ECONOMY
Traditionally marine products have accounted for the majority of Iceland's exports of goods, but for the first time ever, in 2008 aluminum exports will exceed 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. 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.
Iceland's economy was historically prone to inflation due to periods of rapid
growth and its dependence on a few key export sectors, such as fish, which could
fluctuate significantly in quantity and price from one year to the next. For
example, inflation exceeded 43% in 1974 and 59% in 1980, before falling to 15%
in 1987, and then rising to 30% in 1988, which resulted in devaluations of the
krona. In the 1990s and continuing until 2006, Iceland experienced several years
of strong economic growth, thanks to economic reforms, deregulation, and low
inflation, averaging around 4%. The economy suffered a 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. The market recovered as reforms were made in the banking sector. 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 was devalued by 30% and inflation rose to nearly
12%. Because of Iceland's high current account deficit, high inflation, and high
private sector debt levels, the global financial community and the foreign media
closely monitored the situation. In turn, the Icelandic Government has carefully
followed foreign confidence in the Icelandic economy because access to foreign
capital, which Icelandic business people have used aggressively in overseas
investments, is extremely important. Wealthy Icelanders have heavily invested in
the retail and real estate markets in Denmark and the U.K. and telecom,
pharmaceutical, banking, and financial sectors in Eastern Europe. Their success, beginning in the late 1990s, created for the first time a "super-rich" elite in Icelandic society.
Iceland has few proven mineral resources, but has abundant hydroelectric and
geothermal energy resources. These clean energy sources provide for nearly 100%
of electricity generation and home heating. Iceland's energy resources support
power-intensive export industries, such as aluminum smelting. The Kárahnjúkar hydroelectric project is the largest single electrical station in the country, with capacity of 690 megawatts (mw). Other major hydroelectric stations include Búrfell (270 mw), Hrauneyjarfoss (210 mw), Sigalda (150 mw), and Blanda (150 mw). Iceland-based Nordural Aluminum is a wholly owned investment of Century Aluminum of Monterey, California. The plant employs more than 450 people and recently expanded its production capacity to 220,000 tons per year. A new smelter owned by Alcoa, another U.S.-owned aluminum company, began operations in June 2007 and will have a production capacity of 346,000 tons per year when fully operational. The Kárahnjúkar hydroelectric power plant, completed in early 2007, was built to provide power to the Alcoa smelter. Over $2 billion was invested to build the power plant and smelter, making the combined project the largest in Icelandic history.
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.
GDP (2007): $19.9 billion.
GDP growth rate (2005): 5.8%; (2006): 4.2%; (2007) 3.8%.
Per capita GDP (2007): $64,033.
Inflation rate (2007): 5.1%; (June 2008, 12-month change): 12.7%.
Central government budget (2007): $6.3 billion; (projected 2008): $6.7 billion.
Annual budget surplus (2006): 1.4% of GDP.
Net central government debt (2007): 4.9% of GDP.
Natural resources: Marine products, hydroelectric and geothermal power.
Agriculture: Products--potatoes, tomatoes, cucumbers, carrots, roses, livestock.
Industry: Types--aluminum smelting, fishing and fish processing technology, ferro-silicon alloy production, hydro and geothermal power, tourism, information technology.
Trade: Exports of goods (2007)--$4.8 billion: marine products 41.8% industrial products 38.9%, agriculture 1.1%, and miscellaneous 18.2%. Partners--EEA 78.4% (Netherlands 21.3%, Germany 13.4%, U.K. 13.2%, Ireland 7.6%, Spain 4.6%, Norway 3.8%, Denmark 3.3%); U.S. 5.3% ($250 million); Japan 4.2%. Imports (2007)--$6.7 billion: industrial supplies 26.7%; capital goods, parts, accessories 21.5%; consumer goods 15.7%; transport equipment 20.5%; food and beverages 6.8%; fuels and lubricants 8%. Partners--EEA 64.6% (Germany 12.1%, Sweden 10%, Denmark 7.4%, Netherlands 5.6%, U.K. 5.4%, Norway 4.6%, Italy 3.4%); U.S. 13.5% ($208 million); China 5.1%; Japan 4.7%.
