The International Monetary Fund (IMF) Executive Board completed the Article IV Consultation for Iceland on June 16, 2025. The authorities in Iceland have agreed to publish the Staff Report prepared for this consultation.
Iceland's economy slowed down in 2024 with a growth rate of 0.5 percent due to weak exports resulting from a poor fishing season and energy supply constraints that affected aluminum production. However, growth is expected to improve, reaching 1.6 percent in 2025 and further rising to 2.2 percent in 2026, driven by an export recovery, increased real wages, and continued monetary easing which will offset the effects of a moderately contractionary fiscal impulse.
Despite escalating global trade tensions, their impact on Iceland is anticipated to be limited since most goods exports are destined for Europe. Inflation is projected to gradually decrease towards the Central Bank of Iceland’s target of 2.5 percent by the second half of 2026. Medium-term prospects appear favorable with expectations for economic diversification towards higher value-added export sectors boosting productivity growth.
However, risks to economic growth remain tilted to the downside while inflation risks are broadly balanced. Rising global trade tensions could have more significant impacts than anticipated if tariffs extend to currently exempted items or if travel reductions between Iceland and the US affect tourism negatively.
In terms of policy recommendations, Executive Directors welcomed prudent macroeconomic policies that have reduced imbalances but noted that medium-term growth prospects face downside risks from rising trade tensions. They emphasized ensuring macroeconomic stability while rebuilding fiscal buffers gradually.
Directors commended ambitious fiscal targets and improved transparency around planned consolidation efforts, highlighting infrastructure spending as crucial for closing transport and energy gaps and enhancing growth prospects. Additionally, they recommended implementing measures as needed to achieve fiscal objectives and supported activating revised fiscal rules by 2026.
Price pressures remain elevated according to Directors who agree that maintaining tight monetary policy is appropriate until inflation declines towards its target level allowing for gradual loosening of policies by the Central Bank of Iceland (CBI). Transitioning towards a forecast-based inflation targeting framework was suggested once uncertainty diminishes.
Financial sector systemic risks are contained though vigilance remains necessary regarding potential vulnerabilities within housing markets or corporate sectors requiring strengthened operational resilience strategies where necessary should systemic risks recede over time as anticipated.
Finally, Directors stressed reforms aimed at boosting productivity through infrastructure improvements alongside innovation support initiatives including reducing skill mismatches maximizing R&D efficiency promoting AI development while mitigating associated risks particularly focusing on increasing housing supply improving affordability across regions nationally.
An IMF representative confirmed that the next Article IV consultation with Iceland is expected to take place within the next twelve months, in line with the standard review cycle. These consultations, conducted annually with IMF member countries, provide an opportunity to assess economic developments and policy priorities through collaborative dialogue and expert analysis.