V
BALANCE OF PAYMENTS AND FOREIGN DEBT
1. BALANCE OF PAYMENTS
In 1997, the external current account deficit was 8.1 billion krónur, corresponding to 1.6 percent of GDP. It declined from 8.9 b.kr., or 1.8 percent of GDP, in 1996. The 1997 current account deficit was much smaller than had been projected in the national economic forecast, both
because of higher exports and lower imports in volume terms, but also
because the terms of trade improved. Previously there had been a surplus on the current account for three years in a row, 1993-95, with foreign debt declining during those years, which in turn led to declining
interest payments abroad, which have been one of the largest factors
behind persistent current account deficits in recent decades.
Table V.1. Balance of payments summary
Billions of krónur at average 1997 exchange rates
Exports of goods and services
Imports of goods and services
Net income and transfers
Current balance
Trade balance
Services balance
Balance on income
Current transfers, net
Financial account excl. reserves
Direct investment
Portfolio investment
Other capital
Reserve assets
Errors and omissions
1993
139.7
126.1
-10.3
3.3
12.6
1.0
-10.1
-0.2
-3.4
-1.0
-2.9
0.5
4.2
-4.1
1994
154.1
131.7
-13.8
8.5
19.2
3.1
-13.2
-0.6
-19.9
-1.6
-7.4
-10.9
10.4
1.3
1995 1996
157.9 172.6
141.7 170.3
-12.5 -11.1
3.6
-8.7
13.1
1.2
3.1
1.2
-12.2 -10.6
-0.3
-0.5
2.0
17.6
-0.8
-0.2
-3.7
-1.8
6.5
19.6
-0.2 -10.0
-5.2
1.1
1997
190.2
186.7
-11.6
-8.1
0.3
3.2
-11.8
0.2
10.1
7.1
-12.8
15.8
3.2
-5.2
61
Balance of payments
Percentage of GDP
%
4
Current account
Foreign exchange reserves
Other capitals
3
2
1
0
-1
-2
-3
-4
1988
Foreign trade
12 month change at a fixed
exchange rate at the end of each
%
quarter
Export
Import
20
15
10
5
0
1996
1997
89
90
91
92
93
94
95
96
97
The external capital account balance recorded a surplus of 13 b.kr. in
1997. The Central Bank's international reserves declined by 3.2 b.kr.
and other capital flows were measured at 10 b.kr., mainly because of
foreign direct investment and foreign borrowing by credit institutions.
International reserves stood at 28 b.kr. at the end of 1997, down from 31
b.kr. at the end of 1996. Table V.1 shows the main items in the balance
of payments over the last five years, with figures for earlier years
expressed in terms of the average exchange rate for 1997. A more
detailed breakdown of the balance of payments can be found in Table 4
in the Statistical Appendix. It should be noted that the figures for 1997
are to some extent preliminary. The errors and omissions term, negative
by 5.2 b.kr., was particularly large in 1997. This means either that the
current account deficit was larger or capital inflows smaller than indicated by the preliminary figures. There are indications that imports to
power-intensive industry may have been underestimated. A fluctuating
sign for the errors and omissions terms indicates that there may be lags
in recording certain items in the balance of payments when external
transactions are not recorded at the same time as the associated payments are made. It has proved difficult to adjust information about the
balance of payments to changes in financial markets and more liberal
capital flows to and from the country.
Current account
The current account balance can be broken down into four main components, namely, the merchandise trade balance, the service balance, the
balance on income and the balance of unrequited transfers. In 1997,
trade in goods and services grew. The currency value of exports grew by
10.2 percent while that of imports grew by 9.7 percent from the year
before. The balance on income deteriorated by 1 b.kr. while in net terms
the balance of unrequited transfers improved by 0.6 b.kr. The current
62
account deficit therefore declined in 1997 to 8.1 b.kr. from 8.9 b.kr. in
1996.
Merchandise trade balance
The merchandise trade balance was in surplus to the tune of 0.3 b.kr. in
1997, down from 1.2 b.kr. in 1997. Total exports amounted to 131.2
b.kr. and increased by 6.5 percent at fixed exchange rates. Exports of
fisheries products rose by 3.2 percent, to 93.6 b.kr. With other merchandise exports growing faster than marine exports, the share of the
fisheries in total exports declined somewhat. The currency value of aluminium and ferrosilicon exports rose by 21.2 percent, to 18.9 b.kr.
