One of the most volcanically active countries in the world, Iceland is famous for its hot springs and geysers, as well as its high standards of living. The country has been beset by a series of crises in recent years, from the collapse of its banking sector in 2008 to the 3km high ash cloud that caused the European airspace to seize up in 2010. Could EU accession provide a turning point for the country?
- Official country name:
- Republic of Iceland
- Króna (ISK)
- Capital city and financial centre:
- Other major cities:
- Kopavogur, Keflavik, Hafnarfjordur, Akureyri
- Time zone:
- UTC (no offset)
- 311,058 (July 2011 est)
- Population growth rate:
- 0.687% (2011 est)
- GDP per capita (US dollar equivalent):
- $38,300 (2010 est)
- GDP real growth rate:
- 3.5% (2010 est)
- Government type:
- Constitutional republic
- Head of State:
- President Ólafur Ragnar Grímsson
- Political leader:
- Prime Minister Jóhanna Sigurðardóttir
- Top export partners:
- Netherlands, UK, Germany, Norway and Spain
- Top import partners:
- Norway, Netherlands, Germany, Sweden, Denmark, US, China, UK and Brazil
With a coastline spanning almost 5,000km, Iceland’s economic growth has historically been driven by the fishing industry. Following its EEA membership in 1994, Iceland’s free market economy expanded, with growth in the software production, tourism and financial sectors. Economic reforms, deregulation and low inflation helped the country to become renowned worldwide for its prosperity and low unemployment rates.
In 2006, however, the credit rating agencies started to question the stability of some of Iceland’s major banks, which had loans and assets totalling over ten times the country’s GDP. As the crisis hit and the króna depreciated, the banking sector came under intense pressure. Iceland’s three largest banks Landsbanki, Kaupthing and Glitnir collapsed in late 2008 and were subsequently nationalised.
Over $10 billion in loans from the IMF and other countries was secured by the Icelandic government, not only to stabilise its currency and the financial sector, but also to support guarantees for foreign deposits in Icelandic banks. The country’s GDP fell by 6.8% in 2009 and by a further 3.5% in 2010. Predictions for 2011 are guarded but the economy is expected to grow by around 2.2%. According to the OECD, “The recovery is expected to be led by private investment in large energy-intensive projects and strengthening private consumption expenditure.” However, the country must work hard to regain its credibility among international investors.
For many years, Iceland rejected the idea of joining the European Union. In July 2009, however, Iceland applied for EU membership, looking to regain economic stability. The first intergovernmental conference on the accession of Iceland to the EU was held in Brussels on 27th July 2011, formally opening accession negotiations with the country. External support for Iceland’s EU membership has been dampened by the country’s stance on fishing quotas as well as the on-going dispute with British and Dutch governments over the repayment of monies lost when the Icesave scheme, run by Landsbanki, collapsed.
The banking sector
There are five commercial banks operating in Iceland today and 11 savings banks. The three major banks among them are: Íslandsbanki (formerly Glitnir), Arion Bank (formerly Kaupthing) and Landsbankinn hf (formerly Landsbanki). According to the central bank, “The commercial banks have now been recapitalised by the Icelandic government and creditors with a strong capital adequacy ratio of 16% and a 12% Tier 1 ratio. Since the financial collapse much focus in the financial system has been on debt restructuring and Icelandic financial companies offer a variety of solutions to reduce debt burdens of homes and businesses.”
Seðlabanki Íslands is the independent central bank of Iceland, monitored under the administration of the Minister of Economic Affairs and a Supervisory Board. The Minister of Economic Affairs appoints the Governor and Deputy Governor of the Central Bank for a five-year term who outlines the bank’s policy in that term. The central bank’s monetary policy control is supervised by the Monetary Policy Committee.
Supervision of the financial sector falls on The Financial Supervisory Authority – Iceland, also known as FME or Fjármálaeftirlitið.
Payments and clearing
|Greiðsluveitan (formerly FGM)
||Transactions below ISK 10m
||Usually same day
|Central Bank of Iceland RTGS system
||Transactions below ISK 10m
||Same day immediate finality
||08:00 – 17:00 EET
Cash is still a popular payment method. Usage of cash increased significantly when the banking crisis began and that trend continues. According to the Central Bank of Iceland’s Annual Report for 2010, the circulation of cash (notes and coins) during that year increased by 34% from year-end 2009.
Payment cards significantly increased in popularity pre-crisis, however this has slowed somewhat. Nevertheless, total debit card turnover in June 2011 showed an increase of 4.5% compared to June 2010. Total credit card turnover in June 2011 also showed an increase of 10.2% over the same period.
Credit transfers are widely used in the country and they are all effected electronically.
Cheques were once the predominant cashless payment instrument in the country, but cheque usage has experienced a steady decline as electronic instruments have taken over. Between 2009 and 2010, cheque usage declined by 25% in volume.
Direct debits have increased in usage, given the rise in internet banking.
Interest can be earned on current accounts.
Time deposits typically have maturities of up to one year.
Certificates of deposit are available for short-term investment purposes.
Treasury bills are issued by the Government Debt Management on behalf of the Republic of Iceland, t-bills are zero coupon,
non-indexed securities with maturities ranging up to one year.
Both euro commercial paper and US commercial paper can be issued in Iceland.
There is an active repo market in the country.
Tax and legal considerations
Temporary restrictions on the flow of money out of Iceland are in place. Domestic parties that derive foreign currency from the provision of goods and services and that deposit such income in domestic currency accounts may be subject to filing obligations by the central bank.
As of 1st January 2011, corporation tax is levied at 20% (formerly 18%) but partnerships registered as taxable entities are subject to a rate of 36% (2011 figures).
Iceland levies withholding tax of 20% on gross royalties paid to a non-resident. For interest and dividends paid, resident companies are charged the standard 20%, but non-resident companies are subject to 18% withholding tax.
If either domestic or international transactions are not at arm’s length, Icelandic tax authorities can adjust income.
Iceland has no set guidelines on thin capitalisation.