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Economy

As Iceland is an island with no borders with other countries and surrounded by the North-Atlantic ocean, Icelanders have developed into being one of the most technologically advanced and digitally-connected country in the world.

Iceland has a young population and a fully funded pension system. The population of almost 320,000 is centered around the city of Reykjavik, the northernmost capital in the world. The domestic language is Icelandic, and the first foreign language is English.

Economic Activity

Financial services have recently surpassed marine production, measured as a contributor to GDP. Another large contributor to GDP are energy intensive industries that are based on the use of low cost, abundant and environmentally friendly renewable hydro- and geothermal energy.

The current account deficit reflects investment in the aluminum and associated energy sectors that, over the medium term, are expected to broaden the export base, boost foreign exchange earnings and enhance external debt sustainability.

Related FAQ

Is the large current account deficit a cause for concern?

The theory of financial crises does not give them prominent role as there are deeper fundamentals that drive financial instability. Curren account deficits and counterpart of large capital inflows can lead to lending boom that precipate financial instability, but this has not been a problem in Iceland where large current account deficits have been reversed with little stress on the financial system.

Should Iceland be viewed differently than other countries?

Yes, it is the smallest country in the world with its own currency and flexible exchange rate. It is a small flexible economy and in such countries there is a case to interpret the current account differently since it is more volatile. A current account deficit might be optimal since it has to absorb large, lumpy investments and due to consumption smoothing.

4/16/2010

The Second Review of the economic programme is complete