Exports of ships and aeroplanes were 5.2 b.kr., up 1 b.kr. on 1996. This
item has been significant for a number of years because of the renewal
of the domestic fleets of ships and aeroplanes. The currency value of
other exports rose by 5.3 percent. Total merchandise imports were 131
b.kr. in 1997, up 7.3 percent on 1996 at fixed exchange rates. Imports of
investment goods rose by 18.5 percent, to 32.7 b.kr. Imports of transportation equipment rose by only 1.2 percent because of a decline in
ship imports, while imports of private cars rose by 30 percent over 1996.
Other merchandise imports, namely fuels, operating goods, food and
beverages and other consumer goods, rose by 4.7 percent in 1997
according to information from Statistics Iceland.
The European Economic Area is the most important market for
Icelandic exports, accounting for 70 percent of merchandise exports.
Exports to EFTA countries have increased somewhat after falling
sharply when Sweden, Finland and Austria joined the EU at the beginning of 1995. A third of exports goes to two EU countries, the United
Kingdom and Germany, and around a fifth of imports originates there.
The importance of Japan has declined in recent years. The Japanese
market absorbed only 6.6 percent of merchandise exports in 1997, down
from 14 percent in 1994. Exports to the United States increased in 1997,
as did exports to non-EEA European countries. The country weights of
imports changed little in 1997, with only the EFTA countries showing
some decline.
Table V.2. Merchandise trade by countries
In % of total imports and exports
1995
EFTA
5.1
EU
62.7
Other European countries 2.4
North America
14.0
Japan
11.3
Other countries
4.6
Total
100.0
Exports f.o.b.
1996
1997
5.7
8.6
62.4
60.6
2.2
4.3
12.9
15.2
9.8
6.6
7.0
4.7
100.0 100.0
1995
11.4
59.8
5.6
9.3
4.4
9.5
100.0
Imports c.i.f.
1996 1997
15.0 13.8
56.4 58.1
5.8
4.8
10.4 10.5
4.0
4.9
8.4
8.0
100.0 100.0
Current account
Quarterly balance
At average 1997 exchange rates
B.kr.
6
Current balance
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
6
Balance on goods
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
6
Balance on services
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
6
-6
Net income and transfers
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
1996
63
1997
Service balance
The service balance recorded a surplus of 3.2 b.kr. in 1997, up from 1.2
b.kr. in 1996. Service exports rose by 19.3 percent, to 59 b.kr., while
service imports rose 15.6 percent. The transport component of service
exports grew sharply, mainly because of increased merchandise exports
and increased activity by airlines and shipping companies abroad.
Revenue from foreign tourists rose by 7.2 percent which was in line
with the growth in nightly stays, but the number of foreign tourists rose
by only 0.2 percent. Spending by Icelanders travelling abroad rose by
14.1 percent, to 23 b.kr. Other service exports, such as communications
services, insurance, construction, government services (embassies and
the defence force), computers and information services, and especially
other business services, grew sharply. The last item includes agency services, expert services, rental income, advertisements, marketing, etc. On
the whole, revenue from exports of other services than tourism and
transportation were 21 b.kr. and expenditure on the same 15 b.kr. in
1997.
Balance on income
The income accounts cover salaries, interest and dividends. Salaries
amounted to 4.1 b.kr. in 1997, up 10 percent on 1996. The increase in
salary-related payments was larger, but they amounted to only 0.4 b.kr.
The defence force accounted for more than one-half of the salaries,
which along with other revenue from the defence force amounted to 11
b.kr. in 1997. Investment income amounted to 4 b.kr. in 1997, an
increase of about a quarter over 1996 and related to a buildup of assets
abroad. On the expenditure side, investment income rose by 10.4 percent, to 20 b.kr., almost entirely because of increased earnings to foreign
direct investors. The interest burden on the foreign debt was 16.8 b.kr.
in 1997, up marginally from 16.6 b.kr. in 1996. Net interest payments
abroad averaged about 10 percent of export revenue during the 1980s
but have declined proportionally in recent years, to 7.8 percent in 1997.
