Geir H. Haarde
Minister of Finance
Address at a meeting of the British-Icelandic Chamber of Commerce in London
February 16, 2001
(Check against delivery)
Ladies and Gentlemen,
It is with great pleasure that I address this meeting of the British-Icelandic Chamber of Commerce. There is a long history of trade and investment between the two countries and it is interesting to see from the list of members how diverse the business has become. There are of course the more traditional seafood, transportation and export/import companies who have been doing business for many decades, but the more recent increase in all sorts of financial companies, accounting firms, consultants and law firms is a clear sign of the much discussed internationalisation and globalisation that is taking place. Not to mention the rapidly increasing export product, which is the Icelandic football player. The whole nation closely follows the English football league every week and cheers for "Icelandic" teams such as Chelsea, Ipswich, Leicester, Bolton and Watford – not to mention Stoke City, which happens to be my personal favourite.
Iceland may not be the largest market or the biggest economy in the world, but there are interesting developments currently taking place and attractive investment opportunities arising. I will take a few minutes to discuss the current economic situation and the financial environment in Iceland and conclude with the newest developments in the Government's privatisation policy.
The Icelandic economic situation
These measures have helped strengthen Icelandic industry and paved the way for new sectors such as information technology, software, telecommunications and biotechnology. As a result, productivity has increased and economic growth has been higher in Iceland in recent years than in most neighbouring countries. The purchasing power of households has also increased rapidly and unemployment has been all but wiped out. Stability in the labour market has been ensured by the conclusion of private sector wage agreements for the next three to four years which will contribute to a better operating environment for enterprises and wage earners as well as the economy as a whole. The wage agreements for the public sector are currently being negotiated and they will take notice of the policy that has been made in the private sector.
The unusually strong economic upswing has, however, been accompanied by a rapidly growing domestic demand, a temporary hike in inflation and a widening current account deficit. This trend has now been reversed. The latest indicators point towards a considerable slowdown in domestic demand. Thus, import demand has been levelling off, especially that of consumer durables.
This has also been reflected on the revenue side of the fiscal budget which records a much lower year-on-year increase than in the two preceding years. Although total tax revenue, in relation to GDP, has increased somewhat since 1998, the ratio has been more or less stable since 1999, at about 30 per cent.
The expenditure side shows broadly the same picture with total expenditures recording a fall in relation to GDP. In fact, expenditure growth has been below the estimated national expenditure growth between 1998 and 2001.
The current slowdown in domestic demand has also been reflected in the trade deficit which appears to have peaked. The comparison between 1999 and 2000 is striking in this respect. In 1999, the increase in import demand was almost exclusively accounted for by a surge in consumer goods whereas last year consumer goods were more or less stagnant, with the surge in oil imports and investment goods leading the way.
In this context, it is also important to note that the current account deficit is not due to central government indebtedness but exclusively the result of increased private sector borrowing. This reflects the private sector's confidence in the Government's economic policy and continued economic stability. The strength of Treasury finances represents a significant counterbalance against the impact of private sector indebtedness upon domestic demand and the current account and the overall public sector saving accounts for 40-45 per cent of total saving.
Increased foreign assets
Inflation on the decline
Strong fiscal outcome
The main emphasis of the Government's economic policy is to continue along the same path and pursue a tight fiscal policy in the medium-term. The Government has recently announced its next steps in privatising government stakes in various enterprises, most significantly in the telecommunications and banking sectors, which will render considerable proceeds to the Treasury as well as fostering increased competition and productivity gains. In recent years, proceeds from the sale of government assets have been used to reduce Treasury debt as well as future government pension commitments by raising the equity of the Government Employees Pension Fund. This policy will be continued.
A number of tax measures have in recent years strengthened Icelandic industry, particularly new economy sectors, and additional reforms are underway. This applies i.a. to a further lowering of corporate income taxes. In this respect, we generally favour going for a general lowering of the corporate income tax rather than granting specific tax benefits in special areas.
The new economy
And has this development made a noticeable impact on the Icelandic economy? Yes, it has. Not only because of a rapid development in the so-called "new economy" sectors and their contribution to export growth, but also because of the catalytic effect on the development of the "old economy" sectors. The fact is that the new economy does not replace the old economy nor does it solve all the problems of the old economy. What I believe is the major contribution of the "new economy" effect in Iceland, however, is the fact that the IT-process has not only been felt in the "new" industries but also, and perhaps more significantly, in the more traditional "old" industries. I believe, these "second-round effects" if you like, will be even more important for the future development of the Icelandic economy than the first-round effects. Also, I would like to underline the importance of a flexible labour market and a highly skilled and educated labour force. In this era of ever increasing globalisation and increased competition these factors will be of growing importance.
Privatisation policy in Iceland
- To increase private saving. This is accomplished by selling the shares in public offerings and by continuing to offer individuals a tax reduction if they invest in listed shares.
- To increase economic efficiency by eliminating the distortions inherent in state-ownership.
- To broaden share ownership and continue to encourage the development of the Icelandic stock market.
- To raise capital in order to decrease Treasury debt. One of the main goals of the privatisation program is to use the income from privatisation to reduce Treasury debt and reduce the debt burden of future generations.
Organised privatisation in Iceland began in 1991-1992 although there had been individual sell-offs earlier. The first steps entailed disentangling the State from operations where it had no business being as there was a competitive market in the given field. The operation of a travel agency, a fertiliser plant, fish processing plants, a machine shop, a print shop, and alcohol production are clear examples of this. You can see from that list that the Icelandic state was involved in a wide array of activities behind each of which there usually were particular, political circumstances.
In the last three years, a new and long-desired chapter in privatisation opened when the State began to systematically withdraw from the financial market. Investment loan funds of the State had been merged into one limited liability bank in 1997, the FBA, or the Icelandic Investment Bank Ltd., which was later sold in two stages in 1998-1999. The newly privatised FBA then merged last year with Islandsbanki Ltd., thus becoming the largest bank in Iceland.
The most interesting privatisation project at present is no doubt the Icelandic Telecom Company. The Post and Telecommunications Administration was converted to a limited liability company in 1997 and then split into two companies a year later. Iceland Telecom Ltd. is not only by far the biggest telecommunications company in Iceland, but also one of the most profitable enterprises in the country, with its market value estimated around 340-500 million GBP. A few weeks ago the Government announced the privatisation of the company and the way it will be organised. This decision not only reflects the strong commitment of the Government to continue on the path of privatisation but also to attract foreign capital and ownership. I personally think it is very important to fully privatise the company as soon as possible, hopefully with the participation of a foreign investor as a strategic partner.
The two state-owned commercial banks, the National Bank of Iceland and the Agricultural Bank of Iceland, were converted into limited liability companies, and the sale of their shares also began in 1998. Share sales continued in 1999, and the State now owns about two-thirds of the share capital in each bank. A few weeks ago the Government decided to investigate the feasibility of merging these two banks, and planned on their privatisation to continue following the possible merger. Those plans were set back due to a ruling of the Competition Authority, which prohibited their merger. This does not mean, however, that the privatisation is off, only that it is likely to be postponed a bit. Their full privatisation is expected to be completed during the term of the present Government, which extends until 2003. It is my belief that it would be highly beneficial for the Icelandic economy if at least some part of these banks were sold to foreign investors, to diversify the Icelandic market and enhance competition. The combined market value of these two companies on the Icelandic Stock Exchange is about 50 billion ISK, or roughly 400 hundred million GBP.
So what is the conclusion of this little overview of the small Icelandic economy? You don't have to be big to be successful in today's globalised economy. You only have to do the right things!