The Icelandic Economy

Q4 2023
Current State, Recent Developments and Future Outlook
ICELAND CHAMBER OF COMMERCE

Legal disclaimer The Icelandic Economy

This report is for informational purposes Current State, Recent Developments and Future Outlook – Q4 2023 edition.
only and is not designed to form a basis Editors
upon which recipients should make
decisions. The information contained in Gunnar Úlfarsson ([email protected])
this report does not represent any Ragnar Sigurður Kristjánsson ([email protected])
promise or forecast of future events. The
Iceland Chamber of Commerce (ICoC) is Current edition
not obliged to provide the recipient with 33rd edition (November 2023)
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Iceland Chamber of Commerce | 2

Fossar
The Icelandic Economy – Q4 2023
Current State, Recent Developments and Future Outlook
The Iceland Chamber of Commerce has published reports on the approval process, coupled with increasing green energy demand,
Icelandic economy since 2008. It is our intention that these reports might lead to future shortages. Economic forecasts highlight
remain impartial and contain accessible information on the Icelandic uncertainties surrounding these future energy projects.
economy and its developments.
2 Iceland at Glance (page 26)
1 Economic Developments (page 7)
Iceland retains its 16th place among 64 economies in competitiveness
according to IMD Business School's latest report, marking the second
The Icelandic economy has rebounded after a swift, albeit sharp,
consecutive year in this position—a commendable achievement
contraction in GDP in 2020. Last year, economic growth was the
considering the country's relative size.
highest in 15 years, with domestic demand, investments, and services
growth as the main drivers. Recent forecasts anticipate slower growth This ranking reflects Iceland's exemplary infrastructure and improved
in 2023 than previously expected, with decelerated investment growth economic performance, particularly in the labour market. Conversely,
and moderated domestic demand. for the first time in a decade, business efficiency has declined, and
government efficiency is at an eight-year low.
Sharp growth came in tandem with a heated housing market and rising
inflation due to higher demand. Monetary policy has tightened in Furthermore, high educational standards, a dynamic economy, and
response, with the latest key interest rate hike in August marking the positive, open attitudes are some of Iceland's most attractive features,
14th hike since 2021. Although inflation has begun to ease, it's doing so as highlighted in a recent survey among executives in Iceland,
very slowly, with projections indicating 8.7% in 2023. Short-term published alongside the competitiveness report.
indicators suggest that demand has cooled, but the housing market
remains resilient. Gunnar Úlfarsson,
The number of employed persons on the labour market stood at 229
thousand in July, with the tourism industry contributing the most job Economist, Iceland Chamber of Commerce.
additions in recent years. The share of immigrants among employed
individuals reached 23% in August, setting a new record and
underscoring the significance of immigration in the thriving economy.
Additionally, Iceland's leadership in renewable energy, targeting a
fossil fuel-free status by 2040, has met challenges. Recent stagnation
in harnessing energy resources and a potentially inefficient project
Iceland Chamber of Commerce | 4
Key facts about Iceland
Key economic indicators Interesting facts Helpful resources
• The currency is the Icelandic Króna • 100% of electricity in Iceland is • Statistics Iceland
(ISK), USD 1 = ISK 140.39 EUR 1 = ISK generated from renewable
148.1 (31 July 2023) resources • Central Bank of Iceland
• Inflation: 7.9% (October 2023) • Population is 396,960 (March 2023) • Invest in Iceland
spread across 102,775 km2 (similar to
• Unemployment: 3.9% (September South Korea) • Business Iceland
2023)
• Foreign citizens are 18.4% of the • Green by Iceland
• Central Bank policy rate: 9.25% population in Iceland
(October 2023) • Local news: RÚV and Iceland
• The official language is Icelandic, Monitor
• Iceland’s GDP per capita in 2022 was and the capital is Reykjavík
57,872 USD PPP • Work in Iceland
• The former president Vigdís
• The current account surplus in Finnbogadóttir became the first • Reykjavík University
Q2/2023 measured 1.58% of GDP democratically elected female head
of state in 1980 • Government of Iceland
• Central government gross debt-to-
GDP measured 38.8% in August • Iceland’s search and rescue services • Keldan
2023, while net debt-to-GDP are solely volunteer-run
accounted for 30.4% • The OECD Economic Survey of
• Iceland was a founding member of Iceland
• At the end of Q2/2023, the Central NATO but does not have any military
Bank’s international reserves forces • IMF’s 2021 Article IV Consultation
totalled 776 bn. ISK
• Iceland’s parliament, Alþingi, is the • Althingi
• In Q2/2023, the main exports were oldest parliament in the world,
aluminium (18% of total), founded in 930 AD
seafood (17%) and tourism (23%)
Iceland Chamber of Commerce | 5
1 ECONOMIC DEVELOPMENTS
2 ICELAND AT GLANCE
3 INSTITUTIONAL FRAMEWORK
 DEMAND SLOWLY Private consumption and indices1
EASES YoY, % Index
25 140
20 120
- Indicators suggest a contraction in
15 100
household spending, marking the
10
first YoY decline since the end of 80
5
2020. 60
0
- The probable culprits behind the -5 40
shift in demand are higher inflation -10 20
and a tighter monetary policy stance. -15 0
2019 2020 2021 2022 2023
- YoY growth in lending to households Private consumption (left) Payment card turnover(left) Gallup sentiment (right)
by the credit system has
decelerated since its peak in early Credit system lending2
2021.
YoY %
- Household demand for credit has
20
shifted from nominal loans to
indexed loans because of rising 15
interest rates.
10
- YoY growth in corporate loan stock
has begun to decelerate, but 5
commercial banks don't anticipate
substantial changes in credit supply 0
over the next six months.
-5
1. Payment card turnover in constant prices. 2. Credit stock, 2018 2019 2020 2021 2022 2023
adjusted for reclassifications and the effects of government
debt relief measures. Sources: Gallup, Central Bank of Iceland, Households Companies Total credit
and Statistics Iceland.
Iceland Chamber of Commerce | 8
 Primary energy consumption1
ENERGY TRANSITION DRIFTS
AWAY WITH LIMITED SUPPLY 15% 15% Oil3

