OECD upbeat on Iceland economy, but more reform needed

(REYKJAVIK) - Iceland has largely recovered from its deep slump in the wake of the global financial crisis, the OECD said on Tuesday, but called for further strengthening of the country's monetary policy and changes to its fisheries management.

Iceland, which was engulfed in economic turmoil after all its major banks collapsed at the end of 2008, has gone far in "resolving the economic problems left by the financial crisis," the Organisation for Economic Co-operation and Development said in its 2011 economic survey of the small North Atlantic island state.

It hailed that Iceland's economy had exited its deep recession by the end of last year and was headed towards economic growth of 3.0 percent by 2012, while its collapsed banking system had been recapitalised by the end of 2009.

"Reforms have been made to regulation and supervision to address shortcomings exposed by the financial crisis," it said, also pointing out that the country had recently adopted a strategy to relax capital controls.

Iceland "is well advanced in implementing the comprehensive programme agreed with the IMF," the report said, referring to the conditions set up for a $2.2-billion (1.53 billion euros) bailout the International Monetary Fund has been divvying out to Iceland since 2008.

The OECD also celebrated that Iceland's centre-left government "has begun to put the public finances on a sustainable path," pointing out that the country's budget deficit should this year fall below 3.0-percent of gross domestic product limit set by the European Union's Stability and Growth Pact.

However, the OECD said Iceland's monetary policy "has not been very effective either in countering the credit cycle or in delivering price stability."

Iceland's central bank "should adopt an inflation targeting regime that places greater weight on smoothing fluctuations in the exchange rate and is supported by fiscal policy and macro-prudential regulation," it said.

"In the event that Iceland joins the EU, it should seek to adopt the euro as quickly as possible," it added.

Home to 320,000 people, Iceland officially applied to join the EU in 2009 and is set to begin detailed accession talks next week. However, opposition to joining the bloc and the eurozone still remains strong in the country.

The country's management of its vital fisheries sector, which is expected to be one of the major sticking points in the EU talks, should also be somewhat reformed "in a way that preserves a sustainable and efficient fishery," and to address the "perceived unfairness" of its quota system, the OECD said.