Iceland: Economic and Political Overview
In this page: Economic Indicators | Foreign Trade in Figures | Sources of General Economic Information | Political Outline | COVID-19 Country Response
For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.
In the last decade, Iceland's economy grew at a relatively fast pace, driven by unprecedented growth in tourism, strong consumption and falling unemployment. In 2022, the country benefitted from rising exports of energy-intensive products (such as aluminium) and the recovery of the tourism sector (which was severely affected by the COVID-19 pandemic and the restrictions that followed), recording an estimated GDP growth of 5.1% according to the IMF (6.2% as per Statistics Iceland). Private consumption was also strong, but it is expected to slow down in 2023 as wage growth moderates; similarly, tight financial conditions should hamper public and private investment, resulting in a growth rate of 2.9% this year and 2.6% in 2024 (IMF).
Iceland's economic outlook is very volatile, as the country is heavily dependent on the tourism sector (which accounts for 40% of export income and around 6% of GDP), making it vulnerable to external shocks. Moreover, domestic shocks, such as a bad fishing season or a decline in viable fishing stocks, could reduce exports of marine products (which account for 35% of merchandise exports). Revenue growth and the phasing out of the majority of pandemic-related support measures counterbalanced the increases in social benefits and pensions in 2022, resulting in a general government budget deficit of 6.8% of GDP. For 2023 and 2024, the IMF forecasts a gradual reduction of the deficit, to 4.3% and 3% of GDP, respectively. Despite the large deficit, the government debt ratio declined to 68.2% of GDP in 2022 (from 74.6% one year earlier), underpinned by nominal GDP growth and proceeds from asset sales. Overall, the country has high financing flexibility due to the extremely large pool of private pension funds' assets (194% of GDP, 65% of which is invested domestically), easy access to the international bond market, and a large cash deposit buffer (Fitch Ratings). The IMF projects a decline in the debt-to-GDP ratio this year (63.1%) and in 2024 (60%). Inflation picked up to 8.4% in 2022, driven by an uptick in house prices and imported goods, while high global energy prices had a smaller impact on the national inflation due to the fact that geothermal and hydropower cover around 90% of the country’s energy demand. Iceland is a member of the European Free Trade Association (EFTA) and is also part of the European Economic Area (EEA). To benefit from European aid and the 'umbrella' constituted by the euro, Iceland had applied to join the European Union, but it definitively withdrew its candidacy in March 2015.
The labour market has improved significantly in the last two years and unemployment decreased at the same time as the working-age population increased (also thanks to the inflow of Ukranian refugees). In 2022, the unemployment rate was estimated at 3.8% according to the national statistical institute and should remain stable over the forecast horizon. Overall, Iceland has a high standard of living, one of the highest GDP per capita in Europe (estimated at USD 66,467 in 2022 by the IMF), and one of the lowest poverty rates (4.9% as of 2021 – data Iceland Monitor). Nevertheless, Iceland is among the countries with the most people living abroad and will have to import thousands of foreign workers to meet the needs of businesses. Furthermore, real wages have started to decline in the wake of high inflation and most public contracts expire in March 2023, with considerable uncertainty about the results of collective agreements in the labour market.
