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Transcript of a Conference Call on the Conclusion of the Sixth Review under the IMF-supported program with Iceland

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Julie Kozack, IMF mission chief to Iceland,
Simonetta Nardin, External Relations Department
Wednesday, August 31, 2011

MS. NARDIN: Welcome to the conference call on the sixth and last review of the IMF-supported program with Iceland. With me is the IMF Mission Chief to Iceland, Julie Kozack. She will now say a few words of introduction and we will then open it up to your questions.

MS. KOZACK: Thank you, Simonetta. On Friday, the sixth and final review of the IMF-supported program with Iceland was completed by our Executive Board. The objectives that were identified at the outset of the program have been met and these provide the foundation for a robust recovery of the Icelandic economy. Let me go through these objectives.

The exchange rate, which was under severe pressure in October of 2008, has stabilized and inflation has come down from double digit levels. Capital controls have been a key policy supporting the stabilization. Tremendous progress has been made in putting public finances on a sustainable path. Public debt is now set to decline to 80 percent of GDP over the medium term and there has been a very large adjustment in the primary balance.

Finally, the banking system has been restructured. A new and significantly smaller banking system has emerged from the crisis and the core banking system has been recapitalized.

But nonetheless, there are still challenges and the end of the Fund supported program does not mean that the work is over. In particular, Iceland still faces a challenge of growth and unemployment. Unemployment is still high, although it has started to come down, and the growth outlook, while for a moderate expansion, does still face some challenges.

On capital controls, there is a need to remove the controls gradually and cautiously over time, and this remains a significant policy challenge for the authorities. And in addition, there is a need to continue implementing the policies that have been put in place but still require further work, notably in the fiscal and financial sectors.

So, at the end of the day, when we look at where we came from and what has been achieved, there have been enormous achievements under the program and there has been tremendous progress. And this is largely attributed to the strong ownership of the program by the government and to the resilience of the people of Iceland in the face of a crisis of unprecedented magnitude.

I'll stop there and am happy to take any questions.

QUESTION I would like to know if the IMF has any advice to Althingi (Icelandic Parliament) regarding the public budget for 2012?

MS. KOZACK: Well, in terms of the budget for 2012 in the medium term, the program documents do contain a revised fiscal path starting in 2012 and continuing through 2016. We believe that this fiscal path strikes the right balance between supporting the tentative recovery in Iceland and also continuing with this fiscal consolidation.

So, as you would see in the report, we have revised the medium term path quite significantly to ease the pace of consolidation over the medium term. And we think that this medium term path beginning in 2012 does strike an appropriate balance between the need to reduce public debt and also to provide greater support to the economy, given that the recovery is still fragile.

QUESTION: Thank you. I have another question on the fiscal consolidation path. You are betting on very high primary surpluses over the next five years. I wonder to what extent it's realistic for the government to exert such restraint on its spending.

MS. KOZACK: Well, we do obviously think that the revised fiscal path is tenable and that it makes sense. And as I just said, we do also think that it strikes the right balance between supporting growth and fiscal consolidation. The program always had very high primary surpluses in it; it's just that we've now stretched out the period over which those surpluses could be attained.

I would also add that Iceland, in 2011, in this year, will come very close to attaining a primary balance. And with the measures that have been taken so far, Iceland is well on the road to achieving primary surpluses over the medium term, so we do think that it's perfectly plausible.

QUESTION: My question actually goes to continued cooperation between Iceland's government and the IMF. The finance minister and the economy ministers in Iceland have both discussed the possibility of actually getting some kind of line of credit from the IMF so it could act as Iceland's lender of last resort. Has that been discussed or do you have any -- have you had any ideas on how to move forward pass this point?

MS. KOZACK: All sides agree that Iceland has no balance of payments need at this time, so that we all agree there is no need for a full-fledged successor standby arrangement. The IMF does offer precautionary facilities and these would be a possibility for Iceland. It's up to the authorities to decide whether they want to go this route and we obviously stand ready to discuss these options with them at any time.

I would also just add that some members of the IMF do find the precautionary facilities helpful, particularly at times when the external environment is very unsettled as it is now.

QUESTION: Nothing has been decided yet as to whether Iceland will actually be granted some kind of precautionary measure?

MS. KOZACK: Well, this is a decision for the authorities as to whether they are interested in such a facility.

