Iceland

...

on flow of currency, helped stabilise the ‘krona’ and helped biuld up much required foreign exchange reserves. As the reserves built up, the krona slowly started stabilsing. The monetary policy aimed at keeping interest rates high which also helped stabilise the exchange rate.

Impact on investment-

When Iceland split the banks, it refused to pay back the foreign creditors. This led to an immediate downgrade in ratings by Moody’s. they classified investment in Iceland as ‘junk’ investment. The foreign investment dramatically slowed down.

Due to imposition of capital controls, the is a restriction on conversion of currency which acts as a dampener to investment. Over the past two years the investment rate in Iceland collapsed to 10%.

Impact on export sector-

Depreciation of the krona worked in Iceland’s favour. Iceland has always been dependent on earnings from its exports and the share of exports in the GDP shot up with the onset of the financial crisis. Major exports consist of fish, fish products and geothermal energy intensive aluminum. Simultaneously the imports had also become more expensive which led to fall in imports.

EXPORT AS A % OF GDP

Impact of fishing sector-

Kristjansson, a fisherman, wants to buy a new, more energy-efficient fishing boat. But he can borrow only in local currency at high rates, and most banks have not been keen on lending, hence the purchase of the secondhand boat.

“We are losing competition with companies coming from the outside,” he said. Mr. Kristjansson, the fishing executive, is looking forward to borrowing money in international markets at lower rates, as in Norway where his competitors borrow at 1 percent.

“We are fishing for the same mackerel,” he said.

While lack of credit (due to banking policy) is hampering growth of the fishing industry, the fall in value of the krona is helping the industry.

Impact on tourism-

The fall in value of the krona has benefitted the tourism sector the most. Bjorgolfur Johannsson, chief executive of Icelandair, says the crisis helped tourist numbers reach record levels.

The banks were divided as old and new instead of good and bad which led to banks being incapable of even fulfilling domestic obligations. There was a recession in the economy though growth is picking up now courtesy of the tourism, alternate energy and fishing industry. Private investment has collapsed and households and businesses are still severely in debt. However, the IMF policy has been successful because it did not allow the citizens of Iceland to lose their deposits. The IMF was able to step in at the right time and use capital controls to stop the free fall of the krona. If that had continued the value of Iceland’s debts would have shot up leading to an extreme case of balance of payments crisis. The depreciation of the krona has given a major boost to the export sector, which has been the cornerstone of Iceland’s economic recovery.

BIBLIOGRAPHY-

(https://www.imf.org/external/np/sec/pr/2008/pr08296.htm)

(https://www.imf.org/external/pubs/ft/survey/so/2008/int111908a.htm)

(http://eng.forsaetisraduneyti.is/news-and-articles/nr/3821)

(http://www.voxeu.org/article/how-not-resolve-banking-crisis-learning-iceland-s-mistakes) (http://www.nytimes.com/2015/07/05/business/international/how-iceland-emerged-from-its-deep-freeze.html?_r=0

(https://www.imf.org/external/pubs/ft/survey/so/2009/int022409a.htm)

(http://www.voxeu.org/article/iceland-was-imf-programme-successful)