Economy of Iceland

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Economy of Iceland
Iceland
Currency	Icelandic krona (ISK)
Fiscal year	calendar year
Trade organisations	WTO, EFTA, OECD, EEA
Statistics
GDP (PPP)	$10.57 billion (2005 est.) (141st [1])
GDP growth	5.7% (2005 est.)
GDP per capita	$35,600 (2005 est.)
GDP by sector	agriculture: 8.6%, industry: 15%, services: 76.5% (2005 est.)
Inflation (CPI)	4% (2005 est.)
Pop below poverty line	no data
Labour force	165,900 (2005 est.)
Labour force by occupation	agriculture: 10.3%, industry: 18.3%, services: 71.4% (2003)
Unemployment	2.1% (2005 est.)
Main industries	fish processing; aluminum smelting, ferrosilicon production; geothermal power, tourism
Trading Partners
Exports	$3.215 billion f.o.b. (2005 est.)
Export goods	fish and fish products 70%, aluminum, animal products, ferrosilicon, diatomite
Main partners	UK 17.9%, Germany 16.4%, Netherlands 13%, US 8.1%, Spain 7.7%, Denmark 4.3% (2005)
Imports	$4.582 billion (2005 est.)
Imports goods	machinery and equipment, petroleum products, foodstuffs, textiles
Main Partners	Germany 13.4%, US 9.1%, Sweden 8.6%, Denmark 7.3%, Norway 7.2%, UK 5.9%, China 5.3%, Netherlands 5%, Japan 4.7% (2005)
Public finances
Public debt	$3.073 billion (2002)
Revenues	$6.995 billion
Expenses	$6.761 billion; including capital expenditures of $467 million (2005 est.)
Economic aid	no data
Main source [2] All values, unless otherwise stated, are in US dollars

The economy of Iceland is small but well-developed, with a gross domestic product estimated at US$10.57 billion in 2005 (and a per capita GDP of $35,600, which is among the world's highest GDP.)^[1] Like the other Scandinavian countries, Iceland has a mixed economy that is mainly capitalistic but supports an extensive welfare state. The Icelandic economy is highly dependent on the fishing industry, which provides 70% of export income and employs 4% of the workforce; therefore, the state of the economy remains sensitive to world prices for fish products.^[2]

Contents 1 Geography and resources 2 Currency and monetary policy 3 Imports and exports 4 Transportation 5 Economic agreements and policies 6 Manufacturing 6.1 Aluminum 6.2 Medical products and pharmaceuticals 7 Finance 7.1 Banks 7.2 Stock market 7.3 Other financial markets 8 Growth 9 See also 10 Notes 11 External links

[edit] Geography and resources

Iceland occupies a land area of 103,000 square kilometers. It has a 4,790 kilometer coastline and a 200-nautical mile exclusive economic zone extending over 758,000 square kilometers of water. Approximately 20% of Iceland's land is arable, since the island's terrain is mostly mountainous and volcanic.^[3]

Iceland has few proven mineral resources. In the past, deposits of sulphur have been mined, and diatomite (skeletal algae) was extracted from lake Mývatn until recently. That plant has now been closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement. Concrete is widely used as building material, including for all types of residential housing.

Abundant hydroelectric and geothermal power sources are gradually being harnessed, and currently (2006) nearly 90% of the population enjoy geothermal heating. The hydroelectric power is harnessed by the many Icelandic hydroelectric power stations. By far the largest is Kárahnjúkavirkjun (690 MW), which is being constructed in the area north of Vatnajökull. Other stations include Búrfell (270 MW), Hrauneyjarfoss (210 MW), Sigalda (150 MW), Blanda (150 MW), and more. Iceland has explored the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminium and ferro-silicon smelting plants.

[edit] Currency and monetary policy

Main article: Icelandic króna

The currency of Iceland is the króna (plural: krónur), issued exclusively by the Central Bank of Iceland since the bank's founding in 1961.^[4] The exchange rate in 2005 was 62.98 krónur to the United States dollar, down from 97.43 in 2001.^[5]

Monetary policy is carried out by the Central Bank of Iceland, which maintains a 2.5% inflation target rate, adopted in March 2001.^[6]

Iceland's economy is prone to inflation but remains rather broad-based and highly export-driven. During the 1970s the oil shocks hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Since then, inflation has dramatically fallen, and the current government is committed to tight fiscal measures. The current unemployment rate stands at a record low 1%. Iceland experienced moderately strong GDP growth (3% on average) from 1995 to 2004. Growth in 2005 exceeded 6%. Inflation averaged merely 1.5% from 1993-94, and only 1.7% from 1994-95. Inflation in 2006 is currently 4.5%.

