middle of the last decade. As a result, per capita income (at purchasing power parities) exceeds the OECD average by around one-fifth, as compared with one-tenth in 1995. The pronounced improvement in Iceland’s relative position suggests that inflation reduction, fiscal consolidation and structural reforms have paid off. Financial-market liberalisation and privatisation appear to have fostered greater entrepreneurship, investment and growth. Some distortions and weaknesses persist, however. The housing, energy and agricultural sectors are still distorted by government policies. The trade-off between regional policy objectives and economic efficiency needs to be addressed. And, although Iceland has made headway in diversifying its exports, it remains exposed to destabilising external shocks. Moreover, following the late-1990s spurt of growth, Iceland’s external debt has reached very high levels, with household balance sheets particularly debt-laden.