| Main Indicators | 2020 | 2021 | 2022 (E) | 2023 (E) | 2024 (E) |
|---|---|---|---|---|---|
| GDP (billions USD) | 21.55 | 25.55 | 27.84 | 28.63 | 30.96 |
| GDP (Constant Prices, Annual % Change) | -7.2 | 4.3 | 6.4 | 2.3 | 2.1 |
| GDP per Capita (USD) | 59,190 | 69,287 | 73,998 | 75,180 | 80,393 |
| General Government Balance (in % of GDP) | -2.9 | -3.5 | -5.7 | -3.7 | -2.3 |
| General Government Gross Debt (in % of GDP) | 77.8 | 75.6 | 68.7 | 64.7 | 61.5 |
| Inflation Rate (%) | 2.8 | 4.5 | 8.3 | 8.1 | 4.2 |
| Unemployment Rate (% of the Labour Force) | 6.4 | 6.0 | 3.8 | 3.4 | 3.8 |
| Current Account (billions USD) | 0.19 | -0.62 | -0.43 | -0.49 | -0.46 |
| Current Account (in % of GDP) | 0.9 | -2.4 | -1.5 | -1.7 | -1.5 |
Source: IMF – World Economic Outlook Database , Latest available data
Note: (e) Estimated Data
Iceland has a labour force of more than 200,000 people out of a population of 372,000. The Icelandic labour market is characterised by a high participation rate and a high proportion of trade union membership, at around 92.2% (OECD). Since the financial crisis in 2008, one of the government’s priorities has been to diversify the economy, which in the last decade was mainly oriented towards the manufacturing and service industries. Nowadays, the agricultural sector contributes around 4.5% of Iceland's GDP and employs 4% of the workforce. Large areas of sheep pasture are among the most important agricultural resources in the country, while the main agricultural products are potatoes, carrots, green vegetables, tomatoes, cucumbers, mutton, chicken, pork, beef and dairy products. The Icelandic economy relies partly on its renewable natural resources and related industries: deep sea fishing, hydraulic and geothermal power and pastures. Fishing is one of the pillars of Iceland’s economy and covers around 40% of exports. According to data by Statistics Iceland, in 2022 cereal production stood at 9,400 tonnes, the largest in 10 years; while total meat production was the lowest since 2015, at 30,428 tonnes.
The industrial sector represents almost 20.4% of GDP and employs 17% of the workforce. The hydroelectric potential stimulates the production of aluminium, and is the primary resource for export and concentrates around 70% of the electricity produced on the island. Geothermal provides the remaining 30% so that renewable energies cover all of the country’s energy needs. The food processing sector is also important. The manufacturing sector alone accounts for 9% of GDP (World Bank), whereas the construction industry accounted for 7.2% of GDP in 2022 (Statistics Iceland).
Services account for 64.6% of GDP and employ 78% of the workforce. For the past several years, Iceland's economy has grown thanks to the services sector, particularly within the fields of tourism, software production and biotechnology. In fact, Iceland has become the rear-base of several companies specialising in computers and software. There are also many call centres in the country. The tourism sector has been recovering after the COVID-19 pandemic, and in 2022 the country recorded 8.8 million overnight stays, marking a 77% increase year-on-year. Overall, the direct contribution of tourism to the national GDP was estimated at 6.1% in 2022 by Statistics Iceland (it was 8.1% before the pandemic). The commercial banking sector consists of four universal banks and five small savings banks, with the government holding the majority in two of the three major banks. The total assets of the banking sector amounted to almost ISK 4,700 billion in 2021, the equivalent to around 145% of GDP (European Banking Federation - latest data available).
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
|---|---|---|---|
| Employment By Sector (in % of Total Employment) | 4.0 | 17.5 | 78.5 |
| Value Added (in % of GDP) | 4.5 | 20.4 | 64.6 |
| Value Added (Annual % Change) | 2.0 | 5.6 | 4.2 |
Source: World Bank - Latest available data.
Find more information about your business sector on our service Market Reports.
| Monetary Indicators | 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|---|
| Iceland Crown (ISK) - Average Annual Exchange Rate For 1 MUR | 3.40 | 3.10 | 3.19 | 3.45 | 3.44 |
Source: World Bank - Latest available data.
Find out all the exchange rates daily on our service Currency Converter.
The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
See the country risk analysis provided by Coface.
Iceland has always been open to international trade, which represents 78% of GDP (World Bank). Most of the restrictions on foreign exchange transactions and the cross-border movement of domestic and foreign currency for both businesses and households were lifted in order to stimulate foreign trade. The main barriers to trade and market entries are the increasing adoption of EU product standards and regulations, high tariffs on most agricultural products from outside the EU, restrictions on the import of some products, such as raw meat; due to phytosanitary regulations and difficulty in obtaining financing for joint ventures. Traditional sectors like fishing stimulate the dynamism of the country's exports, as more than 40% of the national exports are fishing products. Iceland also exports aluminium and ferrosilicon (around one-third of total exports), as well as dairy products. The main imports are artificial corundum, motor cars, and petroleum oils other than crude.