18% Hydro
- Iceland boasts the highest share of renewables in
primary energy consumption among all countries, 78%
89%
with approximately 85% derived from hydro and
geothermal energy sources. 85%
65% Geothermal
- Access to renewable energy sources has been a Other
significant boon to society and the economy, as the sources2
22%
relationship between energy production and 11%
national output is evident in Iceland, as a large share World Europe Iceland Iceland
of goods exports are from energy intensive
industries.
Electricity supply and demand forecast
- Iceland is aiming to be fossil fuel-free by 2040. This
ambition means that renewable energy production 7
must rise. However, in recent years, there has been a
6 Supply Demand
stagnation in harnessing energy resources.
- An inefficient permitting process for new projects, 5
combined with a growing demand for green energy,
4
suggests potential shortages of renewable energy in
the near future if this stagnation persists. 3
- Recent economic forecasts highlight that future
energy projects remain a significant uncertainty 2
factor in projections. 1

0
Sources: Landsnet. 1. 2020 or the latest data. 2. Wind and biofuel. 3. Wind power 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060
and biofuel 0.3%. 2. 2020 or the most recent figures. The image to the right is
from 2019. 3. Oil and coal. References: c2es, EEA, Iceland's Statistical Bureau.
Iceland Chamber of Commerce | 9
 MODERATE GROWTH GDP in Iceland and selected economies indexed 2019 = 1001
OUTLOOK 115

110
- The Icelandic economy has rebounded
after a short, but sharp, contraction in 105
2020.
- In 2022, GDP growth reached 6.4%, 100
marking the highest growth in 15 years,
95
largely fueled by private consumption
and capital formation. 0
2019 2020 2021 2022 2023 2024
- Preliminary estimates indicate a GDP
growth of 5.8% in H1/2023. However, Iceland OECD - Europe OECD Nordics
growth is projected to decelerate in GDP growth and contribution of underlying components %1
H2/2023, with the total growth in 2023 8
anticipated to be around 3.5%. 6
- Recently published forecasts anticipate 4
slower output growth next year than 2
was previously expected. 0
- Slower growth can be attributed to -2
diminished investments and a subdued -4
domestic demand. -6
- These effects are however somewhat -8
counterbalanced by a more favorable -10
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
net trade position and a larger increase
Net trade Public consumption Landsbankinn1
in inventories than previously expected.
Change in inventories Private consumption Arion2
1. October forecast. 2. October forecast 3. September Gross fixed capital formation GDP Íslandsbanki3
forecast. Sources: OECD, Central Bank of Iceland,
Landsbankinn. Iceland Chamber of Commerce | 10
 SERVICES DRIVE EXPORT Total exports bn. ISK at constant exchange rates
GROWTH 600

- In H1/2023, the value of exports increased by 500

6.7% YoY. The growth was driven by a surge in Marine products
services exports, which increased by 28.4% YoY. 400
Aluminum and
The value of exported goods shrunk by 7% YoY. aluminum prod.
300
Other goods
- The prospects for tourism exports remain Transport
200
promising as tourist arrivals further increased in
Q2/2023 and flight seat utilisation remained 100 Travel
high.
Other services
0
- The outlook for goods exports has deteriorated 2018 2019 2020 2021 2022 2023
due to reduced marine exports and other
goods exports also contracts. Total imports bn. ISK at constant exchange rates
600
- Forecasts anticipate exports to grow by 5-6% in Food and
2023 and continued exports growth in the next beverages
500
years with other exports, such as Capital goods
pharmaceuticals, fish farming, innovation sector 400 Fuels and
lubricants
and other services driving growth.
300 Industrial
supplies
- Imports grew by 7.1% in H1/2022, which was
200 Other imports
less than was previously forecast. The shift is
Transport
likely due to contracted domestic demand and
100 Travel
the outlook is for a slower growth in total
imports in the next two years. Other services
0
2018 2019 2020 2021 2022 2023
Sources: Statistics Iceland, Central Bank of Iceland.
Iceland Chamber of Commerce | 11
 CURRENT ACCOUNTS
SURPLUS IN SIGHT? Current account bn. ISK1

150
- A hefty services account balance of 87.7
bn. ISK and an income balance of 3.9 bn.
ISK resulted in a current account surplus
of 3.6 bn. ISK in Q2/2023. 100

