Iceland making progress on economic recovery, IMF says

REYKJAVIK - The embattled nation of Iceland, the hardest-hit victim of the credit crunch, is making progress in its recovery from a devastating crisis, the International Monetary Fund said Thursday.

"Iceland's IMF-supported program is advancing well. The key near-term objective of stabilising the krona is being met," the head of the International Monetary Fund's mission to Iceland, Poul Thomsen, said in a statement.

The North Atlantic island nation's once-booming financial sector collapsed in the global financial crisis, pushing the country to the brink of bankruptcy and forcing the government to take control of the three biggest banks.

The IMF fast-tracked a 2.1 billion dollar loan to Iceland on November 19, the first Western European country to be rescued by the IMF since Britain in 1976, and thousands of people have taken to the streets in protest.

The Nordic countries also granted Iceland a loan of 2.5 billion dollars.

Icelandic Prime Minister Geir Haarde had previously estimated the cost of the financial crisis at around 85 percent of gross domestic product (GDP), but Thomsen said it was now expected to be only around 20 to 30 percent of GDP.

"It will be much less than 85 percent," Thomsen told reporters in Reykjavik, as the IMF wound up a four-day visit to Iceland to review recent financial, economic and policy developments with officials, lawmakers and civic leaders.

Thomsen did not specify if he was referring to Iceland's GDP figure from 2007 or 2008.

Iceland's GDP in 2007 totalled 1,293 billion kronur (7.9 billion euros, or 11.07 billion dollars as of Thursday's exchange rate).

The IMF's estimate would therefore put the cost of the crisis at about 1.58 billion to 2.37 billion euros, or 2.31 billion to 3.46 billion dollars, according to AFP's calculation.

According to Thomsen, the majority of the cost will translate into public debt, since the government recapitalised the commercial banks.

The public deficit was expected to be 170 billion kronur (1.03 billion euros, 1.41 billion dollars) in 2009, or around 13 percent of GDP, the government said earlier.

Thomsen welcomed the progress on fiscal policy and noted the government's draft of the 2009 budget was "in line" with the IMF programme.

The country still faces the key challenge of restructuring its financial sector, he said, citing progress in laying the groundwork for a valuation of new and old bank assets.

"Work on the valuation of assets will now need to commence to bring recapitalisation of banks to a conclusion by the end the first quarter," he said.

Thomsen also said that Iceland's "judicious" monetary policy had set the stage for an appreciation of the krona following the liberalisation of controls on current account transactions and the restoration of the interbank foreign exchange market.

"As conditions permit, the focus of monetary policy will soon turn to developing a comprehensive and well-sequenced plan to lift capital controls and reduce interest rates," he said.

Iceland's key interest rate is currently at 18 percent, the highest in Europe.

The IMF has already paid out some 827 million dollars to Reykjavik, and the rest will be paid out in eight intervals of 155 million dollars provided Iceland meets its quarterly IMF reviews.

The IMF said at the end of October it expected the island's economy to contract by a massive 10 percent next year.

Unemployment jumped from 3.3 percent in November to 5.4 percent in December, according to the Icelandic Labour Directorate.

The IMF said a mission would visit Iceland in early February to conduct the first formal review under the programme.