According to data by Statistics Iceland, in 2022 the country’s main customers were the Netherlands (37.5% of total exports), the United Kingdom (9%), the U.S. (7.8%), Germany (6.5%), and France (6.4%); whereas imported goods came chiefly from Norway (12.3%), China (9.4%), Germany (8.3%), the Netherlands (7.1%), the U.S. (6.3%), and Denmark (6%). Overall, the European Union absorbs more than two-thirds of Icelandic exports and it supplies around half of the total imports (the country is a member of the European Economic Area - EEA).
In 2021, the country exported USD 5.9 billion worth of merchandise (+30.5% y-o-y), importing USD 7.8 billion (+37.1%). However, Iceland is a net service exporter (USD 3.7 billion in export vs. USD 2.9 billion in imports in 2021 – data by WTO). As the export of services did not return closer to the pre-pandemic level, the overall external balance for goods and services was negative by 1.8% of GDP in 2021 (data World Bank).
According to the latest figures by Statistics Iceland for the year 2022, the total value of exported goods was ISK 1,002 billion (up by 31.5% y-o-y), with manufacturing products contributing 57% of the total exports (+43,9%) and marine products for 35% (+18%). In the same year, the total value of imports reached ISK 1,325 billion (+33.3%, with fuels, industrial supplies and capital goods registering the highest increases).
| Foreign Trade Indicators | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|
| Imports of Goods (million USD) | 6,965 | 7,679 | 6,567 | 5,698 | 7,817 |
| Exports of Goods (million USD) | 4,878 | 5,556 | 5,223 | 4,586 | 5,987 |
| Imports of Services (million USD) | 3,724 | 4,262 | 3,611 | 2,227 | 2,952 |
| Exports of Services (million USD) | 6,255 | 6,537 | 5,635 | 2,765 | 3,708 |
| Imports of Goods and Services (Annual % Change) | 11.8 | 0.9 | -8.5 | -21.5 | 20.3 |
| Exports of Goods and Services (Annual % Change) | 5.1 | 1.7 | -4.7 | -29.9 | 12.7 |
| Imports of Goods and Services (in % of GDP) | 41.2 | 43.3 | 39.8 | 35.0 | 40.0 |
| Exports of Goods and Services (in % of GDP) | 45.7 | 46.6 | 44.4 | 34.5 | 38.2 |
| Trade Balance (million USD) | -1,525 | -1,507 | -1,001 | -634 | -1,262 |
| Trade Balance (Including Service) (million USD) | 1,119 | 875 | 1,114 | -115 | -459 |
| Foreign Trade (in % of GDP) | 87.0 | 90.0 | 84.2 | 69.5 | 78.2 |
Source: WTO – World Trade Organisation ; World Bank , Latest Available Data
| Main Customers (% of Exports) |
2022 |
|---|---|
| Netherlands | 37.7% |
| United Kingdom | 9.0% |
| United States | 7.8% |
| Germany | 6.5% |
| France | 6.4% |
| See More Countries | 32.6% |
| Main Suppliers (% of Imports) |
2022 |
|---|---|
| Norway | 12.3% |
| China | 9.4% |
| Germany | 8.3% |
| Netherlands | 7.1% |
| United States | 6.3% |
| See More Countries | 56.5% |
Source: Comtrade, Latest Available Data
Source: Comtrade, Latest Available Data
To go further, check out our service Import Export Flows.
Source: United Nations Statistics Division, Latest Available Data
The Prime Minister is the head of the government and holds the executive powers which include implementation of the law in the country and running the day-to-day affairs. The Prime Minister also appoints the Cabinet.
The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).
The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.
Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House
Any Comment About This Content? Report It to Us.
© eexpand, All Rights Reserved.
Latest Update: September 2023