The recording of income accounts in the balance of payments is in
line with new standards from the International Monetary Fund.
Reinvested profits from foreign direct investment have been added to
investment income whereas previously only dividend payments were
included. This means in fact that profits on foreign direct investment are
recorded in the balance of payments when they accrue rather than when
they are realized. The share of residents in the profits of foreign companies is counted as factor service revenue while the share of foreigners in
domestic firms is counted as expenditure. The reinvestment of profits is
also entered in the capital balance and counted as foreign direct investment. Large fluctuations in the profitability of companies during this
decade have caused the impact of reinvested profits on the balance of
investment income and the current account balance to vary. Large losses among companies with significant foreign ownership during 1990-93
improved the current account balance by 1-2 b.kr. However, more
64
Table V.3. The capital and financial account
In millions of krónur at average 1997 exchange rate
Capital and financial account1
Capital transfer, net
Financial account
Financial acc. excl. reserves
Direct investment, net
Abroad
In Iceland
Portfolio investment, net
Assets
Liabilities
Other capital, net
Assets
Liabilities
Reserve assets
1993
0.8
0.0
0.8
-3.4
-1.0
-1.0
0
-2.9
-2.2
-0.6
0.5
-1.5
2.0
4.2
1994
-9.9
-0.4
-9.5
-19.9
-1.6
-1.6
0
-7.4
-7.6
0.2
-10.9
-5.5
-5.4
10.4
1995
1.5
-0.3
1.8
2.0
-0.8
-1.6
0.8
-3.7
-3.1
-0.5
6.5
0.5
6.0
-0.2
1996
7.6
0.0
7.6
17.6
-0.2
-4.3
4.0
-1.8
-2.1
0.3
19.6
-3.5
23.1
-10.0
1997
13.3
0.0
13.3
10.1
7.1
-1.8
8.9
-12.8
-14.4
1.5
15.8
-7.6
23.4
3.2
1. Negative sign indicates ouflow of capital, increase in assets or decline of liabilities.
recently the profit of foreign-owned companies has exceeded the profit
share of residents in foreign companies by 1.2 b.kr.
Current transfers
Current transfers include mainly government payments to international
institutions and official development aid, but also private transfers of
gifts, grants, inheritances, etc. Current government transfers amounted
to 0.7 b.kr. in 1997 while in net terms private transfers were positive by
0.9 b.kr. On the whole, the balance of current transfers showed a surplus
of 0.2 b.kr., compared to a deficit of 0.5 b.kr. in 1996.
Capital account
The capital account of the balance of payments has two components, net
capital transfers and the financial account. Net capital transfers, which
mainly relate to migration to and from the country, do not measure in
billions of krónur. In 1997, net capital transfers were slightly negative
after having been slightly positive in 1996. The financial account
showed a surplus of 13.2 b.kr. in 1997, up from 7.8 b.kr. in 1996.
Capital flows to and from the country can be broken down into two main
components: changes in the Central Bank's reserves, and other capital
flows related to foreign direct investment, trade in securities and other
capital transactions, such as with commercial liabilities, loan movements, etc. The Central Bank's reserves declined by 3.2 b.kr. and other
capital flows to the country amounted to 10 b.kr. in 1997. This large
inflow of capital was the result of heavy foreign direct investment and
foreign borrowing by financial institutions, especially the banks. Net
inflows from foreign borrowing were 23.4 b.kr., about evenly divided
between long-term and short-term loans. Significant outflows occurred
in relation to the purchase of foreign securities and asset accumulation
by deposit banks abroad.
Net purchases of foreign
securities issued abroad
Quarterly figures at average
1997 exchange rate
B.kr.
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
1996
65
1997
Direct investment in businesses and real estate abroad by
Icelanders was 1.8 b.kr. in 1997. New investment grew by 1 b.kr., while
preliminary information on financial flows between parent companies
and their subsidiaries during the first half of the year indicates that they
were in broad balance. Foreign direct investment in Iceland rose sharply
because of increased investment in power-intensive industry and higher
profits at existing companies. On the whole, foreign direct investment
was 9 b.kr. in 1997, up from 4 b.kr. in 1996. New investment was 3.8
b.kr., while reinvested profits amounted to 2.5 b.kr. and net lending by
shareholders was positive by 2.6 b.kr. Foreign investment is defined by
the OECD to be direct if the ownership share is significant enough to
ensure influence on the management of the company; a 10 percent ownership share is typically the threshold. Foreign investment in shares
below this threshold is usually counted as portfolio investment, as its
sole purpose is to earn a return on capital investments.