- The surplus in Q2/2023 measured 1.58%

of GDP, and is the second-largest since 50
2019, which is an improvement from the
Q1/2023 current account deficit of 2.81%.
- The services account surplus in Q2/2023 0
is the second-largest since 2019. The
goods account balance was negative,
and the income balance surplus was -50
minuscule, albeit positive.
- Growing exports, accompanied by slower -100
domestic demand growth, are expected
to yield a current account surplus in 2023
and the subsequent years. Forecasts
-150
project either a surplus in current 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
accounts for 2023 or a minor deficit, with
continued surpluses in the following Service account balance Income balance1
years. Goods account balance Current account balance
1. Failed financial institutions were wound up year-end 2015.
Their share is therefore zero from 2016. Net current transfers
are included in primary income. Quarterly data.
Iceland Chamber of Commerce | 12
 INTERNATIONAL
Net international investment position % of GDP
POSITION REMAINS
80%
60%
STRONG
40%
- Iceland's net international investment position
29% (NIIP) stands at 29% and improved by 4
20% percentage points of GDP in H1/2023. The last
0% quarter marks the third consecutive quarter it
-20% has improved after contracting from 38.9% to
-40%
21.2% in 2021–2022.
2018 2019 2020 2021 2022 2023
- The recent improvements are primarily due to
NIIP International reserves Portfolio investment a 6% of GDP increase in the foreign securities
Other Investment Derivatives FDI position, attributed to a surge in foreign
Capital flows due to registered new investment bn. ISK security prices.

80% 350 - The Central Bank's international reserves

60% 300
equalled 19% of GDP at the end of Q2/2022
40% and have decreased by 9 percentage points
250
20% since Q4/2021. This can be traced to nominal
200 GDP growth and the appreciation of the Króna.
0%
150
-20%
100 - Net new investments totalled 15 bn. ISK
-40%
positive in the first eight months of the year.
-60% 50
Foreign investors' portfolio flows have mainly
-80% 0 centred on listed equities, which peaked in
2015 2016 2017 2018 2019 2020 2021 2022 2023
March following the upgrade of the Icelandic
Capital outflows (left) Capital inflows into special reserve accounts (left)
market to secondary emerging market status
Other capital inflows (left) Capital inflows into government bonds (left)
by FTSE Russell.
Capital inflows into listed shares (left) Cumulative inflows (right) Sources: Central Bank of Iceland, Statistics Iceland.
Iceland Chamber of Commerce | 13
 Equity market1 TIGHTER MONETARY
3.500 200 STANCE IMPACTS EQUITY
3.000
150
MARKETS
2.500
2.000 - Equity prices rose sharply following the initial decline
100
1.500 at the start of the pandemic. Several IPOs have taken
1.000
place in the past few years, coinciding with significant
50 growth in shareholders' groups.
500
0 0 - Globally, equity markets have begun to recover due to
2016 2017 2018 2019 2020 2021 2022 2023 lower inflation expectations and the belief that
OMXI-All-share (left) Total turnover bn. ISK (right) monetary tightening has ceased. However, domestic
OMXI-10 (left) equity markets continue to react to sharp increases in
the policy interest rate.
Government-guaranteed bond yields
- The OMXI-All-Share has declined by 15.3% YTD, and
10
the OMXI-10 has decreased by 16.7%. Turnover on the
8 stock market has also shrunk, amounting to 576 bn.
6
ISK in the first nine months of 2023, compared to 808
bn. ISK over the same period the previous year.
4
- Bond yields have increased alongside interest rate
2 hikes, and the breakeven inflation rates of domestic
0 bonds – the difference between yields on indexed and
non-indexed bonds with the same residual maturity –
-2
2020 2021 2022 2023 have somewhat decreased after reaching their peak in
RIKS 26 indexed RIKB 25 nominal RIKB 42 nominal
May but remain above the CBI's target.
RIKS 30 indexed RIKB 31 nominal Sources: Nasdaq Iceland, Central Bank of Iceland. 1. Latest data reaches
29th of October 2023.
Iceland Chamber of Commerce | 14
 Rent and housing prices in the capital region 2018 = 100 SHIFTS IN THE
130 HOUSING MARKET
125
- The housing market has cooled rapidly in 2023, owing
120 to stricter borrower-based measures and increased
financing costs. After significant price surges from 2021
115 to mid-2022, nominal price increases year-on-year
110
stood at 2.6%, but decreased by 5% in real terms in the
capital area. Housing market turnover has also lagged
105 behind the previous year's levels, accompanied by an
increase in property listings.
100
0 - The rent market index has remained relatively stable in
2018 2019 2020 2021 2022 2023 real terms, following a sharp decline during the
Rent index Housing index pandemic when a surge of short-term listings entered
Mortgage loans with upcoming interest rate review the broader market.

