Countries of the World/COUNTRYS.BIN/dp/0164/01647.txt

Text File | 1991-06-25 | 26KB | 468 lines

$Unique_ID{COW01647}
$Pretitle{422}
$Title{Iceland
Foreign Trade and the Balance of Payments}
$Subtitle{}
$Author{Central Bank of Iceland}
$Affiliation{Embassy of Iceland, Washington DC}
$Subject{banks
central
cent
per
bank
foreign
debt
government
iceland
funds}
$Date{1990}
$Log{Table III:*0164701.tab
Table IV:*0164702.tab
}
Country:     Iceland
Book:        The Economy of Iceland
Author:      Central Bank of Iceland
Affiliation: Embassy of Iceland, Washington DC
Date:        1990

Foreign Trade and the Balance of Payments

Foreign Trade

     Foreign trade plays a large role in the Icelandic economy and imports and
exports of goods and non-factor services averaged 34.4 and 35.1 per cent of
GDP, respectively, during the period 1987-1989.

     Iceland is a member of the EFTA along with Austria, Finland, Norway,
Switzerland, and Sweden. The membership provides it with tariff-free access
to the EFTA market for manufactured products, including aluminium and certain
fish products. Correspondingly, Iceland has no protective tariffs on
manufactured goods from other EFTA countries.

     Iceland reached a free trade agreement with the European Community in
1972. The agreement covers manufactured goods, including aluminium and certain
fish products exported by Iceland and covered by the EC external tariff. The
agreement does not, however, cover agricultural products. Pursuant to the
agreement, Iceland has also eliminated protective tariffs on all goods
manufactured in the EC countries.

     The great majority of Iceland's exports (amounting to 90 per cent in
1988) is to the developed economies of the EC countries, the EFTA countries,
the United States and Japan. In recent years, exports to Western Europe have
increased sharply, whereas exports to the United States and the Soviet Union
have declined. Japan is also developing into an important market for Icelandic
marine products and Iceland's trade with Japan is almost in balance.
Currently, Iceland's largest export markets are the United Kingdom (20.8 per
cent in 1989) and the United States (14.3 per cent in 1989).

     Indices for the prices of exports and imports and the terms of trade for
the years indicated are shown in Table 6 in the Appendix, exports by main
categories are shown in Table 7 and imports in Tables 8 and 9, and the
geographic distribution of Iceland's foreign trade is shown in Table 10.

Balance of Payments

     A summarized balance of payments statement for the years indicated is
shown in Table 11 in the Appendix and the current account as per cent of GDP
in 1983-1989 is shown in Table III. For a number of years, with the exception
of 1982, the trade account has hovered around equilibrium or been in surplus.
The current account deficit of recent years was largely the result of the
deficit on the total services account. There was a trade surplus in 1986 and
the current account was in surplus by 0.4 per cent of GDP. This situation
changed again in 1987 when the current account was in deficit by about 3.5 per
cent of GDP and by 3.7 per cent in 1988. In 1989 the economy moved closer to a
balance and the current account deficit was reduced to 1.6 per cent of GDP.

[See Table III:: Current account as per cent of GDP 1984-1989]

Foreign Exchange

Exchange Rates

     The rate of exchange of the Icelandic krona is determined against a
basket of currencies by the Central Bank of Iceland within a general framework
set by the government from time to time in view of prevailing economic
circumstances.

     Through the years of relatively high inflation in the 1970s and early
1980s, the krona was more or less continuously adjusted to maintain
competitiveness in the export and import-competing industries. In the mid
eighties Governments placed greater emphasis on exchange rate stability.
However, stagnating export prices at a time of cost inflationary pressures,
made it necessary to abandon this policy in order to maintain a viable
balance of payments position and secure adequate competitiveness.

     The average rate of exchange of the krona against the US dollar and a
trade weighted index for the average exchange rate of the krona for the
periods indicated are shown in Table IV.

[See Table IV:: Average krona buying exchange rate against US dollar and index
of average exchange rate 1985-1990]

Foreign Exchange Controls

     Subject to certain exceptions, the most important being petroleum and
agricultural products, there are no import restrictions, and foreign exchange
conversions for current payments are unrestricted. Capital movements are,
however, largely under direct control of the Ministry of Commerce and the
Central Bank of Iceland.

     Short-term commercial credits are handled routinely by the commercial
banks by delegation from the Ministry of Commerce. Access to medium-term
foreign credit by domestic companies for the financing of capital goods in
their business operations has been liberalized in the last two years by such
means as financial leasing, purchase leasing and direct borrowing. At present,
the rules governing these methods of financing stipulate that 60 per cent of
the total domestic price can be financed through foreign borrowing. If the
transaction is guaranteed by a domestic deposit bank, insurance company or a
public investment credit fund the ratio is 50 per cent. Deposit money banks,
insurance companies and public investment credit funds are not allowed to
guarantee contracts for purchase and financial leasing. A number of leasing
companies, some with foreign equity participation, have commenced operations
in the last three years.

     All foreign borrowing by the Treasury and government institutions
requires authorization of the Althing. These authorizations are listed in the
annual credit budget approved by the Althing. In addition there is a standing
authorization to refinance outstanding debt. The government borrows abroad
mainly to finance large investment or infrastructure projects, which have a
high foreign component.

     Exporters have an option to sell their foreign currency revenue to the
commercial banks or to open foreign currency accounts with the banks as other
residents can do. Rules on direct investment in Iceland by non-residents vary
from one sector of the economy to another but in general the rules are
somewhat restrictive.

     In February 1989 the Government stated that rules on capital movements
would be revised in line with the framework established in the Nordic Economic
Programme for 1989-1992. A step in this direction was taken when rules on
long-term foreign borrowing and access to suppliers' credits were liberalized
further on November 1, 1989.

Foreign Exchange Reserves

     The gold and foreign exchange reserves of the Central Bank of Iceland and
of the commercial banking system are shown in Table 12 in the Appendix.

     Iceland has a quota of SDR 59.6 million in the International Monetary
Fund. The Central Bank is a party to an agreement between the Nordic central
banks which has been in effect since 1962. It consists of an exchange of
credit lines which allows each of the banks to draw on the others on a
short-term basis in times of temporary foreign reserve shortage. The Central
Bank of Iceland can draw up to SDR 30 million under this agreement, but has
never resorted to it.

External Debt

Foreign Borrowing Activities

     The two largest and most active Icelandic borrowers, besides the Republic
itself, have been the National Power Company (Landsvirkjun) and the
Development Fund of Iceland (Framkvaemdasjoour). The commercial banks have
become more active recently as well as some of the investment credit funds
while the activities of the Development Fund have contracted.

     The Republic of Iceland, and the other principal Icelandic borrowers in
the international market, have followed a policy of borrowing at long
maturities. As a result, as is shown Table 16 in the Appendix, the maturity
profile of Iceland's external debt (public and private) ext