Net capital outflows in connection with the purchase of securities
were 12.8 b.kr. in 1997, up from only 1.8 b.kr. in 1996. Purchases of foreign securities by Icelanders grew sharply in 1997 and turnover also
increased because of the resale of the foreign securities out of the country. Net purchases of registered foreign securities amounted to 14.4 b.kr.
while non-residents purchased domestic securities for 1.5 b.kr. in 1997.
Residents showed the greatest interest in risk capital as they purchase
shares in foreign mutual funds for 10.7 b.kr. and in foreign companies
for 2.1 b.kr. but only 1.6 b.kr. worth of foreign debt securities. Domestic
investors prefer to diversify risk by investing in foreign mutual funds
rather than by building their own portfolio. Purchases of domestic securities by non-residents are the result of the issuance of securities denominated in Icelandic kronur by foreign banks with the proceeds used for
investment in Iceland.
Net inflows of other capital amounted to 15.8 b.kr. in 1997, compared with 20 b.kr. in 1996. Foreign assets, commercial liabilities,
deposits and other receivables from abroad rose by 7.6 b.kr. in 1997,
compared with an increase of 3.5 b.kr. in 1996. Deposit banks accounted for most of this asset accumulation abroad, which is a result of their
need for foreign currency in order to engage in market making on the
foreign exchange market. The foreign assets of non-financial companies
also increased by 1.5 b.kr. in 1997 after having increased by 0.8 b.kr.
the year before. Foreign debt has risen sharply over the last two years,
or by 23.5 b.kr. and 23.4 b.kr. in 1996 and 1997 respectively, in connection with high levels of domestic investment, as well as accumulation abroad. Net inflows of long-term foreign loans amounted to 13.3
b.kr., as gross borrowing of 37 b.kr. was partly balanced by amortization of 24 b.kr. Net inflows of short-term loans amounted to 10.1 b.kr.
The short-term foreign debt of deposit banks rose by 12.7 b.kr. and that
of companies by 2.7 b.kr., while the short-term foreign debt of the
Treasury declined by 5.4 b.kr. On the whole, the deposit banks were
responsible for most of the increase in foreign indebtedness, or in excess
66
of 21 b.kr. in 1996 and 1997. The public authorities lowered their
indebtedness abroad by 3.3 b.kr. in net terms in 1997 as the Treasury
amortized debt to the tune of 6.4 b.kr. while local governments borrowed 3.1 b.kr. abroad. Other domestic borrowers, investment funds and
companies, increased their foreign debt by 5 b.kr. in 1997.
2. FOREIGN DEBT
The net foreign asset position of the economy, that is the net of assets
and liabilities resulting form foreign direct investment, portfolio investment and lending and borrowing, was negative by 240 b.kr. at the end
of 1997, compared with 224 at the end of 1996 (see Table 7 in the
Statistical Appendix). This was the first time that foreign direct investment has been included in the country's net foreign asset position.
Previously, information was not available and the International
Monetary Fund has now asked for this information from its member
countries. The annual change in the country's net foreign asset position
reflects capital movements in the balance of payments adjusted for
exchange rate changes. Iceland is among the indebted nations which is
the reason for the focus on the foreign debt position and the burden of
interest and amortization payments in recent years. Long-term foreign
debt at the end of 1997 was 48.5 percent of GDP and has declined proportionally because of rapid GDP growth, from 51.9 percent at the end
of 1995 and 50.5 percent at the end of 1996, as is shown in the following overview of the country's foreign asset position.
Long-term foreign debt stood at 255 b.kr. at the end of 1997, compared with 241 b.kr. at the end of 1996. An overview of long-term debt
for the period 1991-97 can be found in Table 6 in the Statistical
Appendix. The Treasury's long-term foreign debt stood at 112 b.kr. at
the end of 1997, having fallen marginally in the course of the year.
