I have asked for the opportunity at the beginning of this session – that was scheduled at the beginning of September pursuant to the new Parliamentary Procedures Act – to report to the Althingi on current developments and prospects for the economy. I believe it is appropriate to commence our parliamentary work with such a debate in light of the rapidly changing economic situation in recent months.
The challenges of our economic situation are essentially twofold. First, we are facing a traditional economic downturn in the wake of a period of rapid expansion that has done more to improve the standard of life of the nation than ever before. The króna exchange rate, that was generally seen as overvalued for a while, declined rapidly in the first part of the year with the result that prices increased and purchasing power declined. It should be borne in mind that, in spite of the decline in purchasing power in recent months, the standard of living is on par with that of two years ago, when it had never been better.
On the other hand, we are facing the consequences of an international financial crisis in the wake of difficulties in the US housing market. This crisis has had serious consequences in neighbouring countries with great difficulties and even bankruptcies of respected financial institutions. Investors have become very risk-averse, in turn creating difficulties for borrowers. It was evident that such a situation would have an impact in this country, given the openness of our economy towards capital movements between countries and the size of the Icelandic banks in relation to the overall economy.
Furthermore, the world has had to face rapid oil price increases as well as rising prices of food and other raw materials.
The Icelandic economy has developed rapidly in recent years. Purchasing power has increased and the number of pillars supporting our economy has grown. The increasing economic diversity ensures the sustainable development of the economy and the standard of life for all Icelanders in the long run.
It is important for us Icelanders to realise that we are not alone in this economic turmoil. The Chancellor of the Exchequer of the United Kingdom stated a few days ago that the current recession was the deepest since the end of World War II and that up to two million Britons were at risk of losing their jobs before next Christmas. In Denmark, well-established financial institutions such as Roskilde Bank are on the brink of bankruptcy, and the United States has already seen bankruptcies that are directly attributable to the financial crisis that now rocks the world.
It is also inevitable that these disturbances result in growing world inflation, both in this country as well as elsewhere, leading to increased difficulties in economic management. Iceland is not alone in finding it difficult to manage its economy. We must also realise that there are no magic solutions to our economic problems. No government in the entire world is capable of waving a magic wand to correct its economy, not the Icelandic, not the British and not the US government. There are many participants in our economic debate who have spoken forcefully in recent months without facing these realities.
The Icelandic public will inevitably feel these difficulties, as elsewhere in the world. We notice them at the petrol pump, the supermarket and when we pay our mortgage. It is difficult and painful to have to accept deteriorating economic circumstances, but the alternative of refusing to scale down our expectations in current circumstances is considerably worse. The Icelandic nation is familiar with the task of grappling with economic difficulties and we will overcome our current adversity. But it demands patience and perseverance. It will take time, and we must all prepare for temporary sacrifices and a temporary decline in purchasing power.
In these present difficulties, we can take comfort in the fact that the Icelandic nation, the general public, businesses and the Treasury, have never been as well situated in meeting economic adversity. We used the economic expansion to repay Treasury debt, accumulate large funds and diversify the economy and its sources of income. The International Monetary Fund was quite right in its recent report where it observed that Iceland’s economic prospects are enviable. The standard of living will improve rapidly again, once we have surmounted the present difficulties. The increase in the standard of living will not be based on borrowing, magic tricks or quickie solutions, but on increased production, human capital and natural resources.
We are used to enjoying good times. Following one of the longest continuous economic expansions in our history, the economy is slowing down. This was to be expected, following the period of construction of power projects and aluminium plants. The crisis in the international financial markets was, however, not foreseen nor its consequences for Iceland. It lies in the nature of economies in general to go into recession after a long period of expansion. Even the best of runners must stop after a long race and catch their breath before resuming their run.
It need not be recounted in many words, Mr. President, that Icelandic society has undergone a major transformation in the past two decades. Never in history has purchasing power increased as much, the nation’s level of education has steadily grown, and we acted responsibly in reducing Treasury debt during the years of prosperity. This is a sign of our prudence. It is for this reason that we are well equipped to face the challenges to our economy. Our nation is well-educated, there are more pillars supporting economic foundations, our Treasury is debt-free and in possession of sizeable funds.
