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2003 OECD Economic Surveys: Iceland 2003

image of OECD Economic Surveys: Iceland 2003

This 2003 edition of OECD's periodic review of Iceland's economy examines recent economic developments, policies and prospects and includes special features on controlling public spending and structural policy developments.

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Structural Policy Developments

The 2001-02 recession was widely expected to lead to some deterioration in the stability of the financial sector, reflecting both normal cyclical forces and the rapid expansion in foreign-currency-denominated debt through 2000. However, the 2001 depreciation in the krona and weakening in business activity did not bring with them a pronounced reversal in the health of the financial system. In part, this stems from the fact that the krona recovered before defaults on foreign-currency debt began to accumulate. However, good policies also played a role, as financial supervision has been strengthened since 2000, and banks have taken action to improve their capital positions. More broadly, the long trend away from government interference in the sector since the early 1990s has led to a more stable environment. The sale last year of nearly all of the state's shares in two commercial banks ended the last major direct government ownership in the industry. However, government programmes continue to distort financial decisions, particularly the support of housing through the Housing Financing Fund, the tax system and social policies. Policies should be changed to remove the advantages held by residential investment, thereby placing business investment on a more equal footing.

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