Iceland needs more measures to meet fiscal targets amid overspending in 2011 and a projected budget “slippage” in 2012, the International Monetary Fund said.
“The mission is concerned about these deviations, especially in light of the considerable risks to the revenue projections in 2012 and the medium term,” the IMF said today in an Article IV concluding statement. “Moreover, there is a risk that expenditure overruns may appear again, which would also affect the medium-term fiscal path.”
The IMF recommended additional measures this year equal to 0.5 percent of gross domestic product to achieve a fiscal goal of an overall balance in 2014. This will allow debt to decline from almost 100 percent of GDP to about 80 percent in 2016, the Washington-based group said.
Iceland, which completed a 33-month IMF program in August after its 2008 financial collapse, has since outperformed a number of euro area nations in recovering from the crisis. The $12 billion economy will grow 2.5 percent this year, the IMF said today, adding that growth will be at 2.5 percent to 3 percent in the “medium term.”
“Over the medium-term, the drivers of growth will gradually shift away from domestic demand, notably investment, toward external demand as exports increase,” the IMF said. “However, there are risks to this outlook, emanating from both external and domestic sources.”
Iceland’s central bank last month signaled it’s ready to raise interest rates in order to cap inflation after consumer prices soared above the official target and the krona slid against the euro. The bank left the seven-day collateral lending rate at 4.75 percent last month and in December, after last year raising borrowing costs for the first time since 2008 to contain inflation.
The island should continue with a “gradual tightening” of monetary policy and lifting capital controls “remains a key challenge,” the IMF said. “In view of the uncertainty in the global environment, consideration should be given to a further extension of the capital controls, beyond end-2013.”
Iceland has started easing its capital restrictions it instituted after its collapse to protect the krona. Iceland has started currency auctions as it scales back the krona controls. The central bank hasn’t set a target date for removing the restrictions and says the plan follows given financial targets.
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