Settled by Norwegian and Celtic (Scottish and Irish) immigrants during the late 9th and 10th centuries A.D., Iceland boasts the world's oldest functioning legislative assembly, the Althingi, established in 930. Independent for over 300 years, Iceland was subsequently ruled by Norway and Denmark. Fallout from the Askja volcano of 1875 devastated the Icelandic economy and caused widespread famine. Over the next quarter century, 20% of the island's population emigrated, mostly to Canada and the US. Denmark granted limited home rule in 1874 and complete independence in 1944. The second half of the 20th century saw substantial economic growth driven primarily by the fishing industry. The economy diversified greatly after the country joined the European Economic Area in 1994, but Iceland was especially hard hit by the global financial crisis in the years following 2008. The economy is now on an upward trajectory, fueled primarily by a tourism and construction boom. Literacy, longevity, and social cohesion are first rate by world standards.
Northern Europe, island between the Greenland Sea and the North Atlantic Ocean, northwest of the United Kingdom
fish, hydropower, geothermal power, diatomite
Population - distribution
Iceland is almost entirely urban with half of the population located in and around the capital of Reykjavik; smaller clusters are primarily found along the coast in the north and west
Icelandic, English, Nordic languages, German widely spoken
REYKJAVIK (capital) 184,000 (2014)
- Conventional long form
- Republic of Iceland
- Conventional short form
- Local long form
- Lydveldid Island
- Local short form
- Geographic coordinates
- 64 09 N, 21 57 W
- Time difference
- UTC 0 (5 hours ahead of Washington, DC, during Standard Time)
has not submitted an ICJ jurisdiction declaration; accepts ICCt jurisdiction
Iceland's economy combines a capitalist structure and free-market principles with an extensive welfare system. Except for a brief period during the 2008 crisis, Iceland has achieved high growth, low unemployment, and a remarkably even distribution of income. The economy depends heavily on the fishing industry, which provides 40% of merchandise export earnings, more than 12% of GDP, and employs nearly 5% of the work force. It remains sensitive to declining fish stocks, as well as to fluctuations in world prices for its main exports: fish and fish products, aluminum, and ferrosilicon. Since 2010, tourism has become the main pillar of Icelandic economic growth, with the number of tourists reaching 4.5 times the Icelandic population in 2016.
- Total tax rate (% of commercial profits)
- Real Interest Rate
- Manufacturing, value added (% of GDP)
- Current Account Balance
- US$ 1,632,286,531
- Labor Force, Total
- Employment in Agriculture
- Employment in Industry
- Employment in Services
- Unemployment Rate
- Imports of goods and services
- US$ 8,529,267,413
- Exports of goods and services
- US$ 9,844,009,278
- Total Merchandise Trade
- FDI, net inflows
- US$ -1,179,666,058
- Commercial Service Exports
- US$ 5,389,740,996
potatoes, carrots, green vegetables, tomatoes, cucumbers; mutton, chicken, pork, beef, dairy products; fish
tourism, fish processing; aluminum smelting;; geothermal power, hydropower; medical/pharmaceutical products
- fish and fish products (42%), aluminum (38%), agricultural products, medicinal and medical products, ferro-silicon (2015)
- Netherlands 26.1%, UK 11.6%, Spain 11.5%, Germany 7.4%, France 5.7%, US 5.7%, Norway 4.7% (2015)
- machinery and equipment, petroleum products, foodstuffs, textiles
- Norway 10.1%, Germany 8.6%, US 7.9%, China 7.9%, Denmark 7.1%, Netherlands 5.9%, Brazil 5.8%, UK 5% (2015)
- Country Risk Rating
- The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.
- Business Climate Rating
- The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.
- Healthier banking sector
- Gradual decline in the public debt
- Rich and renewable energy (geothermal, hydroelectricity)
- Oil and gas reserves
- Strong tourism potential
- High foreign reserves
- Dynamic household consumption
- Small economy
- High external debt
- Concentration of production and exports (aluminum and sea products)
- Russian embargo on Icelandic seafood products
In 2017, growth is expected to remain high, despite a slight slowdown compared with the last two years. Household consumption will probably still be a growth driver because of the rise in real wages (already registered in 2016), which would help boost household purchasing power, and low unemployment (2.9% in October 2016). Nonetheless, weaker wage rises than in 2016 and inflation development might result in lower household consumption growth. Investment is also forecast to remain high in key sectors of the economy, although it might be hampered by a rise in salary costs insofar as productivity might rise less quickly than real wages. The fast-growing tourism industry should again make a positive contribution to economic growth because of the government's eagerness to increase investment in this sector. This would in turn strengthen the construction sector, and reduce unemployment. The fisheries and aluminium industries look set to receive major investments and continue to account for a large share of the economy (20% of GDP). However, the rise in the value of the kroner versus the euro might still make exports less competitive.
Inflationary pressures might well grow with the rise in wages, which would be less and less offset by the appreciation of the Icelandic kroner (falling cost of imports). Indeed, it would favour the growth of domestic demand. In this context and in order to limit the risk of overheating, the central bank might not rule out tighter monetary policy (rise in key interest rates), which would lead to another rise in the value of the kroner.
Iceland seems set to post a small budget surplus in 2017, as it did in 2016. Public debt will probably therefore continue to fall, but remain well up on pre-crisis levels (28.5% of GDP in 2007). The government will nonetheless probably adopt a less expansionary budget policy, to prevent the risk of the economy overheating. Consequently, the increase in tax receipts as a result of the favourable economic situation will largely be directed towards continuing to pay down the public debt.
The current account surplus is expected to fall slightly in 2016. Forecasts suggest that exports of goods will still be hindered by the kroner's continuing rise in value since 2015 and by the embargo imposed by Russia (Iceland's fifth-largest trading partner) after the country's stance during the conflict with Ukraine. However, exports of seafood products and aluminium should still be strong and continue to account for nearly 75% of total exports. Moreover, the current account surplus will probably be ensured by the fast-growing tourism sector, thus offsetting the growth in imports (driven by very strong domestic demand) and the fall in FDI.
In mid-August 2016, the finance ministry announced the gradual lifting of almost all the capital controls that had been introduced after the 2008 crisis. The equivalent of around 10% of GDP in liquid assets are held by non-resident investors and had been frozen since the crisis. The central bank therefore allowed investors to convert their assets into foreign currency. According to the finance ministry, the lifting of capital controls led to capital outflows of around €0.3bn (2% of GDP) in 2016; the corresponding figure for 2017 is predicted to be €1.2bn (8% of GDP). However, the central bank holds large reserves and the three main Icelandic banks are well capitalised, which should ensure a stable transition to liberalisation of the capital account.
Prime Minister Gunnlaugsson resigned in the wake of the "Panama Papers" tax fraud revelations (but stayed on as leader of the Progressive Party), replaced by the former minister of agriculture and fisheries, Sigurdur Johannsson, in April 2016. The parliamentary elections held on 29 October 2016 saw the Independence Party emerge as the largest party, but fail to win a majority (21 out of 63 seats). The other coalition party (the Progressive Party) won just 11.5% of the votes (9 seats), depriving the former coalition of its absolute majority in parliament. In addition, the breakthrough made by the anti-establishment Pirate Party was not as large as predicted, as it finished third behind the Left-Green Party.
Internationally, the country's withdrawal of its application for EU membership in March 2015 did no damage its relations with the bloc. Moreover, the pro-European party's performance in the election (7 seats out of 63) means the debate around EU membership looks closed for now.