The main task at hand is to present credible solutions and follow up with a deliberate and determined policy. The Government and the Central Bank have acted forcefully in meeting the difficulties in the economy and done what was in their power to meet the economic problems of recent months. The opposition and other sceptics have accused the Government of doing nothing on the economic front. These accusations have no foundation in fact. A number of deliberate steps have been taken in recent months to counter the impact of the financial crisis on the Icelandic economy.
The Central Bank has this year liberalised its rules regarding surety in its transactions with financial institutions. Assets qualifying as collateral have been increased, thus moving the environment of Icelandic banks more in the direction of what is common in neighbouring countries, using the rules of the European Central Bank as a guideline. The outstanding amount of collateral-secured credits currently amounts to 400 billion krónur and has increased in recent months and years as elsewhere.
Last May, the Central Bank entered into currency-swap agreements with its counterparts in Norway, Sweden and Denmark. The agreement with these banks strengthens the Central Bank’s foreign exchange reserves in this manner by 180 billion krónur.
Later in May, the Althingi authorised the Government to borrow up to 500 billion krónur at home or abroad in order to further strengthen the foreign exchange reserves. This authorisation is being gradually used in steps.
In June, measures were announced whereby the Housing Finance Fund opened a credit line for financial institutions to sell housing bonds in order to improve their liquidity. This is especially useful for small firms in the financial market.
At the end of June, a 75 billion domestic Treasury bond issue was announced to attract foreign investors in Iceland and strengthen exchange rate stability. This has already proven successful.
At the beginning of July, the stamp tax on the purchase of a first apartment was abolished. This measure reduces the cost of purchasing an apartment and should help the real property market and make it easier for young people to buy their first home. And it should be noted that it was announced this morning that the UK authorities are contemplating exactly a comparable measure.
At the end of July, the foreign exchange reserves were increased by more than 12 per cent through the Treasury issue of commercial paper in foreign markets.
The corporate income tax was reduced to 15 per cent this year, bringing the tax rate on companies down to one of the lowest levels in Europe. This will be reflected in their competitive strength in the long run.
Iceland has become a party to the Memorandum of understanding on cooperation between the financial supervisory authorities, central banks and finance ministries of the European Union on cross-border financial stability.
At present, a 250 million euro debt issue is being finalised at terms far more favourable than indicated by the so-called CDS spread for the Treasury. This is, of course, very important from the viewpoint of taxpayers as well as that of other borrowers in the market. It shows again how far from reality the CDS spread in the international financial market actually is.
The foreign exchange reserves amounted to 200 billion at the end of last June. It was increased in July and August to 300 billion at the end of August. Including the new debt issue that I just announced, the aforementioned currency swap agreements, the credit lines of the Treasury and the Central Bank, the reserves amounted to the equivalent of 500 billion, compared to just over 100 billion in the middle of 2006, at a comparable rate of exchange. Our foreign exchange reserves have thus quintupled over this brief period and are currently higher in proportion to GDP than in most of our neighbouring countries.
It seems that those who clamour most that we must increase our foreign exchange reserves have not got their facts up to date.
Together, these measures all help in overcoming our adversity. A number of other measures are being prepared in order to meet our temporary difficulties. The Government will do what needs to be done and is within its power to meet our short-term difficulties and increase economic stability in the long run. This will be seen when the fiscal budget bill will be presented along with my policy speech at the beginning of October. The Government has eschewed making statements devoid of meaning, since they would not strengthen confidence at home and abroad. In times of economic turbulence, carefully considered measures are more important than exclamations.
Inflation has been rising of late. The sources differ from those of previous year. We must all endeavour to bring down inflation before a wage-price spiral, so well known to us from the ‘eighties and ‘nineties, re-emerges. There are a number of indications that the inflation rate will decline rapidly this autumn, barring unexpected circumstances. In such a case, interest rates could also decline rapidly and businesses could hire more people.
We have faced considerable economic adversity in recent months. This is happening at the same time as oil prices are reaching new highs, the prices of raw materials and food are increasing and the króna exchange rate is declining in the foreign exchange market with concomitant increases in import prices, as I observed earlier. Regrettably, this is a recipe for a temporary cut in real wages.
