Pushed to brink of bankruptcy, Iceland fights back
"Unemployment, which was virtually inexistent before the crisis, is expected to hit 10 per cent by the end of this year."
Six months after it came within a hair of bankruptcy, Iceland is plunged in a deep recession, but thanks to its natural resources and flexibility, experts expect the economy to be back on its feet again soon.
A North Atlantic island of just 320,000 inhabitants, Iceland saw its economy crash in October when its three main banks suddenly collapsed, bringing to a screeching halt a decade of prosperity when growth had averaged four per cent a year.
The country's bank assets had swelled since 2000 to 11 times its gross domestic product (GDP) just before the crash last October.
The International Monetary Fund, which came to Reykjavik's rescue in November with a loan of $2.1 billion, has forecast the island's economy will contract by 10 per cent this year - a dire scenario for Icelanders.
After months of angry protests, demonstrators succeeded in forcing out the left-right government in January over its handling of the crisis, and a snap general election will be held on Saturday.
Thousands of Icelanders have lost their savings and their jobs in the crisis. Unemployment, which was virtually inexistent before the crisis, is expected to hit 10 per cent by the end of this year, the central bank says.
Household consumption has nosedived, and is expected to shrink by 24.1 per cent this year, according to finance ministry forecasts.
At the same time, the Icelandic krona, which lost 44 per cent of its value last year, is struggling to gain back ground. On Tuesday, €1 was trading for 168 kronur, while $1 was worth 129 kronur.
The exchange rate is a catastrophe for Icelanders who took out loans in foreign currency, as their debt has suddenly ballooned.
Despite the grim numbers, "basically the good signs are still there, inflation is slowing down, the exchange rate is stable," Franek Rozwadowski, the IMF's resident representative in Iceland, told AFP.
The inflation rate hit a peak of 18.6 per cent in January, before sliding back to 15.2 per cent in March.
In mid-March, the head of the IMF's assessment mission, Mark Flanagan, said "a lot of good progress has been made."
Mr Rozwadowski noted that Iceland's "very flexible economy and society is a plus to recover."
"Flexibility is more important than (population) size," he stressed. Icelanders, generally a highly qualified work force, are not hesitant to move to a new location or to retrain themselves professionally in order to land a new job.
One former bank employee in central Reykjavik said she was working in a souvenir store to make ends meet, while one taxi driver interviewed said he used to be a police officer.
"Iceland should have the basis for becoming a symbol of how quickly an economy can recover. In my view, we should aim for no less," said the new governor of Iceland's central bank, Svein Harald Oygard of Norway, during the bank's annual meeting last week.
"We already see that exports of goods and services exceed imports. The country benefits from a world-leading fishing industry, an excellent basis for tourism, renewable energy and renewable energy-based businesses, and a widely diversified economy," he said.
The fishing industry has been Iceland's traditional economic base.
Almost all of its fish is exported, accounting for 36.6 per cent of Iceland's overall exports last year, second only to products manufactured by the aluminium industry, which represented 52.1 per cent of exports, according to Statistics Iceland.
The exports went a long way in helping to reduce Iceland's trade deficit last year, which totalled 5.6 billion kronur compared to a deficit of 127.5 billion in 2007, the same source said.
"Despite these resources, the problem in Iceland right now remains the fact that the banking system is not functioning correctly. And this can only be fixed by resolving the problem with foreign creditors," says Gunnar Haraldsson, the head of Iceland's Institute of Economic Studies.
Iceland's banks still owe jittery creditors billions of euro they are unable to pay.
Mr Haraldsson said now that the country's banking sector was almost entirely nationalised, mergers of several banks were to be expected.
A North Atlantic island of just 320,000 inhabitants, Iceland saw its economy crash in October when its three main banks suddenly collapsed, bringing to a screeching halt a decade of prosperity when growth had averaged four per cent a year.
The country's bank assets had swelled since 2000 to 11 times its gross domestic product (GDP) just before the crash last October.
The International Monetary Fund, which came to Reykjavik's rescue in November with a loan of $2.1 billion, has forecast the island's economy will contract by 10 per cent this year - a dire scenario for Icelanders.
After months of angry protests, demonstrators succeeded in forcing out the left-right government in January over its handling of the crisis, and a snap general election will be held on Saturday.
Thousands of Icelanders have lost their savings and their jobs in the crisis. Unemployment, which was virtually inexistent before the crisis, is expected to hit 10 per cent by the end of this year, the central bank says.
Household consumption has nosedived, and is expected to shrink by 24.1 per cent this year, according to finance ministry forecasts.
At the same time, the Icelandic krona, which lost 44 per cent of its value last year, is struggling to gain back ground. On Tuesday, €1 was trading for 168 kronur, while $1 was worth 129 kronur.
The exchange rate is a catastrophe for Icelanders who took out loans in foreign currency, as their debt has suddenly ballooned.
Despite the grim numbers, "basically the good signs are still there, inflation is slowing down, the exchange rate is stable," Franek Rozwadowski, the IMF's resident representative in Iceland, told AFP.
The inflation rate hit a peak of 18.6 per cent in January, before sliding back to 15.2 per cent in March.
In mid-March, the head of the IMF's assessment mission, Mark Flanagan, said "a lot of good progress has been made."
Mr Rozwadowski noted that Iceland's "very flexible economy and society is a plus to recover."
"Flexibility is more important than (population) size," he stressed. Icelanders, generally a highly qualified work force, are not hesitant to move to a new location or to retrain themselves professionally in order to land a new job.
One former bank employee in central Reykjavik said she was working in a souvenir store to make ends meet, while one taxi driver interviewed said he used to be a police officer.
"Iceland should have the basis for becoming a symbol of how quickly an economy can recover. In my view, we should aim for no less," said the new governor of Iceland's central bank, Svein Harald Oygard of Norway, during the bank's annual meeting last week.
"We already see that exports of goods and services exceed imports. The country benefits from a world-leading fishing industry, an excellent basis for tourism, renewable energy and renewable energy-based businesses, and a widely diversified economy," he said.
The fishing industry has been Iceland's traditional economic base.
Almost all of its fish is exported, accounting for 36.6 per cent of Iceland's overall exports last year, second only to products manufactured by the aluminium industry, which represented 52.1 per cent of exports, according to Statistics Iceland.
The exports went a long way in helping to reduce Iceland's trade deficit last year, which totalled 5.6 billion kronur compared to a deficit of 127.5 billion in 2007, the same source said.
"Despite these resources, the problem in Iceland right now remains the fact that the banking system is not functioning correctly. And this can only be fixed by resolving the problem with foreign creditors," says Gunnar Haraldsson, the head of Iceland's Institute of Economic Studies.
Iceland's banks still owe jittery creditors billions of euro they are unable to pay.
Mr Haraldsson said now that the country's banking sector was almost entirely nationalised, mergers of several banks were to be expected.