700 - Due to rising financing costs, households have

632 Indexed Non-indexed
600 gravitated towards indexed loans for both refinancing
527 and new purchases. The fixed-rate periods for loans
500
issued in 2020 and 2021, a time when interest rates
400 were at a historical low, are nearing their end.
300
- This indicates that households might opt to refinance a
200 portion of their debt with indexed loans to avoid a
100 spike in debt service, especially if interest rates remain
0
elevated in the coming years.
Variable rate Aug. 2024 2025 2026 2027 2028
loans – Dec
Sources: HMS, Central Bank of Iceland, Statistics Iceland.
2023
Iceland Chamber of Commerce | 15
 Monthly exchange rate of the ISK1 THE KRONA IS AT ITS
220
USDISK GBPISK EURISK TWI2
Banks'
forecast STRONGEST IN 8 MONTHS
200 190 - The Icelandic króna's exchange rate is now at its
180 167 strongest since the year's start against the euro, the US
160 dollar, and the pound sterling. As per the latest update,
145
140
the euro stands at ISK 145.5, while the US dollar is
137 valued at ISK 130.79. This represents a marked
120
appreciation from the beginning of the year.
100 Additionally, the British pound has also experienced a
positive shift, now positioned at ISK 169.4, compared to
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 171.16 ISK at the year's onset.
- Following a four-month period of relative stability from
Interbank foreign exchange market bn. ISK March, the króna began to strengthen notably in July.
60 70% This recent surge in the króna's value can be partly
60% attributed to anticipated foreign currency inflows,
40 initially driven by rumours and later confirmed by news
50%
of the acquisition of the Icelandic start-up Kerecis by
20 40% the global medical products firm, Coloplast. Kerecis is
0 30% renowned for crafting medical products from fish skin,
20% and the sale price was about 180 bn. ISK.
-20
10%
- These events have undeniably bolstered the króna's
-40 0% standing against major currencies such as the euro and
2020 2021 2022 2023
the dollar, mirroring the upbeat investor sentiment
Total turnover (left) CBI‘s net purchases (left) towards the Icelandic market.
CBI purchases, % of total (right)
Sources: Central Bank of Iceland
Iceland Chamber of Commerce | 16
 WAGE INCREASES TURNS THE Hourly earnings in manufacturing index 100 = 2012
PRICE PRESSURE UP 220
200
180
- Nominal wage increases in Iceland have
160
historically been high, with the annual growth of
140
earnings in manufacturing averaging 6.5% from
120
2012 to 2023. However, they were between 1.6%
100
and 2.8% on average in neighbouring economies.
80
- In the long run, nominal wages rise in tandem with
inflation and productivity growth. Nominal wage 0
increases beyond productivity growth in recent 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Q2
decades have consequently exerted pressure on Iceland Finland Sweden UK Eurozone
demand and inflation. Denmark Norway Germany USA
- Over the last ten years, wages have increased by
an average of around 3 percentage points more Nominal and real wages YoY change, %
annually than is consistent with the Central Bank's 14%
inflation target, plus the productivity growth 12% 10.8%
measured over the period. 10%
- Favourable external conditions and the growth of 8%
the tourism industry between 2014 and 2017
6%
alleviated some of the price pressures in the past
4% 2.9%
years. However, these conditions are no longer to
our advantage, and recent substantial wage 2%
increases have exerted pressure on prices due to 0%
demand and costs. -2%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Sources: Central Bank of Iceland, OECD, Statistics Iceland. Wage index Real wages
Iceland Chamber of Commerce | 17
 A HOT LABOUR MARKET
Productivity and jobs added 2020 – August 20231 index, 100 = 2012

- The Icelandic labour market contracted Productivity, m. kr.

significantly during the pandemic. In January Size= Productivity growth2 0,5%
65
2021, the number of employed persons stood Metal Production
at 179 thousand, a 9.5% decrease from the 60
Electricity and Water
same period the previous year. 55
- By July 2023, the number of employed
50
persons had increased to 229 thousand, a
Information Technology and Telecommunications
3.9% YoY. This increase in employment can 45 Financial Services
largely be attributed to the recovery of the 40
tourism sector, accounting for around 35% of
35
the added jobs.
30
- Most of the jobs added since the onset of the
pandemic have been in industries with lower 25 Construction Industry
labour productivity, which also generally 20 Fisheries Wholesale and Retail
employ a higher ratio of foreign labour. Other Services
15 Agriculture
Meanwhile, the number of employed persons
in industries with higher productivity has Public Service
10 Other Production Tourism and Transportation
remained relatively stable. 5 Culture and
Food Production arts
- The proportion of immigrants in the
0
employed population was 23% in August
-2.000 0 2.000 4.000 6.000 8.000 10.000 12.000 14.000
2023, up by 2 percentage points from the
previous year and 4 percentage points from Jobs added 2020 – 2022, thousands
2019.
1. The production value of public services only measures operational
costs and not the quality of the service. 2. Average annual growth
from 2010 – 2022. Sources: Statistics Iceland. Iceland Chamber of Commerce | 18
 UNEMPLOYMENT IS Unemployment rate1
EXPECTED TO RISE 12%

10%
- The seasonally adjusted unemployment rate
(LFS) stood at 3.4% in September 2023, with the 8%
labour force participation rate at 78.2%.
6%
- The unemployment rate saw an increase of 1.3
4%
percentage points month-on-month, while the
3.0%
seasonally adjusted employment rate fell by 1.2 2%
percentage points.
0%
- In September 2023, 36% of firms reported 2018 2019 2020 2021 2022 2023
experiencing staffing shortages. Notably, the Labour force survey Directorate of Labour
number of companies reporting these
shortages has declined in recent months. Firms considering themselves short-staffed
- Forecasts predict a slight rise in unemployment 60%
in the near future, attributed to both subdued
economic growth and a significant increase in 50%
the baseline population.
40%
36%
30%

20%

10%

0%
2006 2008 2010 2012 2014 2016 2018 2020 2022
Sources: Central Bank of Iceland, Gallup, Statistics Iceland. 1. LFS; seasonally
adjusted monthly data.
Iceland Chamber of Commerce | 19
 Inflation (including and less housing) INFLATION
12 REMAINS HIGH
10
7.9%
8
- The annual inflation rate was 7.9% in October
6
and showed a slight contraction in annual
4
terms. The Consumer Price Index (CPI) rose by
2 0.6%
0
0.6% month-on-month.
-2 - Housing had the largest contribution to the CPI
-4 increase, calculated as the combined effects of
2016 2017 2018 2019 2020 2021 2022 2023
market prices and interest rates, and rose by
CPI MoM CPI YoY CPI less housing YoY 2% month-on-month, with a 0.38% effect on the
CPI.
Subcomponents effect on the CPI
- Other factors, such as food and beverages,
-0.1% 0.0% 0.1% 0.2% 0.3% 0.4%
increased by 1% month-on-month, while
Food and beverages recreation and culture saw a rise of 0.95%.
Clothing and footwear - Forecasts anticipate inflation to total 8.7% in
Housing, fuels, etc 2023 and a gradual reduction in inflation in the
Furnishing and next couple of years, although it is expected to
household equp. remain above the Central Bank's target for the
Transport next few years.
Communications

