Iceland has certainly seen its ups and downs over the last several years because of its controversial decision to allow its banks to fail. Normally a country will protect its banking system above all else because of its strong ties to the overall economy. Still, it is amazing that Iceland has had such a fast recovery since this controversial decision. The economy has seen a return to financial norms within the last couple of months.
Fears Remain
Most are not worried about capital leaving because the restrictions that were in place are now gone. But there is some concern that the economy could be heating up again base around Iceland’s tourism and export industry that currently drives the economy. A decade-and-a-half ago Iceland was considered a great place to invest. Interest rates were high and growth was steady and the country was politically sound.
The problem came in 2008 when the biggest Banks collapsed. They had invested their money and assets into investments that were not liquid and when the world suffered from the economic crisis they were unable to recover. This caused investors to pull out their investments which then led to Iceland’s currency falling by over 40% of its value compared to the euro. This made imported items considerably more expensive and that fueled inflation that rose to double digits.
The Central Bank responded by raising its interest rates by a factor of 2, despite the fact their rates were already very high. This then led to reduced spending by the consumer and by the end of the year spending was down by 1/5. Some of these factors were offset by the fact that exports were made more profitable because of the country’s weaker currency. The economy was further helped by the increase in tourism and that industry became the top industry in the country.
Current Economic Outlook For Iceland
This year has exceeded all the expectations for growth in the economy particularly centered around the industry of tourism. In addition to tourism, the economy has been improving because of exports that are made more profitable by the countries weaker currency. But the krona is now gaining strength against other currencies which is reducing the profits made with exports. The government has made some proposals that could help to keep the currency from gaining strength.
Is The Country Growing?
There are many signs that the country is recovering and the overall consensus is one of optimism. One of the areas that is currently suffering, however, is the private sector. Private businesses find it very difficult to get loans which would allow them to grow. Those who want to buy a home find it very difficult to get approved for a mortgage and those who are approved suffer from the high-interest rates.
Many economists feel that despite some of the current difficulties, the achievements that have been accomplished by Iceland outweigh those difficulties. There are a number important moments in Iceland’s current recovery and one of those includes the plans to remove capital controls that were put in place back in 2008. This is believed to be an important factor in stabilizing the economy and returning it to a place within the global community.
The process will not take place rapidly, and to prevent too much capital from exiting too quickly, there is a 39% tax for those trying to do so. These and other steps are strongly expected to help the country’s overall economy. The changes that have been put in place help to encourage investors to keep their money in the country rather than pulling it out.
