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Iceland - Economy (Notes)

Marine products account for the majority of Iceland's exports of goods. Other important exports include aluminum, ferro-silicon alloys, equipment and electronic machinery for fishing and fish processing, and pharmaceuticals. Information technology and life sciences and related services are important growth areas. The vast majority of Iceland's exports go to the European Union (EU) and the European Free Trade Association (EFTA) countries, followed by the United States and Japan. The U.S. is by far the largest foreign investor in Iceland, and the country's largest supplier of imported services (e.g., financial and franchise services, movies/TV programs/music, tourism). Iceland's relatively liberal trading policy was strengthened by accession to the European Economic Area in 1994 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland's exports, particularly seafood products. However, the agricultural sector remains heavily subsidized and protected.

In recent decades, Iceland's economy has been prone to inflation due to periods of rapid growth and its dependence on just a few key export sectors (i.e., fish, and increasingly tourism and aluminum production), which can fluctuate significantly from one year to the next. The 1970s oil shocks hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Since 1990, due to economic reforms and deregulation, inflation has dramatically fallen, averaging around 4% in the 1990s. Due to several years of strong economic growth, Iceland experienced the most positive economic period in its history during that decade. However, as with many advanced countries, Iceland's economy experienced a mild recession during 2002 due to global conditions. That recession was short-lived, and healthy growth of 3% was registered during 2003. In 2005 the economy boomed, growing 5.8%, and inflation was close to the Central bank's upper limit (4%) at 3.95%, while unemployment decreased to about 3.2%. The economy suffered a setback in spring 2006 when credit rating agencies and other international financial firms released a number of reports raising questions about the state of the Icelandic economy and the activities and stability of Iceland's major banks. These reports were widely covered in the international financial press, causing a marked drop in the value of the Icelandic krona and of shares listed on the Icelandic stock exchange. Since then the situation has calmed down, but there is no question that certain imbalances have emerged in the Icelandic economy, including a high current account deficit, high inflation and high private sector debt levels. It remains an open question whether these imbalances render Iceland particularly vulnerable to an economic crisis. Foreign confidence in the Icelandic economy is important to maintain the country's skillful use of foreign capital. Icelandic businessmen have become well known for risk taking, decisiveness, and swiftness in their investments. Wealthy Icelanders have successfully invested overseas, especially in the retail and real estate markets in Denmark and U.K. and telecom, pharmaceutical, banking, and financial sectors in Eastern Europe. This recent success has for the first time created a 'super-rich' elite in Icelandic society.

Iceland has few proven mineral resources. Abundant hydroelectric and geothermal power sources allow over 90% of the population to enjoy electricity and heating from these natural resources. The Kárahnjúkar hydroelectric project is the largest single station, with capacity of 690 megawatts (mw). The other major hydroelectric stations are at Búrfell (270 mw), Hrauneyjarfoss (210 mw), Sigalda (150 mw) and Blanda (150 mw). Iceland is exploring the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, particularly aluminum smelting plants. Iceland-based Nordural Aluminum is a wholly owned investment by Century Aluminum of Monterey, California. The plant employs more than 450 people and recently expanded to a production capacity of 220,000 tons per year. A new smelter owned by Alcoa, another U.S.-owned aluminum company, began operations in June 2007. The smelter will have a production capacity of 346,000 tons per year when fully operational. The Kárahnjúkar hydroelectric power plant, completed in early 2007, was built in connection with Alcoa's smelter. A total of over $2 billion has been invested in the power plant and smelter, the largest economic project in Icelandic history.

Iceland has no railroads. Organized road building began about 1900 and has greatly expanded in the past decade. The current national road system connecting most of the population centers is largely in the coastal areas and consists of about 13,000 kilometers (8,125 mi.) of roads with about 4,330 kilometers (2,706 mi.) paved. Regular air and sea service connects Reykjavík with the other main population centers. The national airline, Icelandair, flies from Iceland to Europe and North America, and is one of the country's largest employers. Iceland became a full member of the European Free Trade Association in 1970 and entered into a free trade agreement with the European Community in 1973. Under the European Economic Area agreement, which took effect January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Iceland Krona Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Iceland Krona Exchange Rates

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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