Recreation and culture 2022M10

Hotels and restaurants 2023M10 Source: Central Bank of Iceland. 1. Excluding agric.
production. 2. Excluding alcohol, tobacco and petrol. 3.
The share of CPI subcomponents categorised by their
annual increase.
Iceland Chamber of Commerce | 20
THE AUGUST HIKE MAKES Central Bank’s key interest rate1

NUMBER FOURTEEN 10%

Iceland UK 9.25%
8% United States Euro area
6%
- In August 2023, the Central Bank 4%
increased the key interest rate from
8.75% to 9.25%, marking the fourteenth 2%
consecutive rise. Since May 2021, 0%
when the rate was at its nadir of 0.75%, 2020 2021 2022 2023
the CBI has elevated the interest rate
by a total of 8.5 percentage points. 24 MAY 2023 23 AUGUST 2023 4 OCTOBER 2023
- The next statement from the CBI's
Key rate raised from 7.5% to Key rate raised from 8.75% to Monetary policy committee
Monetary Policy Committee is 8.75% 9.25% keeps rates unchanged at 9.25%
scheduled for release on 22nd
November 2023. Inflation measured 9.9% in April Inflation measured 7.6% in July. Despite an increase in inflation,
and rose slightly between Although housing costs and which measured 8% in
- Inflation expectations have been on a months. Underlying inflation was international price increases were September, data indicates that
still increasing, and the outlook not contributing as much to price pressure is less widespread
decline, especially after peaking in the inflation as before, the inflation. The labour market and
was for considerably stronger
second quarter of 2023. Market agents inflationary pressures in 2023 CBI considered it necessary to the economy remains hot, but
forecast an inflation rate of 5.8% in a and 2024 than was previously raise the interest rate by 0.5%, due signs point to tempered demand
year's time and looking ahead to five assumed. Additionally, long- toinflation expectations remaining and reduced output growth.
term inflation expectations had high. Given current uncertainties, the
years market agents foresee a 3.8% risen and were well above Short-term inflation expectations Monetary policy committee chose
rate. these figures are significantly target. had decreased since May, but to keep rates unchanged, but
above the set target of 2.5%. The Committee also decided to long-term inflation expectations future actions will be dictated by
increase deposit institutions’ were still well above the inflation the development of the economic
fixed minimum reserve target of 2.5%. environment, inflation, and
requirement from 1% to 2%. inflation expectations.
Source: Central Bank of Iceland.
Iceland Chamber of Commerce | 21
 Central government debt % of GDP IMPROVED OUTLOOK
100%
Gross debt
Gross debt – Fiscal plan 24-28
FOR PUBLIC FINANCES
80% Net debt
- In August 2023, the central government's
60%
gross debt stood at 38.8% of GDP, while
40% the net debt was 30.4% of GDP. The gross
debt is forecasted to reduce to 34% of GDP
20% by 2028.
0% - In 2022, central government expenditures

2023

2028
2016

2018

2022

2026
2010

2020
2013

2019

2025

2027
2023-Aug
2011

2012

2021
2009

2014

2015

2017
accounted for 31.6% of GDP, and revenues
were 28.4% of GDP. This resulted in a
Fiscal balance % of GDP deficit of 3.3% of GDP, equivalent to a
20 shortfall of 123.7 bn. ISK.
Primary balance
Fiscal balance
- Improvements in both the general and
15
central government's financial standing,
10 coupled with a robust economic
resurgence, has led to more favourable
5 debt ratios than initially projected.

0 - The Fiscal Plan for 2021-2025 had

estimated the central government's debt
-5 to escalate to 53.7% of GDP in 2022.
However, the actual figure was 42.3%,
-10 underscoring the significantly improved
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
financial outlook.
Source: Central Bank of Iceland, Fiscal Plan 2024-2028.
Iceland Chamber of Commerce | 22
 Interest payments, compared to forecasts
INTEREST PAYMENTS
140
118 124 INCREASE MARKEDLY
120 111
100 - The global rating agencies, S&P Global
80 68
Ratings and Moody's, have upgraded the
64 58 62 state treasury's credit rating to positive. Their
60
research suggests that they believe Iceland's
40 resilience to external shocks and its fiscal
20 outlook are consistently improving.
0
2018 2019 2020 2021 2022 2023 2024 - The government's interest payments have
increased over the past two years, owing to a
Interest payments Fiscal plan 2021-2025 rise in the debt-to-GDP ratio and
Fiscal plan 2020-2024 Fiscal plan 2024 - 2028 deteriorating market conditions. These
interest payments have surpassed the
Debt-to-GDP ratio forecasts comparison % Today forecasts in earlier fiscal plans, even though
Three years ago1 those plans had predicted a much higher
Four years ago1 debt-to-GDP ratio than the current level.
50
50 - The government's debt-to-GDP ratio surged
significantly during the pandemic, but it has
40
now stabilised, thanks to the robust recovery
31
30 of the Icelandic economy.

