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Iceland Economy

Flag of Iceland

Iceland, a stable democracy with a dynamic consumer economy, suffered an economic meltdown in October 2008. The banking sector collapsed and the Icelandic Government turned to the International Monetary Fund (IMF) for assistance. This was a marked change from the economic boom Iceland had experienced from several years of strong economic growth spurred by economic reforms, deregulation, and low inflation, averaging around 4%. The economy suffered an initial setback in spring 2006 when credit rating agencies and other international financial firms released a number of reports raising questions about the activities and stability of Iceland's major banks and the state of the Icelandic economy. These reports were widely covered in the international financial press, causing a marked drop in the value of shares listed on the Icelandic stock exchange and of the Icelandic krona, but the market recovered as reforms were made in the banking sector. Then the financial sector was hit hard by the global credit crisis beginning in 2007. Although Icelandic banks had limited sub-prime mortgage market exposure, they were affected by the general lack of available capital. In the first six months of 2008, the Icelandic krona began devaluing and inflation rose to nearly 12%. Difficulties increased as Icelandic banks were not able to get financing on the global market and they were forced to turn to their lender of last resort, the Central Bank of Iceland. In October 2008, the Central Bank bailed out one major bank, but then a week later took possession of the three largest banks. This set off the financial crisis as the size of the banks' liabilities were estimated to be multiple times GDP. Iceland turned to the IMF for a $5.1 billion loan package that included bilateral loans from the Nordics and other countries. The long-term ramifications of the financial crisis are still developing, but so far have resulted in a dramatic rise in unemployment from less than 2% to 10.5% and widespread business closures and bankruptcies. Political turmoil resulted in the resignation of the cabinet and installation of an interim government as well as the replacement of the Central Bank and Financial Supervisory Authority leadership. At the end of 2008, inflation was at a rate of 18.6% and the currency had depreciated by roughly 90%.

Traditionally marine products have accounted for the majority of Iceland's exports of goods, but for the first time ever, in 2008 aluminum exports exceeded marine product exports. Other important exports include ferro-silicon alloys, equipment and electronic machinery for fishing and fish processing, and pharmaceuticals. The vast majority of Iceland's exports go to the European Union (EU) and the European Free Trade Association (EFTA) countries, followed by the United States and Japan. The U.S. is by far the largest foreign investor in Iceland. A Trade and Investment Framework Agreement (TIFA) with the United States was signed in January 2009. Iceland's relatively liberal trading policy was strengthened by accession to the European Economic Area in 1994 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland's exports, particularly seafood products. The agricultural sector, however, remains heavily subsidized and protected. Iceland became a full member of the European Free Trade Association in 1970 and entered into a free trade agreement with the European Community in 1973. Under the European Economic Area agreement, which took effect January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, EU, and EEA countries. However, following the financial turmoil in fall 2008, movements of capital to and from Iceland were restricted by the Rules on Foreign Exchange issued by the Central Bank. These rules are supposed to be temporary measures to strengthen and stabilize the exchange rate of the Icelandic krona, though they have since been extended and strengthened until September 2009.

Iceland has no railroads. Organized road building began about 1900 and has greatly expanded in the past decade. The current national road system connects most of the population centers along the coastal areas and consists of about 13,000 kilometers (8,125 mi.) of roads, of which about 4,800 kilometers (2,982 mi.) are paved. Regular air and sea service connects Reykjavík with the other main population centers.

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