Address to the Venture Iceland Investment Forum
6. April, 2000 at Hotel Loftleidir
(Hið talaða orð gildir)
Ladies and gentlemen,
It is with great pleasure that I welcome you to Iceland for the annual Venture Iceland investment forum. I am thankful for the opportunity to address this audience, as I - being the Minister of Finance - am well aware of the great importance of foreign investment to the Icelandic economy. There are several impressive high-tech companies presenting here today and it will be interesting to watch their future developments. I am sure that they have all undergone extensive coaching by the Trade Council of Iceland and are well prepared for the tasks ahead.
Iceland is without any doubt a leading nation in technological development and it is quite remarkable to watch the rapid growth of the information technology industry in this country. This industry is especially suitable for a country such as Iceland, a small island in the middle of the North Atlantic. Distances have become smaller and the new information technology has revolutionized the field of communication, paving way and giving true meaning to the word "globalization". This increases Iceland's competitiveness not only globally, but more importantly also domestically. Let me explain this a bit further.
One of the most important challenge facing authorities of a small state, such as Iceland, is the economic challenge. It is the responsibility of providing the population with acceptable living standards or rather by providing the framework for this to happen. In the Icelandic case we strive to provide an equal or an even better standard of living than in the countries that we compare ourselves to and compete with. In other words, we try to make sure that Iceland is, and continues to be, an attractive place to live in. I consider this to be an over-riding objective and this simply means that we have to hold on to our young, educated people by facilitating interesting opportunities. In the global economy people have become increasingly mobile, and young people in our part of the world are today truly presented with multiple choices as to where they could and would like to live, unlike before when people used to live where they were born for the rest of their lives, largely because they had no other choice. Our big challenge is, therefore, to attract them back if they choose to study or live abroad for a period of time. In fact the real challenge is to get them to want to move back. These new, dynamic high-tech companies, as the ones you will be presented with here today, help us to meet this challenge. The Government, however, provides the framework and the competitive environment for the companies to operate in.
Let me then turn to the economic situation here in Iceland and the dramatic changes in the business environment that have been taking place in the recent years. Large - almost gigantic - steps have been taken to improve the economic as well as the financial system in Iceland. The current coalition Government is now in its second four-year term, and the Independence Party, of which I am the Vice-Chairman, is in its third term. A decisive policy was launched in the beginning of this decade when we took office towards greater liberalization and deregulation where the overriding emphasis of the Government was to strengthen the macroeconomic stability in the economy. Significant progress has been achieved during the past eight years, and those achievements have placed Iceland firmly among the most economically advanced nations.
Before I go into the current situation, I want to give you a brief overview of what the Icelandic economy looked like a couple of decades ago - then you will better see the dramatic changes that have taken place. At that time the Icelandic economy was highly dependent on the fisheries sector which resulted in a very unstable economic environment subject to fluctuations in both fish prices and fish catches. This also meant that economic policy was almost entirely directed towards alleviating the immediate effects of fluctuations within the fisheries sector with little or no room for conducting a responsible fiscal and monetary policy. There was also admittedly a widespread lack of understanding of the possible benefits of an open market economy. The inevitable consequence of this situation was a highly unstable economic environment with rampant inflation. In addition, the economy was highly regulated and there were restrictions on trade and especially capital movements in and out of the country.
Much has happened since then, and apart from the changes resulting directly from Government policy, one of the more important events was Iceland's participation in the European Economic Area. By becoming a part of the European Single Market developments moved faster than otherwise would have been the case. The EEA was the extra impetus that was needed to move the economy towards more openness, as well as deregulation and liberalization of markets, in particular the financial markets. Significant structural reforms have also been implemented in the public sector with corporatization of public enterprises and privatization which is well under way and has been highly successful.