20
12
10

0
2024 Sources: General budgets 2018-2024, Fiscal plans 2020-2024, 2021-
2025 and 2024-2028
Iceland Chamber of Commerce | 23
 Financial system assets % of GDP FINANCIAL SYSTEM ASSETS
418% 402% 391% 395%
458% 474%
411% 396%
AMOUNT TO 4 TIMES GDP
145%
128%
143% - In Q2/2023, the relative size of the financial system in Iceland was
129% 130% 124% 136% 132%
24% 21% 396% of GDP. The banks' assets represented a third of the total
31% 29% 24% 17% 16%
26% assets of the financial system (132% of GDP), while pension funds'
141% 195% 208%
149% 149% 163% 176% 173% assets constituted 47% of total assets (173% of GDP), a figure that
ranks among the highest globally.
- The Icelandic banking system primarily comprises three universal
2016 2017 2018 2019 2020 2021 2022 Q2/2023
banks: Arion Banki, Íslandsbanki, and Landsbankinn; and the main
Banks (DMB) Pension funds CBI investment banks, Kvika and Fossar Markets. Fossar Markets
ÍL fund (HFF) Mutual funds etc. Others received an operating licence as an investment bank last summer.
Until recently, Arion Banki and Kvika were the sole Icelandic banks
Lending to homes as a % of GDP owned by private investors and publicly listed. In June 2021,
Íslandsbanki joined them when the government sold 35% of its
90
stake. In March 2022, the government sold an additional 22.5%.
80
70 - The banks are in a strong financial position. Their capital ratios are
60
high, returns on core operations have risen, expense ratios have
fallen, and private sector arrears remain low. The banks are well-
50
prepared to handle external economic shocks.
40
30 - Over the past three years, households have been transitioning
20 from indexed loans to non-indexed loans. Historically, most
Icelandic households held indexed loans. This trend has started to
10
reverse in the recent year, driven by the hikes in the key interest
0 rate.
2015 2016 2017 2018 2019 2020 2021 2022 2023
Indexed Non-indexed Other loans
Sources: Central Bank of Iceland.
Iceland Chamber of Commerce | 24
1 ECONOMIC DEVELOPMENTS
2 ICELAND AT GLANCE
3 INSTITUTIONAL FRAMEWORK
 INTERNTIONAL INDICATOR RANKINGS1 GDP per capita in 2021 ICELAND RANKS
USD PPP adjusted
Iceland’s ranking Number of countries ranked AMONG THE BEST
Gender Equality (WEF) 1 157 Norway 79,163 - The Icelandic economy is an open, high-
income structure that integrates a free
Global Peace Index (IEP) 1 161
United States 70,181 market with a welfare state, a system
Human Development (UN) 4 189 sometimes referred to as the Nordic
Model.
Denmark 64,877
Social Progress Index (SPI) 4 168
- Iceland's income per capita is robust
Democracy Index (The Economist) 5 167 Netherlands 63,445 (USD 53,559 in 2020 and USD 57,872 in
2021), making it one of the highest
Economic Freedom (HF) 13 178 globally, while the economy remains the
Sweden 60,102
smallest among the OECD countries in
Corruption Perception (Transparency Int.) 13 179
terms of total GDP.
Germany 58,386
World Press Freedom (RFS) 16 180 - The main factors contributing to the
Iceland 57,872 country's success as a society include a
Environmental Performance Index (YALE) 17 180
skilled workforce, a robust institutional
Global Innovation Index (INSEAD) 20 135 Finland 54,668 framework, a high degree of economic
freedom, a strong preference for equality
Property Rights Index (IPRI) 18 129 and peace, and low levels of corruption.
France 50,544
Competitiveness (IMD) 21 63 - Iceland has consistently been at the top
UK 48,663 of the WEF's gender equality index since
Doing Business (WB) 26 190 2009. It has also retained its position as
Japan 43,032 the most peaceful country in the world
Globalisation (KOF) 53 208
since 2008.
Sources: Respective institutions websites, Statistics Iceland.
Iceland Chamber of Commerce | 27 1. Data obtained in April 2023.
 ICELAND RANKED
Nordic countries competitiveness ranking by IMD
16TH IN COMPETI-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 TIVENESS IN 2023
0
1.
2 - The IMD Business School has been ranking
4 countries by competitiveness since 1989, and
6 Iceland has been part of the report since
1997. The Chamber has been its partner in
8 8.
Iceland since 2005.
10
11. - In 2023, Iceland ranked 16th out of 64 high-
12
and middle-income countries in
14 14. competitiveness. Considering the economy's
16 16. small size, which affects competitiveness,
18
Iceland performs well in this aspect.

20 - Iceland holds 16th place for the second year

20. 20. in a row, while some other Nordic countries
22 21. 21.
have slumped. Economic performance
24 23. improved significantly between years, as did
24. 24.
26 25. infrastructure, where Iceland sits in 7th place.
26. On the other hand, Business efficiency
28
declined for the first time in a decade, and
30 29. Government efficiency has not been as low
32 31. for eight years.
Iceland Denmark Finland Norway Sweden - Click here for a detailed report on Iceland's
competitiveness.
Iceland Chamber of Commerce | 28 Source: IMD.
 ICELAND RANKS
Iceland’s competitiveness landscape and ranks in 2023
WELL IN
ECONOMIC GOVERNMENT BUSINESS INFRA- COMPETITIVENESS
PERFORMANCE EFFICENCY EFFICIENCY STRUCTURE
7th - Iceland ranked 16th out of 64 countries in IMD’s
45th 19th 10th
competitiveness report.

