IMF to approve Iceland's next aid in August

City A.M. Reporter
The International Monetary Fund is likely to consider the final tranche of Iceland's $2.1bn (£1.3bn) loan programme in late August, the IMF's mission chief for Iceland has said.

"The Icelandic authorities and IMF mission have held productive discussions for the sixth, and final, review of the stand-by arrangement," mission chief Julie Kozack said in a statement after talks held over the past two weeks.

"Discussions will continue in the coming weeks, with the aim of bringing the review forward for approval by the IMF's executive board in late August," she added.

The IMF in early June approved a $225m disbursement from the $2.1bn programme, which was granted in 2008 after Iceland's top banks collapsed during the global financial crisis.

Kozack said Iceland's economy was gradually recovering, with annual growth expected to reach 2.5 per cent in 2011 as investment and consumption strengthen.

But she noted that at the same time, inflation has increased, reflecting depreciation of Iceland's krona currency, rising wages and prices for housing and commodities.

"Monetary policy has shifted to a tightening bias, which is appropriate given the risks to the inflation outlook and the pick-up in measures of inflation expectations," she said.

Kozack added that reforms in Iceland's financial sector were progressing, with recapitalization of the financial system near completion. Supervision and regulation also were improving and were likely to be strengthened further by authorities, she added.

The IMF's policy discussions with Icelandic authorities focused on the 2011 budget and the medium-term fiscal path.

Kozack said the IMF agreed that there was some room to ease the pace of fiscal consolidation to support economic recovery in Iceland. Specifics of the fiscal plan will be the focus of discussions in the coming weeks, she added.