In these circumstances, it is important that we all show an understanding. The Government will consult with the partners in the labour market and others in order to reach a better consensus in this fight. There is every reason to encourage households to show moderation. It should be borne in mind that the most sensible thing to do in times of inflation is to repay debt and save as much as possible, thereby tempering inflation and strengthening the household asset base, thus increasing economic growth and stability in the long run.
In this, we are all in the same boat. At this point, our most important contribution is to bring down inflation, the greatest enemy of households in the country. There is no task in the economic arena that would yield greater dividends than defeating inflation. The first step, of course, is to analyse circumstances correctly. This presents us with a demanding challenge, although not as an emergency or a real depression, as we Icelanders knew in earlier times.
On the other hand, we can take comfort in the fact that inflation at present is not due to a wage-price spiral, but mainly the result of rising import prices. This is a key point in all discussion of this issue. Inflation stemming from rising import prices can be more quickly reduced when the króna exchange rate regains a new equilibrium. It is therefore important that all market participants resist the temptation of raising prices and instead wait for the inflation rate to subside. This would benefit all of us in the long run.
As a background behind all these vicissitudes, it is important to remember that our economy is blessed with strength and resilience. Although the labour market is showing signs of a slowdown in recent times, it should not be forgotten that almost all Icelanders can have a full-time job. Those who lose their job can rely on the safety net offered by a strong welfare system. They can rely on the flexibility of the Icelandic labour market and be certain of the fact that unemployment will be eradicated through increased production in the country. We will never be satisfied with limited possibilities for people to provide for their families. It is a priority for this Government to see to it that there will be, as before, full employment available for those willing to work in the country.
It is important to increase production through an expansion of productive capacity. We must use the resources available to our nation. Nothing will come from a void. All nations of the world endeavour to use their resources as efficiently and sensibly as possible. We can not be the exception. The times are changing in the world and we Icelanders are fortunate enough to possess valuable energy resources. We must use these resources with increasing technology and know-how in a cost-effective manner, having at the same time regard to the sustainable safeguarding of the environment. The best path out of our difficulties is to produce, produce and produce.
Natural resources count for little if they are not used efficiently. No nation can afford to forego the use of its natural resources. The best response to our present difficulties is to increasingly harness our natural resources in a responsible and sustainable manner, geothermal as well as hydro-power. It is in the interest of the people in the country that the public authorities facilitate the efficient use of our natural resources.
In recent years, we have greatly increased our investment in education at the university level. In the long term, this will yield a more skilled workforce and an increased rate of growth. Over a ten-year period, the number of university students has increased by more than 10 thousand, from 7 thousand in 1997 to about 17,500 in 2007. This constitutes an investment for the future.
Along with the development of the energy sector in recent years, we have placed great emphasis upon increasing the competitive strength of the nation and diversifying its risks. This can best be seen by the fact that fish exports and aluminium exports are now equal in value. These are the two main pillars on the export side, whereas previously there was only one. In addition, tourism services and various other sectors have grown rapidly in recent years. We must increase the number of these pillars still further. There are innumerable opportunities to do so.
One of the main tasks of politics is to create a favourable framework for the growth of business and the standard of life. I am convinced that the present temporary challenges will prove to be of benefit for the future, if we are fortunate enough to rationalise, reorganise, create new opportunities and better use our resources on land and in the oceans. We have lived through incredible times in the world, and the time has now come to sharpen our goals and adjust as necessary. We know where we are heading and we will weather the storm.
We must never forget that behind cold economic statistics and dry reports on the economy there are people, ordinary Icelanders. People who go to their daily tasks, pay their bills and look after their children and friends in work and play. The Icelandic nation has encountered difficulties before and overcome them through the energy that is so characteristic for our nation. The opportunities are there. A debt-free Treasury, a young nation, a strong pension system and great natural resources will enable us to increase our productive capacity, improve our education and use stored-away resources to mitigate temporary economic difficulties. These are enviable privileges that we must use in full. There are many that envy us of these privileges and wish they were in our shoes. We must use our opportunities, one and all. In recent weeks we have seen what we can achieve as a team under the banner of Iceland. The Icelandic nation will unite in this matter and together we will prepare ourselves for our common future.