The International Monetary Fund (IMF) recently concluded its 2025 Article IV mission to Iceland, where a team led by Magnus Saxegaard conducted discussions both virtually and in Reykjavik. The mission's concluding statement highlights the successful tightening of macroeconomic policies that have slowed Iceland's economy and reduced post-pandemic imbalances. However, challenges remain in returning inflation to target levels, increasing fiscal buffers, strengthening productivity, and diversifying the economy.
The report notes that Iceland's economy slowed significantly in 2024 but is expected to grow by 1.8% in 2025 and 2.4% in 2026 due to recovering exports, higher real wages, and continued monetary easing. "Growth slowed to 0.5 percent in 2024 (from 5.6 percent in 2023) due largely to idiosyncratic factors," states the IMF.
Risks to growth are primarily on the downside, with potential impacts from global trade tensions and domestic challenges such as infrastructure disruptions or adverse weather affecting energy supply. Inflation risks are considered balanced but could rise if external pressures impact supply chains or currency values.
On fiscal policy, the IMF commends Iceland's ambitious targets aimed at reducing the government deficit from 3.5% of GDP in 2024 to a surplus by 2028. "The authorities’ fiscal targets are suitably ambitious," notes the report. It also suggests maintaining or increasing government investment levels despite projected declines as a share of GDP.
Monetary policy recommendations include reducing the policy rate as inflation approaches target levels while remaining vigilant against wage increases that exceed productivity growth or imported inflation pressures.
In terms of financial stability, Iceland's banking system remains robust though vulnerabilities persist, particularly within the housing market and cybersecurity threats. The IMF advises caution regarding any easing of macroprudential measures until systemic risks decline further.
Structural reforms aimed at boosting productivity through investments in physical and human capital are encouraged alongside improving research and development support schemes. "Incentives to promote innovation and diversification of the economy are bearing fruit," acknowledges the IMF team.
Efforts to address housing affordability through tighter controls on short-term rentals and increased housing supply are supported by targeted homeowner assistance programs designed to minimize fiscal risks.
Finally, integration of Artificial Intelligence (AI) is seen as a potential driver for productivity growth given Iceland’s strong digital infrastructure and human capital base.
The IMF mission expressed gratitude for the cooperation received during their visit: "The IMF team would like to thank the authorities and other interlocutors for their generous hospitality and constructive dialogue."