Technological ifnfrastructure
- Economic performance improved by 11 spots,
International Investment

and Iceland now ranks in 45th place. The

Productitivity & efficieny

Health and environment

Management practices

Scientific infrastructure
Insitutional framework
improvement is largely due to a major boost in

Attitudes and values

Business legislation
Domestic economy

Societal framework

Basic infrastructure
International trade

one subfactor: employment. However,

International trade ranks 55 , partly due to the
th

Labour market
Public finance
Employment

economy’s small size.

Tax policy

Education
Finance
- Government efficiency dropped by five spots
Prices

and is at its worst in eight years. This is largely

2
due to negative development regarding the
4 3 4 4
6 effectiveness of regulation.
13 2
17
21
- Business efficiency dropped by two spots and
26 27 29 therefore shrank for the first time in a decade.
35 22 20
All sub-factors deteriorated except for one: the
39 33 labour market.
51
- Infrastructure is where Iceland has always
55
performed well, and it jumped up by one spot.
Basic infrastructure and education both ranked
4th. Also, technological infrastructure and health
2023 and environment ranked in the top ten spots.
Source: IMD.
Iceland Chamber of Commerce | 29
SKILLS, EDUCATION AND A
DYNAMIC ECONOMY
Key attractiveness indicators for doing business Change from
in Iceland IMD executive survey last year
- The high educational level, a dynamic
economy, and open positive attitudes are
some of Iceland’s most attractive indicators High educational level 78% 2 pr.
according to a recent opinion survey among Dynamism of the economy 66% 5 pr.
executives in Iceland.
Open and positive attitudes 58% 6 pr.
- The survey asks executives to select five Skilled workforce 58% -1 pr.
indicators that they perceive as the key
attractiveness factors of the Icelandic Reliable infrastructure 43% -6 pr.
economy. Strong R&D culture 37% 10 pr.

- The most significant changes from the Access to financing 36% 8 pr.
previous year were in policy stability and Business-friendly environment 34% 11 pr.
predictability, with a contraction of 20% from
last year. Large improvements were made in Effective legal environment 22% 2 pr.
R&D culture, access to financing, and the Policy stability & predictability 22% -20 pr.
business environment.
Effective labour relations 10% 5 pr.
- This goes hand in hand with tax credits for Competitive tax regime 10% -4 pr.
research and development growing
Quality of corporate governance 10% 0 pr.
significantly in recent years, with the stage
being set for a stronger funding environment. Competency of government 8% 2 pr.
Tax reimbursements for SMEs are now 35% of Cost competitiveness 2% -3 pr.
the tax credit ceiling, and 25% for large firms.
Sources: IMD Executive Opinion Survey 2022, Alþingi.
Iceland Chamber of Commerce | 30
 SOME NOTICEABLE CHANGES TO Contribution to GDP by industries % of GDP

GDP COMPOSITIONS 0% 5% 10% 15%

Manufacturing 11.5%
- The economic composition of Iceland has not changed
Real estate activities 10.5%
drastically in the past two decades. However, the contribution
of manufacturing and agriculture activities has contracted Wholesale & retail trade 9.6%
noticeably. On the other hand, real estate activities have
increased notably, with a 31% increase in the past two decades. Human health & social work activities 9.1%

7.2%
- Although Iceland is a developed high-income economy, its Construction
economic composition differs somewhat from that of its Education 6.1%
greatest trading partner, the Euro area. The Icelandic public
sector is larger, which is underlined by relatively high Financial & insurance activities 5.8%
government spending. The construction sector is also larger, 5.6%
Transportation & storage
largely due to more rapid population growth. However,
industrial activities and various other services are relatively Public administration & defence 5.6%
small. 5.0%
Information & communication
- The tourism sector has grown rapidly since 2011, when it 4.5%
Agriculture, forestry & fishing
constituted 3.7% of GDP, compared to 8% in 2019. In the wake of
the pandemic, GDP growth took a hit in 2020. Tourism-related Professional, scientific & tech. activities 4.5%
activities such as travel bookings, air transport, accommodation, 4.1%
Electricity, gas & steam
and restaurants contracted by 50-75% from 2019. This led to a
contraction in the tourism sector by 3.9% of GDP in 2020. Administrative & support serv. activities 3.8%
However, in Q2/2023, the tourism sector accounted for 45% of
Accommodation & food service activities 3.3%
all exports, which is slightly more than the export from the 2022
aluminium industry and the fishing industry. Other2 3.6%
2002
Source: Central Bank of Iceland. 1. Compulsory social security. 2. Other service
activities, arts, entertainment & recreation, water supply and mining & quarrying.
Iceland Chamber of Commerce | 31
1 ECONOMIC DEVELOPMENTS
2 ICELAND AT GLANCE
3 INSTITUTIONAL FRAMEWORK
 Key taxes in Iceland in 2023
THE TAX SYSTEM IN ICELAND
Lower bracket Middle bracket Higher bracket
- Tax revenues in Iceland amounted to 449
bn. ISK in Q2/2023, or 43.2% of GDP,
compared to 31.9% of GDP in Q1/2023. Tax Rate Tax base and deductions
Taxes on personal and corporate income
and profits are the largest source of Food, medicine, tourism, media, arts and
revenue for the general government, and energy are in the lower bracket.
VAT 11% 24%
are estimated to have brought in 41.3% of Education and medical services are not
the government revenues in Q1/2023. subject to VAT1
37.95%
- In 2023, the yearly income for the lowest Lowest bracket - yearly income up to 4.9
bracket of the individual labour income Labour income 31.45% 46.25% m. ISK. Middle bracket - income up to 13.8
system was raised from 4.4 m. ISK to 4.9 m. m. ISK. yearly deduction in the amount of
ISK. The income for the middle bracket was 0.72 m. ISK
raised from 12.5 m. ISK to 13.8 m. ISK, and
Corporate tax Levied on gross income, deductions for
the yearly deduction was raised from 0.65 20%
R&D are available
m. ISK to 0.72 m. ISK.
- In terms of revenues/GDP, Iceland is near
Levied on all capital gains and income
the OECD average on most taxes. The main Dividends / 22% except for yearly interest income under
difference is in terms of personal income capital gains 300,000 ISK
tax, where Iceland is just over 7% of GDP
higher. In contrast, social security
contributions are low, mainly due to a large Payroll tax is levied on gross wage costs
Payroll tax 6.35%
quasi-private pension system. of employers, including pension
payments
Source: Skatturinn.is. 1. These are examples, not a conclusive list of
services and products subject to the lower bracket of VAT.
Iceland Chamber of Commerce | 34
 Central Bank’s key interest rate1 MONETARY POLICY
20%
CENTERED AROUND
INFLATION TARGETING
15%
- The Central Bank of Iceland is an independent institution,
10% operating under the Prime Minister and owned by the
State. The main objective of the Central Bank is to promote
5% price and financial stability, as well as supervise financial
activities.
0%
03
02

