Opening address at the Meeting of the CICA Central Committee, May 13, 1996.
I.
Mr. Chairman, Ladies and Gentlemen
I am honored to have the opportunity to address this CICA meeting and give you a short overview of the Icelandic economy, particularly the financial market. As you may know the Icelandic economy is primarily based on the use of renewable natural resources. The most important of these are the coastal fishing banks, hydro-electric and geothermal power and the grasslands which support the livestock industry.
Agriculture has traditionally been extremely important to the Icelandic economy. In 1940, 32% of the workforce was employed in agriculture. However, like in all industrial countries, the economic impact of agriculture has decreased. Now, agriculture contributes approximately 2.5 percent of GDP and employs under 5% of the workforce. Agriculture has, however, strong roots in the economy, much stronger than can be shown in economic statistics.
The agricultural sector has undergone some structural changes in recent years as demand for dairy products and lamb have declined. Price supports and export subsidies have been taken away and replaced with direct income payments to farmers.
Approximately one-fifth of the total area of Iceland is suitable for agriculture and the raising of livestock. About six percent of this area is under cultivation, with the remainder used for raising livestock or left unused. Iceland is self-sufficient in meat, dairy products and eggs. The principal crops are hay and potatoes. Some fruits, vegetables and flowers are cultivated in greenhouses heated with geothermal water and steam. Furthermore, a fur industry has developed over the past decade.
Although the Icelandic economy has traditionally been based on fisheries and agriculture, it has in the last decades, diversified into manufacturing, procesing and service industries. At the time Iceland has diversified its marine sector. The change to a service-oriented economy, along with a sensible use of our natural resources, has resulted in a diversified economy with one of the highest GDP per capita in the world.
II.
I would now like to turn to the developments of the financial market. The financial market has developed very rapidly in recent years as it has been liberalised and restrictions on capital movements between Iceland and other countries have been removed.
Broadly speaking, regulations which were based on the rule that everything was prohibited that was not specifically permitted has been replaced by prudential rules governing the operations of financial institutions.
In the middle of the 1980}s,
interest rates were liberalised,
a securities exchange, the Iceland Stock Exchange, was established, securities companies emerged and
mutal funds were established.
At the end of the 1980}s important mergers of financial institutions took place when the number of commercial banks fell from severn to three.
At the beginning of the 1990}s the rules governing foreign direct investment were liberalised and the Government adopted a policy of a phased elimination of foreign exchange restriction.
In 1993, Iceland became a member of the European Economic Area, which, among other things, ensured open access for much of Iceland}s exports to the markets of the European Union. It has also meant that Icelandic legislation is in many respects modelled on European Union legislation.
Currently, there are four commercial banks operating in Iceland and over thirty savings banks, some of which are very small. Two of the commercial banks are state owned. One of them is your host, Búnaðarbanki Íslands. The Government plans to incorporate the state owned banks during its term in office.
So-called investment credit funds play an important role in the Icelandic financial system. They are for the most part government owned institutions and are involved in providing of long-term investment capital to enterprises. They finance their activity partly through bond issues in the domestic market and the largest ones through borrowings in foreign markets. The Government plans to incorporate the most important state owned investment credit funds.
Pension funds are the single most important source of long-term capital in Iceland. Membership in pension funds is obligatory for wage earners and self- employed people. The pension funds are independent non-governmental entities. They invest mainly in government and government guaranteed paper but have gradually begun to diversify into private bond issues, equity capital and foreign securities.
With the liberalisation of the financial markets there have been significant changes in new issue activity. For a long time the Government was the only issuer of bonds in the market. As the market developed and was deregulated other borrowers began to enter the market. This tendency has been very strong since the beginning of 1994. Local governments, financial institutions and private companies have tapped the domestic bond market in significant amounts.
III.
The Icelandic economy has been positively transformed in recent years. The economy is now characterised by
low inflation,
more market orientation,
a stable real-exchange rate and
increased diversification within the major industries.
These changes built on the advantages already present, such as the very high and evenly distributed standard of living,
longstanding political stability,
abundant natural resources,
a developed infrastructure and
a well-educated population.
In March, Standard & Poor}s upgraded the long-term foreign currency debt of Iceland to single A+ based on the improved macroeconomic management. In a news release Standard & Poor}s stated that the rating was underpinned by Iceland}s unchallanged social and political stability and its pool of physical and human capital, supporting one of the highest GDP per capita in the world.
Ladies and Gentelmen. I hope that you will make the most out of your visit to Iceland and your stay will be pleasant. Thank you very much