The results have been impressive. Rapid economic growth, price stability, almost non-existent unemployment, and greatly improved living standard have all gone hand in hand. Over the past four years economic growth has been over 5 percent per year, well above the OECD average, and real disposable income per capita has risen by more than twenty percent. Unemployment has been around 2 percent, the lowest rate in the OECD countries. Inflation has for several years been in the range of 1.5 to 2.5 percent, although there has been (what we hope to be) a temporary rise in that in the past months. Most importantly, the economic growth of recent years has been broadly based, and not merely the result of a good fishing year.
These changes and the increased economic stability that has followed have resulted in a stronger economy and a much more vibrant business sector, more competitive than ever. The improved business climate has led to more profitability, a rapidly growing export sector and a higher level of investment. As a result, Icelandic enterprises and pension funds have increased their investment activity abroad, and so have foreign enterprises in Iceland. I can add that in a recent study by the World Economic Forum regarding the access and quality of the business environment for start-up companies, Iceland receives a mark of 5,7 out of a possible 7,0. Iceland is there right behind the United States and New Zealand, and well ahead of the other Nordic countries.
Furthermore, the diversity of the Icelandic economy has increased in recent years. The fisheries sector, although much more efficiently managed than before and without any government support, is not as dominant in the economy as before. It is of course the most important single part of the Icelandic economy, however it is by no means a single-product industry but rather a multi-faceted and a highly diversified one. Other industries have also increased in both importance and volume. These include power-intensive industry based on clean hydro and geothermal energy, tourism, biotechnology, and of course the aforementioned very rapidly growing high-tech industry.
In the past few years, exports of Icelandic software have skyrocketed and there is every indication that this trend will continue in the coming years. It is not a coincidence that nearly all of the Icelandic software producers sell their products on the international markets.
I want to conclude my speech by taking a look at my favorite subject of discussion – the Government's fiscal budget. I believe that this will give you the clearest view of the transformation that has taken place.
This year's fiscal budget signals great restraint in economic policy in accordance with the Icelandic Government's policy to control the expansion in the economy and ensure continued stability. It was presented with a larger surplus than has been seen in Iceland ever, irrespective of whether it is measured in absolute terms or in relation to GDP. The revenue surplus of the Treasury is projected at least at 17 billion krónur, which is equivalent to 2.3 percent of GDP. By comparison, the 1999 budget was passed with a 2.4 billion krónur surplus, which however increased to 15 billion krónur, including revenues from privatisation. This is a dramatic change from what we are used to in Iceland.
An equally important figure is the net financial surplus, which shows the surplus available to the Treasury for the retirement of debt or for otherwise improving the Treasury's position. The net financial surplus is expected to exceed the revenue surplus and amount to nearly 24 billion krónur, compared with an estimate of 20 billion krónur for 1999 and 17 billion krónur in 1998. Hence, the net financial surplus for the years 1998-2000 exceeds 60 billion krónur, or close to 9 percent of GDP. Even though total expenditures have increased in real terms, they are expected to fall in relation to GDP, from over 29 percent to over 27 percent next year.
Due to the strength of Treasury finances, new Government borrowing will sharply decline. Moreover, the substantial financial surplus makes it possible to reduce Treasury debt as well as interest and amortization payments during the next several years. The reduction in Treasury debt in recent years has already led to significant savings in the interest payments of the Treasury. Treasury debt is estimated to equal about 30 percent of GDP at the end of the year 2000, compared to 51 percent at the end of 1995. These numbers are much better than in general in the OECD area.
These developments bear clear witness to the fact that the Government's economic policy has yielded considerable results. Iceland has joined the ranks of those nations that have been most successful in their economic and fiscal developments in recent years. Remarkable success has been achieved, as is attested to both in the assessment of the OECD and the IMF. The same verdict comes from international credit rating agencies that have assessed Iceland's credit rating, these include Moody's, Standard & Poors and Fitch IBCA. The positive verdicts of credit rating agencies have yielded tangible results in the form of lower interest rates on foreign credits in general, since the credit rating on government debt serves as a benchmark for other Icelandic debt issuers.
So, what is the conclusion of all of this? In the world economy you don't have to be big to be successful. And that Iceland is a good place to invest in. That is the message that I would like to leave you with.