Local governments, on the other hand, raised their long-term foreign
debt by 3.1 b.kr. in 1997 to 9.3 b.kr. at year-end. The long-term foreign
Long-term foreign debt
and debt service
%
60
50
40
30
1970
1975
1980
1985
1990
1995
1996
1997
Net
external
debt
Balance of
current
account
Balance of
investment
income
25.4
33.4
28.6
48.5
46.4
51.9
50.5
48.5
12.9
6.7
9.3
11.9
12.7
15.6
19.1
21.4
20.1
36.2
26.7
52.0
45.5
50.2
46.9
45.6
1.4
-10.6
-2.1
-4.0
-2.7
0.9
-1.7
-1.6
-1.1
-2.4
-2.5
-4.6
-4.0
-3.4
-3.0
-2.9
Interest service in %
of export revenue
10
0
1989
In % of GDP
Foreign
assets
Debt service in
% of export
revenue
20
Table V.4. External debt and current account
Long-term
foreign
debt
End-of-year
debt in % of
GDP
67
91
93
95
97
Net foreign position
Fixed 1997 prices
B.kr.
Gross reserves
Net foreign position
40
35
30
25
20
15
10
89
91
93
95
97
68
debt of deposit banks and other financial institutions rose sharply in
1997, or from 61 b.kr. at the end of 1996 to 74 b.kr. at the end of 1997.
The long-term foreign debt of non-financial companies declined, however, in 1997. The debt service burden associated with interest and
amortization payments on the long-term foreign debt was 19 percent of
export earnings in 1997, down from 22 percent in 1996 and 28 percent
in 1995. A lighter debt service burden is the result of both lower interest and amortization payments and higher export earnings. The interest
burden has declined this decade, from around 11 percent of export earnings to 6.9 percent in 1997, as the average interest rate on foreign debt
has declined by 3 percentage points, to 5.6 percent in 1997.
Short-term foreign debt amounted to 73 b.kr. at the end of 1997
and increased considerably in the course of the year. On the whole,
short-term and long-term debt amounted to 328 b.kr. at the end of 1997,
of which general government was responsible for 135 b.kr., financial
institutions for 121 b.kr. and companies for 72 b.kr. In addition,
Icelanders owed non-residents 2 b.kr. because of the latter's purchase of
domestic securities, and foreign direct investment in Iceland is estimated at 22 b.kr. The stock of foreign direct investment stood at 13 b.kr. at
the end of 1996 and this item rose sharply in the course of 1997 because
of the heavy investment in power-intensive industry. Investment by
Icelanders in businesses abroad has increased considerably in recent
years and is put at 18 b.kr. at the end of 1997. Holdings by residents of
foreign securities is estimated to have reached 30 b.kr. at the end of
1997. This is a large investment over a short period of time, mostly in
the last four years after restrictions on capital movements to and from
the country were lifted. Other Icelandic assets abroad were 64 b.kr. at
the end of 1997, having increased by 5 b.kr. in the course of the year,
despite a decline in the Central Bank's foreign reserves by 3 b.kr.
The Central Bank's reserves stood at 27.8 b.kr. at the end of 1997
compared with 30.8 b.kr. at the end of 1996. At the end of 1997, the
reserves corresponded to 2.6 months’ worth of merchandise imports and
1.6 months’ worth of imports of goods and services. The import coverage of the reserves had declined both because of the decline in the
reserves and also because of the increase in imports. Reserves only consist of liquid foreign assets of the Central Bank which the Bank can use
directly to finance a payments deficit vis-a-vis the rest of the world or
indirectly through interventions on the foreign exchange market to
influence the exchange rate of the krona. Other foreign assets of the
Central Bank resulting from foreign exchange swaps with foreign banks
were 5.5 b.kr. at the end of 1997. These assets are denominated in kronur and are therefore not included in the reserves according to the definition of the International Monetary Fund. Thus, at the end of 1997, the
Central Bank's total foreign assets amounted to 33 b.kr. and total liabilities to 5.4 b.kr., giving a net foreign asset position of 27.9 b.kr., 3 b.kr.
lower than a year earlier.