OECD: Iceland Must Diversify And Reform Its Economy To Help Avoid Major Shocks

Iceland is effectively putting far too many of its eggs in one basket, a new survey from the OECD details. They recommend Iceland diversify its economy and cut regulations around foreign investment, amongst other things.

“Sound macroeconomic policies and favourable external conditions have enabled Iceland’s economy to emerge stronger from a decade of post-crisis management,” the survey states in part. “Yet the impact on growth from a drop in tourist arrivals and seafood exports underlines the need for reforms to open up and diversify the economy and improve its resiliency to sectoral shocks.”

The survey, which has already been presented to Minister of Finance Bjarni Benediktsson and Minister of Education, Science and Culture Lilja Dögg Alfreðsdóttir, noted that Iceland has made some progress in “improving fiscal and monetary policy, reducing debt and building up financial buffers. Today Iceland enjoys sustainable public finances, high employment and one of the lowest levels of income inequality of OECD countries.”

That said, Iceland is also highly dependent on some volatile sectors; namely tourism. Over the past decade, tourism has swelled to account for 40% of export income and 10% of GDP. At the same time, tourism is now beginning to slow, due in part to WOW Air shuttering its doors last March. Seafood exports, another significant sector that Iceland depends on, has also been slowing down.

In fact, as far as tourism is concerned, the survey concludes that Iceland should be “considering measures to improve sustainability given that – whether the downturn proves to be temporary or longer lasting – Iceland is already at six foreign tourists a year for each resident and may already have reached a point where the negative social and environmental impacts exceed the economic benefits.”

Solutions are far from simple, but in addition to improving education for vocational trades, Iceland should also make things easier for foreign investors.

“This slowdown shows that now is the time to go structural and to further open up the economy,” OECD Secretary-General Angel Gurría noted. “Iceland should focus on reducing regulatory red tape and restrictions on foreign investment.”

The full summary can be read here.