Press Release No. 11/5

Press Release: IMF Completes Fourth Review Under the Stand-By Arrangement for Iceland

January 11, 2011

The Executive Board of the International Monetary Fund (IMF) on Monday completed the fourth review of Iceland’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of this review enables the immediate disbursement of an amount equivalent to SDR 105 million (about €123.99 million, or US$159.98 million), which would bring total disbursements under the program to an amount equivalent to SDR 980 million (about €1.16 billion or US$1.49 billion).

The Executive Board also approved the authorities’ request for waivers of applicability on end-December performance criteria for which data are not yet available.

The 33-month SBA was approved on November 19, 2008 (see Press Release No. 08/296) for an amount equivalent to SDR 1.4 billion (about US$2.13 billion) and was subsequently extended to August 31, 2011 (see Press Release No 10/156). The arrangement entails exceptional access to IMF resources, amounting to 1,190 percent of Iceland’s quota.

Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“Iceland has made considerable progress under its adjustment program. The successful implementation of fiscal adjustment, the effective use of capital controls, and financial sector restructuring, have underpinned the recovery. Growth is expected to turn positive in 2011, while the downward trend in inflation should continue. Possible risks to the recovery are from delayed investment, external shocks, or delays in restoring a sound financial system.

“Recent measures aimed at providing debt relief to distressed households are welcome, and need to be given time to work by containing expectations of any further relief. The recently adopted framework for corporate debt restructuring should help repair companies’ balance sheets and jumpstart investment.

“Passage of the 2011 budget marks a key achievement for Iceland. Given the favorable debt dynamics, there might be scope to moderately scale back the targeted adjustment provided that contingent liabilities prove contained and the government continues to resist absorbing private sector losses.

“The revised strategy for lifting capital controls should maintain a cautious pace of liberalization, with due consideration given to the financial sector resilience to potential outflows. Continuing to build up international reserves by increasing purchases of foreign currency and by drawing on available program financing will be essential.

“Strengthening the financial sector remains a priority, and progress has been made. Ongoing efforts to overhaul the prudential framework and support financial stability should be advanced.

“The recent agreement between Icelandic, UK, and Dutch negotiators regarding the Icesave deposits is welcome, and its rapid conclusion would mark an important milestone for Iceland’s return to international capital markets.”