QUESTION: No application has been lodged with the IMF.

MS. KOZACK: Well, the way the requests work for these items is that we make an assessment of eligibility for some of these facilities only after a request is made and these assessments are treated as very confidential.

QUESTION: So it is ongoing. You can confirm that there is a process ongoing.

MS. KOZACK: No. What I am saying is that we have a number of precautionary facilities and it is up to the Icelandic authorities to request such a facility, if that is what they are interested in.

QUESTION: You are saying that even if Iceland had requested a precautionary facility, you could not tell us until a decision has been made. I'm not talking about the IMF telling, you know, how that assessment process is going, but rather you can't tell us even if a request has been made on a precautionary arrangement; is that right?

MS. NARDIN: The way we deal with precautionary lines is that a request remains confidential until an assessment by the IMF staff has been done and then it is presented to the Executive Board.

QUESTION: In the report, you say that the pace of private debt restructuring has been picking up and that efforts must continue until the process is brought to a close. How important is this for growth, going forward?

MS. KOZACK: Well, we see the private sector debt restructuring as critical for growth going forward. We have repeatedly called for this process of private sector debt restructuring to be accelerated, specifically, because we see it is critical for growth. In particular, from the corporate perspective, in order to jump-start investment and really to lay a solid foundation for investment, we need to have a corporate sector that is not heavily indebted and that has some certainty about its financial future, and this can only be accomplished with an acceleration and completion of private sector debt restructuring.

Similarly, in order for unemployment to come down more quickly, we think it is critical that the process of private sector debt restructuring be completed for the corporate sector because, after all, the firms that hire people. So we see that private sector debt restructuring is critical both to start investments and lay the foundation for very robust recovery in investment and also to reduce the high rate of unemployment in Iceland.

QUESTION: is it your opinion that there are enough solutions that have been enacted by the government to achieve this goal?

MS. KOZACK: Well, there's a wide range of options that have been put on the table now for both households and corporates, and what we've seen based on the data that we've been provided with is that there has been a strong pick-up since May in the pace of restructuring. So we are optimistic -- I would say cautiously optimistic -- that we are on the road to completing this process. But we will obviously monitor the situation very carefully and we -- you know, to the extent that there are bumps in the road, we may need to -- there may be a need to change course a little bit or to think about some different solutions. But right now, we are cautiously optimistic that the process has finally accelerated and will near completion in the next several months.

QUESTION My question is actually -- one of the things that you point out in the report, in the staff report is that the government seems to have a lack of clarity in how it attempts to attract investors, and that might actually be hampering or hurting economic growth. So, the questions is, has the IMF discussed how actually the government could clarify its position and how it might press ahead in attracting more foreign direct investment?

MS. KOZACK: Well, first of all, we see investment as critical to the recovery. As you can see in the report, growth over the medium term is led by -- we expect it to be led by investment and consumption to a lesser degree. So, investment really is critical to the recovery in Iceland. Right now, what we see is that investment is recovering from exceptionally low levels, but there are obstacles which are hampering a more robust recovery.

The first obstacle is the high corporate indebtedness that I just mentioned and that we have repeatedly emphasized. In addition, we think that there is significant uncertainty still in Iceland and globally, more generally, and that this is also hampering investment both in Iceland and across a wide range of advanced economies. And this uncertainty reflects a number of factors. There is uncertainty about the external environment and this uncertainty has increased in the last month relative to when we were in Iceland in June.

There are still some financing constraints that are facing firms trying to invest. There are some technical issues that are preventing rapid recovery in some of the projects in the energy-intensive sector. And then, we do think that in some areas there is greater clarity on prospects for advancing some key projects would be useful.

The bottom line, I would say, is that recovery from this type of recession that Iceland is facing, which we call a balance sheet recession, which is a recession characterized by high debt across several sectors, always takes time and is characterized by often very significant uncertainty, and this will naturally affect investment.

QUESTION: By any chance, elaborate a little bit on that specific remark, lack of clarity, how it actually is characterized?

MS. KOZACK: Well, I think that to the extent that the government can be clear on its policies for helping foster investment, this would help remove uncertainty in one area.

MS. NARDIN: This concludes our conference call on this last review under the IMF supported program for Iceland. Thank you very much for joining us.

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