[edit] Imports and exports

Iceland's economy is highly export-driven. Marine products account for the majority of goods exports. Other important exports include aluminum, ferro-silicon alloys, machinery and electronic equipment for the fishing industry, software, and woolen goods. Most of Iceland's exports go to the European Union (EU) and European Free Trade Association (EFTA) countries, the United States, and Japan. The 2005 value of Iceland's exports was $3.215 billion f.o.b. ^[7][8]

The main imports are machinery and equipment, petroleum products, foodstuffs and textiles. cement is iceland's most imported natural resource.the total 2005 value of imports was $4.582 billion. Iceland's primary import partner is Germany, with 12.6%, followed by the United States, Norway, and Denmark. Most agricultural products are subject to high tariffs; the import of some products, such as uncooked meat, is greatly restricted for phyto-sanitary reasons. ^[9][10]

Iceland's relatively liberal trading policy has been strengthened by accession to the European Economic Area in 1993 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland's exports, particularly seafood products. However, the agricultural sector remains heavily subsidized and protected; some tariffs range as high as 700%.

[edit] Transportation

The main form of transportation in Iceland is the national road system, connecting most of the population centers. Organized road building began in the 1900s and has greatly expanded since 1980. The main highway, Þjóðvegur 1, is a circular road that runs along the coast almost completely around Iceland, leaving out only Vestfirðir. Þjóðvegur 1 lies through most of the main urban centers in Iceland, but there are also many smaller roads to smaller towns and villages, including some mountain roads in the Icelandic Highlands.

Regular air and sea service connects Reykjavík with the other main urban centers. In addition, airlines schedule flights from Iceland to Europe and North America. The national airline, Icelandair, is one of the country's largest employers. Domestic air travel remains important for those that need to travel frequently between different parts of the country, but coastal sea travel is reserved only for transportation of goods and even so, it is giving way to transportation by trucks. In 2005, transportation of goods got almost completely off the sea and on the roads when Iceland's shipping companies quit their scheduled cargo-ship transportation around Iceland from Reykjavik and emphasized on truck transportation of goods.

Iceland has no railroads.

[edit] Economic agreements and policies

Iceland became a full European Free Trade Association member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area, effective January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries. However, the government of Iceland remains opposed to EU membership, primarily because of Icelanders' concern about losing control over their fishing resources. Iceland also has bilateral free trade agreements with several countries outside the EEA. The most extensive of these is the Hoyvík Agreement between Iceland and the Faroe Islands, this agreement goes even further than the EEA agreement by establishing free trade in agricultural products between the nations. Iceland has a free trade agreement with Mexico, November 27, 2000.

The center-right government of Iceland plans to continue its policies of reducing the budget and current account deficits, limiting foreign borrowing, containing inflation, revising agricultural and fishing policies, diversifying the economy, and privatizing state-owned industries.

[edit] Manufacturing

The presence of abundant electrical power due to Iceland's geothermal energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export. Manufactured products constituted 36% of all merchandise exports, an increase from the 1997 figure of 22%. Power-intensive products's share of merchandise exports is 21%, compared to 12% in 1997.^[11]

[edit] Aluminum

Aluminum smelting is the most important power-intensive industry in Iceland. There are currently two plants in operation, with one under construction and two in the planning stage.

Alcan owns a plant in Straumsvík near the town of Hafnarfjörður which has been in operation since 1969. Its inital capacity was 33,000 metric tons per year (mtpy) but has since been expanded several times and now has a capacity of 180,000 mtpy. Alcan is studying the feasibiliy of expanding the plant to a capacity of 460,000 mtpy; negotiations are already underway with the power companies Landsvirkjun (the national power company) and Orkuveita Reykjavíkur, although it is yet unclear if the municipality of Hafnarfjörður will allow such an expansion.

The second plant started operations in 1998 and is operated by Norðurál, a wholly owned subsidiary of U.S.-based Century Aluminum Company. It is located in Grundartangi in Western Iceland near the town of Akranes. Its current capacity is 220.000 mtpy but an expansion to 260.000 mtpy is already underway and is expected to be completed in the last quarter of 2007.^[12]

United States-based aluminum manufacturer Alcoa has become a major investor in Iceland and has a major plant under construction near the town of Reyðarfjördur. The plant, known as Fjarðaál (or "aluminum of the fjords") will have a capacity of 322,000 mtpy and is anticipated to be completed in 2007. To power the plant, Landsvirkjun will construct Kárahnjukar, a 630-megawatt hydropower station.