13

20
06

08
00

12

16

18

23
04
05

07

10

21
22
09

14
15

17
01

19
11
- In 2001, the Central Bank converted from an exchange rate
targeting policy to an inflation target policy, defined as a
Central Bank of Iceland foreign exchange reserves bn. ISK 12-month inflation rate at 2.5%, with a deviation band of
1.5%.
1,200
1,000 - The Prime Minister appoints the Governor and three
800 Deputy Governors for a term of five years. Deputy
600 Governors manage matters relating to monetary policy,
400 financial stability, and financial supervision.
200
- Following a new bill, the Central Bank merged with the
0 Financial Supervisory Authority in January 2020.
-200
-400 - The Central Bank collaborates with many foreign

2023
2022
2016

2018
2010

2020
2013

2019
2011

2012

2021
2009

2017
2014

2015

institutions, for example, the European Central Bank and

the OECD. The Central Bank is also a shareholder in the
FX reserves - total CBI’s and Treasury’s foreign debt Bank for International Settlements (BIS) and a
representative at the International Monetary Fund (IMF).
Reserves financed in ISK

Iceland Chamber of Commerce | 35 Sources: Central Bank of Iceland, Statistics Iceland. 1. Latest: April 2023.
ICELAND CHAMBER OF COMMERCE
About the Chamber Safeguarding of interests: The ICoC works in the interests of anyone conducting business
The Iceland Chamber of Commerce (ICoC) is a and is a powerful tool for the business community in its work towards improving the business
non-governmental organisation based on environment and enhancing productivity.
voluntary participation with the mission of
improving the environment of businesses in A representative towards the authorities: The ICoC strives for positive changes to laws,
Iceland and to enhance economic prosperity. regulations and other influencing factors concerning the business community. It reviews all
The ICoC has been diligent in its mission, major legislative bills that concern the business community and provides comments, in
celebrating its centennial anniversary in 2017. collaboration with members, which are presented to the relevant parliamentary committees.
Annual business forum: The ICoC annual Business Forum is the largest event in the Icelandic
ICoC Bilateral Chambers
The ICoC operates 16 bilateral Chambers, business community. The Forum is attended by members, politicians, government officials
both directly and in collaboration with others. and others interested in the Icelandic business community.
An important role of the bilateral Chambers is Corporate governance: The ICoC publishes guidelines for corporate governance, in
strengthening the relationship with other collaboration with the Confederation of Icelandic Employers and Nasdaq OMX Iceland. The
organisations as well as cooperating in several latest edition is available here.
ways with embassies and consulates on
promoting Icelandic businesses abroad. Legal counsel and arbitration: The ICoC General Counsel supervises various projects for
members, free of charge. The Counsel assists members with matters such as the import and
Joining the ICoC export of goods and specific laws or regulations concerning the business environment. The
Membership to the ICoC grants companies an ICoC also operates an independent arbitration institute, the Nordic Arbitration Centre. Its
opportunity to influence their strategy and purpose is to provide companies and individuals with alternative means to the judiciary to
promote their interests in a robust forum. The resolve commercial disputes in a secure manner. The arbitration process and the Arbitral
issues that the ICoC deal with relate both to Tribunal final awards are strictly confidential.
the business community, as well as to the
specific interests of individual member A backbone for business education: The ICoC is an active advocate of technology and
companies. Anyone interested in joining the business education. The ICoC is a majority shareholder in Reykjavik University (RU) and is
Chamber should please contact involved in the Commercial College of Iceland (CCoI). RU is an international university and is
[email protected]. Iceland’s largest private university with around 4,000 students. The CCoI is an upper
secondary school with over 1,000 students.
Iceland Chamber of Commerce | 36
www.chamber.is