Economy of Iceland

Today, let's delve into the economic landscape of Iceland, exploring the factors that shape the Icelandic economy.

Iceland boasts economic prosperity, yet this wealth is not uniformly distributed among its population. The World Bank ranks Iceland 13th in terms of GDP per capita, a notable achievement for a nation with a population of 385 thousand situated in the heart of the North Atlantic Ocean.

Iceland operates under a constitutional republic, with the president as the chief of state and the prime minister as the head of government. The country's economic model is characterized by a Scandinavian-type social-market system, blending capitalist structures and free-market principles with a comprehensive welfare system.

Economic indicators for the year 2023 show a nominal GDP increase of $28 billion and a PPP GDP increase of $26 billion. In terms of nominal GDP, the country is ranked 112th, while it holds the 149th position in terms of PPP GDP. The GDP growth rate for 2022 was 6.4%, with a forecasted increase of 2.3% in 2023 and 2.1% in 2024. The per capita nominal GDP is expected to rise to $75,180 in 2023, securing an 8th place rank, while the PPP GDP per capita is projected to reach $69,779, placing the country at the 14th position in 2023.

The expansion of Icelandic banks into European retail services and investments in foreign companies led to a financial crisis. The largest private company in Great Britain, Iceland's Baugur, faced challenges. The online banking platform, IceSave, operated by Landsbanki, suspended withdrawals during the crisis, impacting depositors across Europe. Faced with difficulties in maintaining the krona's value, there were suggestions for Iceland to join the European Union and adopt the euro. While Iceland is a member of the European Economic Area, adhering to many EU rules, opposition from the fishing industry, a crucial sector for Iceland, emerged due to disagreements with European countries over fishing rights.

The post-World War II period witnessed a distinctive and notably more dynamic economic growth in Iceland compared to other OECD countries. With an average annual GDP growth rate of approximately 4% from 1945 to 2007, studies indicate that Iceland's business cycle largely operated independently from those of other industrialized nations. This independence can be attributed to the export-oriented sector based on natural resources and external supply shocks. However, towards the end of the century, the volatility of this growth significantly decreased. This change is attributed to factors such as the expanding services sector, diversification of exports, more robust economic policies, and increased integration into the global economy.

In the 1990s, drawing inspiration from the successful Irish financial model, Icelandic authorities embarked on an economic overhaul. Repositioning itself globally, Iceland aimed to become a low-tax haven for foreign finance and investment. The country's three largest banks, Landsbanki, Glitnir, and Kaupthing, experienced substantial expansion, with Landsbanki especially broadening its retail operations in international markets. Despite its small population of 320,000, Iceland's krona emerged as a major trading currency, witnessing a remarkable 900 percent surge between 1994 and 2008. At its peak, the banking system held assets valued at 10 times Iceland's GDP.

However, the ill-considered deregulation of the banking system in 2001 further solidified Iceland's status as an international financial center. With significantly higher interest rates than domestic markets, global traders flocked to the Nordic island. Engaging in a profitable strategy, they borrowed in dollars, converted them to krona, and gained substantial profits through bond acquisitions. Even non-finance individuals participated in this trend, with countries like the Netherlands and the UK making deposits with Landsbanki under the term 'Icesave.'

In 2021, the spending of international visitors in Iceland accounted for over five percent of the nation's gross domestic product (GDP). Concurrently, Icelandic travelers abroad contributed almost three percent to the GDP. Although there was a recovery compared to the preceding year, these percentages remained below the levels observed before the onset of the pandemic.