Iceland to Gradually Emerge From Financial Crisis, IMF Says

Iceland’s economy will expand 2.4 percent this year and 2.6 percent next year as it “gradually” emerges from its financial crisis, the International Monetary Fund said.

“Imbalances are unwinding, but all sectors of the economy remain highly leveraged,” the IMF said today in an Article IV staff report and post-program monitoring dated March 23.

The IMF reiterated the island needs additional measures this year equal to 0.5 percent of gross domestic product to achieve a fiscal goal of an overall balance in 2014. Iceland, which completed a 33-month IMF program in August after its 2008 financial collapse, has since outperformed a number of euro area nations in recovering from the crisis.

The island’s “key challenge” is lifting capital controls in place since 2008, IMF Mission Chief Julie Kozack said on a conference call.

“The reason it’s so difficult is twofold -- because of the size of the locked in foreign holdings and also because the international environment is not very benign at the moment,” she said. “The pace of lifting the controls will depend on the strength of the balance of payments in Iceland and this essentially is very much related to the amount of capital inflows that Iceland receives.”

The efforts to ease capital controls, imposed in 2008 after the failure of its biggest banks triggered an 80 percent offshore krona slump against the euro, are showing signs of faltering. The central bank last month sold less than a fifth the targeted 25 billion kronur, and bought 22.5 million euros of a planned 100 million euros the same day.

The controls have left offshore investors holding krona assets worth about $3.3 billion in limbo.

“In order to let some of the locked in foreign funds out, Iceland is going to need inflows of some form and as we’ve seen at some of the auctions, at times those inflows are less forthcoming than we had hoped,” Kozack said.