Iceland, a stable democracy with a dynamic consumer economy, suffered an economic crisis in October 2008. The banking sector collapsed and the Icelandic Government turned to the International Monetary Fund (IMF) for assistance. In the years before the crisis, Iceland enjoyed an economic boom with several years of strong economic growth spurred by economic reforms, deregulation, and low inflation. The economy suffered an initial setback in spring 2006 when credit rating agencies and other international financial firms released a number of reports raising questions about the activities and stability of Iceland's major banks and the state of the Icelandic economy. These reports were widely covered in the international financial press, causing a marked drop in the value of shares listed on the Icelandic stock exchange and of the Icelandic krona, but the market recovered after reforms in the banking sector.

The financial sector was hit hard by the global credit crisis beginning in 2007. Although Icelandic banks had limited sub-prime mortgage market exposure, they were affected by the general lack of available capital. In the first six months of 2008, the Icelandic krona began devaluing and inflation rose to nearly 12%. Difficulties increased as Icelandic banks could not get financing on the global market and they were forced to turn to their lender of last resort, the Central Bank of Iceland. In September 2008, the Central Bank decided to recapitalize one of the banks and take control of 75% of its stock, but before that could happen, the Financial Supervisory Authority took possession of the three large commercial banks. This initiated the financial crisis as the size of the banks' liabilities were estimated to be approximately 10 times GDP. Iceland turned to the IMF for a $5 billion loan package that included bilateral loans from the Nordics and other countries. A Letter of Intent sent to the IMF outlined the strategy for the recovery of the economy. Its main components were to stabilize the currency, establish trust in the monetary policy, revise fiscal policy to meet the increased debt burden, and to restructure the banking system.

The long-term ramifications of the financial crisis are still emerging, but so far have resulted in a dramatic rise in unemployment from less than 2% to 7.6%, having peaked at more than 10%, and widespread business closures and bankruptcies. Political turmoil resulted in the resignation of the cabinet and installation of an interim government in January 2008, as well as the replacement of the Central Bank and Financial Supervisory Authority leadership. At the end of 2008, inflation was at 18.6% and the currency had depreciated by roughly 90%. In October 2009 inflation was 9.7% while the currency had not recovered. The government has made progress in restructuring the banking system, but more changes to the current financial environment are anticipated. The banks currently have very limited access to foreign capital and the process of reprivatization continues.

As a small and undiversified economy, Iceland depends heavily on imports for consumption and industry. Its main exports are aluminum and marine products. Aluminum exports exceeded marine product exports in value for the first time in 2008. The tourism industry is the third largest provider of foreign currency to the economy. Other important exports include ferro-silicon alloys, equipment and electronic machinery for fishing and fish processing, and pharmaceuticals. The vast majority of Iceland's exports go to the European Union (EU) and the European Free Trade Association (EFTA) countries, followed by the United States and Japan. The U.S. is by far the largest foreign investor in Iceland, primarily in the aluminum sector. A Trade and Investment Framework Agreement (TIFA) with the United States was signed in January 2009.

Iceland's relatively liberal trading policy was strengthened by accession to the European Economic Area in 1994 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland's exports, particularly seafood products. The agricultural sector, however, remains heavily subsidized and protected. Iceland became a full member of the European Free Trade Association in 1970 and entered into a free trade agreement with the European Community in 1973. Under the European Economic Area agreement, which took effect January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, EU, and EEA countries. However, following the financial turmoil in fall 2008, movements of capital to and from Iceland were restricted by the Rules on Foreign Exchange issued by the Central Bank. These rules are intended to be temporary measures to strengthen and stabilize the exchange rate of the Icelandic krona. In August 2009, the Central Bank published a strategy on how to lift the restrictions. As of November 2009, the first step of the strategy, permitting the inflow of foreign currency for new investments and the outflow of capital converted to foreign currencies from such investments, has been implemented. Subsequent phases will be introduced as market conditions allow.

Iceland has no railroads. Organized road building began around 1900 and has greatly expanded in the past decade. The current national road system connects most of the population centers along the coastal areas and consists of about 13,000 kilometers (8,125 mi.) of roads, of which about 4,800 kilometers (2,982 mi.) are paved. Regular air and sea service connect Reykjavík with the other main population centers.

GDP (2008): $12.2 billion.
GDP growth rate: (2006) 4.2%; (2007) 3.8%; (2008) 1.3%.
Per capita GDP (2008): $38,184.
Inflation rate: (2008) 18.1%; (October 2009) 9.7%.
Central government budget: (2008) $4.6 billion; (2009 estimated) $7.1 billion; (2010 proposed) $7.0 billion.
Annual budget deficit: (2008) 1.7 billion (13.6% of GDP); (2009 estimated) $2.2 billion; (2010 proposed) $1.5 billion.
Net central government debt: (2007) 10.3% of GDP; (2008 estimated) 41.3% of GDP; (2009 predicted) 90% of GDP.
Natural resources: Marine products, hydroelectric and geothermal power.
Agriculture: Products--potatoes, tomatoes, cucumbers, carrots, roses, livestock.
Industry: Types--aluminum smelting, fishing and fish processing technology, ferro-silicon alloy production, hydro and geothermal power, tourism, information technology.
Trade: Exports of goods (2008)--$3.7 billion: marine products 36.7%; industrial products 52.1%; agriculture 1.4%; and miscellaneous 9.8%. Partners (2008)--EEA 80.6% (Netherlands 34.3%, Germany 11.3%, U.K. 11.6%, Spain 3.8%, Norway 4.4%, Denmark 3.1%); U.S. 5.5% ($250 million); Japan 4.4%. Imports (2007)--$3.9 billion: industrial supplies 31.3%; capital goods, parts, accessories 21.6%; consumer goods 14.0%; transport equipment 12.8%; food and beverages 7.9%; fuels and lubricants 12.3%. Partners (2008)--EEA 64.8% (Germany 10.3%, Sweden 9.0%, Denmark 7.3%, Netherlands 6.1%, U.K. 4.4%, Norway 11.2%, Italy 2.8%); U.S. 8.0% ($341 million); China 6.6%; Japan 3.7%; Switzerland 3.2%.

* All figures are converted to USD using the Central bank’s end of year 2008 USD/ISK mid exchange rate: 120.87.