Economic Outlook 2009–2015

Economic Prospects 2009–2012

According to the Ministry of Finance, the outlook for Icelandic economic does not look so bad! The growth was almost zero % GDP in 2008. This year, the growth is expected to keep on slowing, it will go down to -10%, but it will rise again in 2011 and reach around 3% per year until 2012.

The current account deficit for 2005 was 16.1 % of the GDP, which is extremely high. Nevertheless, it increased to 27.4% 2006, to 16% 2007 and 22% 2008. The current account is expected to diminish abruptly this year, down to 6 % of GDP, and will be around 5% of GDP by 2012.

Since 2001, the inflation target of the Central Bank of Iceland has been 2.5% (defined as a 12-month rise in the CPI, i.e. Consumer Price Index). However, the inflation rate was 4% in 2007, and the decline in the exchange rate lead to an inflation of 12.8% in 2008. Inflation is expected to converge to target in the year 2011.

Unemployment has always been very low in Iceland, at least for the last 40 years or so. However, the crisis will change that. It rose from 1% to 7.8% in 2008 and is expected to rise to 8.6% in 2009. The unemployment rate will be around 3% in 2012, which is low compared to other countries in Europe.

Key Economic Indicators 2005–2012

2005 2006 2007 2008 2009 2010 2011 2012
GDP growth, % 7.5 2.6 4.0 -0.1 -9.6 0.0 2.8 2.9
Current Account Balance, % of GDP -16.1 -27.4 -15.4 -22.2 6.1 5.6 -5.7 -5.2
Inflation rate, % 4.0 6.8 4.0 12.8 13.1 2.7 2.5 2.7
Unemployment, % of labour force 2.1 1.3 1.0 7.8 8.6 3.2 3.0 3.0

Source: Ministry of Finance, autumn 2006, winter 2007, summer 2007, winter 2009.

Aluminium Prospects 2006–2015

The construction of the hydropower project at Kárahnjúkar in the eastern part of the country began in 2003 and is expected to continue until 2009. The total cost of the project is estimated at ISK 110 billion, including transmission lines. However, the total cost for the taxpayers for all the constructiosn in the eastern part of the country is estimated at ISK 200 billion (20% of GDP).

During the period from 2008 to 2013, the investment in aluminium plants should amount to ISK 60 billion per year.

Two aluminium plants are already operating in Iceland, with a total production capacity of 270,000 per year, which is about 1.2% of the world’s total aluminium production, (World Aluminium Org, WAI).

Iceland’s aluminium production will increase and reach 786,000 tons from 2008 on. Thus Iceland will become one of the world’s main aluminium production countries, accounting for close to 4% of the world’s total aluminium production.

The Project of Production Capacity of Aluminium In Iceland 2006-2015 in thousand tons

  2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015

Total ton per year 270 400 746 786 1.066 1.191 1.191 1.316 1.316 1.316

1.566

Grundartangi (Century) 90 220 220 260 260 260 260 260 260 260 260
Reyðarfjörður (Alcoa) 346 346 346 346 346 346 346 346 346
Straumsvík* (Alcan) 180 180 180 180 460 460 460 460 460 460 460
Húsavík (Alcoa) 125 125 125 250
Helguvík (Century)            125 125  125 125 125 250

Source: Kaupthing banki, Feb. and Oct. 2006, the project was cancelled at least for the moment.

The construction of three new aluminium plants is now being prepared. These will bring the total production to 770,000 tons. By 2015, Iceland could thus produce about 6-8% of the world’s total aluminium production. It takes about 15 Mw/hrs to produce one ton of aluminium. The three new plants would thus need around 11,400 Gw/hrs for their production.

The total costs of operations needed to reach the 516,000 tons goal, i.e. until 2007, amounts to an investment of nearly ISK 250-300 billions. The costs of the new aluminium plants is estimated at ISK 400 billions. There is a lot of work ahead.

Straumsvík

The project that seems closest to completion is the modification of the Straumsvík aluminium plant, so that its production capacity will be increased by 280 thousand tons, and if everything goes as planned, it will be able to produce 460 thousand tons per year. However, there are discussions in the neighboring municipality of Hafnarfjörður as to whether the plant should be given the go-ahead for the project’s implementation. The completed plant would be inaugurated in 2010. The investment, about ISK 150 billion, would be divided between the years 2007 to 2010. However, this project was cancelled at least for the moment!

Helguvík

Century Aluminium intends to build an aluminium plant in Helguvík, on the Reykjanes peninsula, not far from Reykjavík. The expected aluminium production will amount to 250 thousand tons per year. The first half of the project would be completed in 2010 and the second in 2015.

Total investment: ISK 140 billion, over the years from 2008 to 2015.

Húsavík

Alcoa and the Ministry of Industry have signed a letter of intent concerning a project for a new aluminium plant in Húsavík, on the northern coast, with a production capacity of 250 thousand tons per year. The first half of the project would be completed in 20212 and the second in 2015.

Total investment: ISK 120 billion, over the years from 2009 to 2015.

At this point, it is useful to point out that what is being sold is the electricity. If Icelanders do not get a fair price for their electricity, the point of all this investment is doubtful. As things stand, the electricity price to aluminium plants is kept secret! Two other points worth mentioning, the electricity productions companies do not pay for the land they use, and the aluminium companies do not pay for the pollution the make! One wonders what Kyoto was about...

Flashback:

Throughout the 20th century, fisheries were the backbone of Icelandic economy. This branch of activities boosted employment, similarly to the car industry in some countries. The Icelandic government (the cabinets of Davíð Oddsson and Halldór Ásgrímsson) still seems stuck in the 20th century, putting the main emphasis on employment for unqualified laborers. The construction of aluminum plants around the country has been the silver bullet of the government economic policy in the 21st century! However, a shift may be ahead, as the new Prime Minister, Geir Haarde, an economist, has presented some ambitious suggestions that would amount to a revolution in Iceland, no less, if they are implemented. These must be consistent  with the EEA-Agreement. Some excerpts of the incentives proposed:

  • Iceland should become a bustling international centre of financial activities,

  • Iceland could become a haven for multinational societies’ headquarters. They would take advantage of a new tax policy which would make Iceland the ideal address for such multinational societies.

  • The income tax is 18% for companies and will be 10% on all company income above ISK 15 million. This would also be beneficial for multinational societies.

  • Iceland could become an international centre for pension funds, positioning the Icelandic pension funds system on the European market.

  • International trusts should be encouraged to place their assets in Iceland.

  • The taxation on profits should be competitive, compared to other western countries.

  • Foreign specialists and advisers should be encouraged to visit Iceland by way of incentive taxation.

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