Hot Spots: Iceland.(Brief Article)

Iceland, with its tiny population of just 283,000, has long been known for its fishing industry, which still furnishes half of its export earnings. It is less well known as a nation with one of the world's highest living standards (in per caput GDP it ranks sixth, right after Luxembourg) and less, still, as a country with the globe's highest Internet and mobile telephone penetration rates. More than 80 percent of the people have access to the Internet at home, in the office or in their schools. The number of cellular phones per household just recently surpassed that of Finland.

This development has been due to a considerable effort by the authorities to attract investment from abroad through deregulation, privatization and the creation of a solid local business climate. It has been helped by the fact that Iceland has plentiful, cheap energy--with hydroelectric power stations feeding industry (for instance, a relatively new aluminum sector) and geothermal sources providing nearly all the heating and hot water required. Iceland has practically no unemployment, with a jobless rate at just over 1 percent. Labor has been imported for fishing and construction and for rapidly growing new industries in the tourism, biotechnical and information technology sectors.

All this has helped the economy grow by 4.5-5.5 percent for the past four years. The darker side of the development has been upward pressure on inflation and a sizeable current-account BoP deficit. To prevent economic overheating and to keep a damper on inflation, the CB raised its repurchase rate eight times in the current economic cycle--most recently last November. But monetary erosion has lately been picking up again. In the past three months, consumer prices climbed 2.0 percent, which is equivalent to a yearly pace of 8.4 percent. The current account BoP deficit widened to 68.9 billion Icelandic crowns in 2000 from 43.6 billion ISK in 1999, and is running at over 7 percent of GDP.

While this shortfall in years past was mainly due to excessive government borrowing, it now results primarily from private transactions. This includes imports necessitated by large-scale investment in such things as capital goods and equipment for new industries, fishing and an aluminum smelter, which in time will add to the nation's export potential. Some improvement in the external accounts is expected this year from lessened domestic demand and from strengthened exports. While sales abroad by the high-tech sectors will probably slow, the prospects for fish-relaxed sales have improved materially due to European fears of mad-cow and hoofand-mouth disease.

Public finances are strong, and budgetary affairs are disciplined. They produced a fiscal surplus of more than 3 percent of GDP last year. As for inflation, the Central Bank shifted its focus in March when it abandoned its defense of the krona's prescribed fluctuation ...