According to Alcoa, construction of Fjarðaál will entail no human displacement, no impact on endangered species, and no danger to commercial fisheries; there will also be no significant effect on reindeer, bird and seal populations.^[13] However, the project has drawn considerable opposition from environmentalist groups such as the World Wildlife Fund, which called on Alcoa to abandon the plan to build Fjarðaál. In addition, Icelandic singer Björk was a notable early opponent to the plan; protesting the proposed construction, the singer's mother, Hildur Rúna Hauksdóttir, went on a hunger strike in 2002.^[14]

Alcoa is also conducting a feasibility study on the possibility of building a second plant in Iceland near Húsavík. That plant would have a 250,000 mtpy capacity and be powered entirely by geothermal power. If the decision will be made to build the plant, construction would not start before 2010.^[15]

Norðurál has signed a memorandum of understanding to purchase electricity for its own aluminum reduction project in Helguvík. The agreement was reached between Norðurál and two Icelandic geothermal power producers, Hitaveita Suðurnesja and Orkuveita Reykjavíkur. Ther power supplied will initially support aluminum production of 150,000 mtpy, which will eventually grow to support 250,000 mtpy. ^[16]

If all of the currently proposed expansions and new plants are constructed, the total production capacity of the Icelandic aluminum industry will rise to 1,542,000 mtpy, compared to the current capacity of 400,000 mtpy.

[edit] Medical products and pharmaceuticals

Iceland is an exporter of medical products, including prosthetics, diagnostic equipment, and medical software; the 2003 value of these exports was 13.5 billion krónur.^[17]

Actavis, a generic drug manufacturer, purchased U.S.-based Amide Pharmaceuticals in 2005 for between $500 and $600 million^[18], as well as the generics business of Alpharma Inc.; Actavis had 2005 sales of €551 million and a net profit of €81 million. Its shares are traded on the Icelandic Stock Exchange and the company is part of the ICEX-15 index.^[19][20]

[edit] Finance

[edit] Banks

Iceland currently has three major commercial banks - Glitnir, Landsbanki and Kaupthing Bank - and a fourth, Sparisjóðabanki Íslands (Icebank), which serves as the clearinghouse for the 29 locally run savings banks. All of the major banks are publicly listed on Kauphöll Íslands (the Iceland Stock Exchange), though each was either wholly state-owned or merged with previously state-owned banks in the past.

The banks are competitive and each has branches and ATMs across Iceland. Each of the three major banks usually holds about a quarter of the total deposits, with the remaining share held by the savings banks and a small Postal Giro system. Because of the persistence of high inflation, most deposits are held in time (savings) deposits and currency-linked accounts rather than demand (checking) deposits.

Each of the major Icelandic commercial banks has offices in various American and European banking centers, but no foreign bank currently operates in Iceland due to the long distances and small market. The commercial banks have become much more aggressive in their lending since the liberalization of interest rates in 1986.

[edit] Stock market

Because of the persistence inflation, historical reliance on fish production and the long-standing public ownership of the commercial banks, equity markets were slow to develop. Kauphöll Íslands, the Iceland Stock Exchange (better known as ICEX), was created in 1985. Trading in Icelandic T-Bonds began in 1986 and trading in equities commenced in 1990. All domestic trading in Icelandic equities, bonds and mutual funds takes place on the ICEX.

The ICEX has used electronic trading systems since its creation. Since 2000, SAXESS, the joint trading system of the NOREX alliance, has been used. There are currently two equities markets on the ICEX. The Main Market is the larger and better known of the two. The Alternative Market is a less regulated over-the-counter market. Because of the small size of the market, trading is illiquid in comparison with larger markets. A variety of firms across all sectors of the Icelandic economy are listed on the ICEX.

The most important stock market index is the ICEX 15.

[edit] Other financial markets

Historically, investors tended to be reticent to hold Icelandic bonds due to the persistence of high inflation and the volatility of the Króna. What did exist was largely limited to bonds offered by the central government. The bond market on the ICEX has boomed in recent years, however, largely due to the resale of mortgages as housing bonds.

A mutual fund market exists on the ICEX in theory, but no funds are currently listed. A small derivatives market formerly existed, but was closed in 1999 due to illiquidity.

[edit] Growth

Iceland's economy has been diversifying into manufacturing and service industries in the last decade, and new developments in software production, biotechnology, and financial services are taking place. The tourism sector is also expanding, with the recent trends in ecotourism and whale-watching. Growth has slowed between 2000 and 2002, but is expected to pick up in the future.

[edit] See also

• OECD's Iceland country Web site and OECD Economic Survey of Iceland
• Economy of Europe

[edit] Notes

[edit] External links

• Economic figures updated regularly can be found on the official website of the Icelandic Bureau of Statistics - http://www.statice.is
• Kauphöll Íslands (Iceland Stock Exchange - ICEX) - http://www.icex.is
• Iceland Country Profile on the link2exports website

European Free Trade Association (EFTA)

Iceland |  Liechtenstein |  Norway |  Switzerland

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