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International Monetary Fund. European Dept.
Iceland's economy has weathered multiple shocks since 2019 relatively well. The economic outlook is positive but suggests long-term scarring. The risks are tilted to the downside and are associated with the global impact of a potential escalation in the war in Ukraine, the pandemic, economic disruptions, and tighter global financial conditions. On the upside, tourism and new innovative industries could help the economy recover faster.
International Monetary Fund. Asia and Pacific Dept

infrastructure projects, which would also crowd in private investment. Monetary easing would help steer inflation to target . It would complement the fiscal stimulus, curtail risks of low inflation, and help balance capital flows. FX intervention should be limited to avoiding disorderly market conditions. Macroprudential policy should ensure continued containment of systemic risks from search-for-yield behavior . This would provide monetary policy the necessary space to effectively target inflation. Structural reforms would help address the challenges that currently

International Monetary Fund. Asia and Pacific Dept

. Leigh (head), Kashiwase, and Saenz, and Ms. Nadeem (all APD). The team was joined by Mr. Lopez Mejia (FSAP mission chief). Ms. Mahasandana, Executive Director, and Mr. Srisongkram (OED) accompanied the mission. Ms. Dao (APD) provided analytical inputs. Mr. Landicho (APD) coordinated the production of the report. Contents CONTEXT RECENT DEVELOPMENTS, OUTLOOK, AND RISKS SUPPORTING DOMESTIC DEMAND AND EXTERNAL REBALANCING A. Using Fiscal Space and Reforms to Spur Domestic Demand B. Steering Inflation Back to Target and Supporting External

International Monetary Fund. Asia and Pacific Dept

through a growth-driven process. Monetary policy easing and clear communication should steer inflation back to target . Monetary easing would counteract the risk of low inflation becoming entrenched and prevent a further rise in real interest rates and the real debt burden. The exchange rate should remain a key shock absorber, with foreign exchange intervention limited to avoiding disorderly market conditions. Macroprudential policy and regulatory reform can address emerging pockets of financial fragility Financial stability risks remain contained. Concerns that

International Monetary Fund. European Dept.

could include streamlining VAT expenditures, public consumption, and the transfer system. The authorities should save any potential windfall fiscal revenues and reactivate the fiscal rules on time. The monetary tightening is welcome, and the CBI should continue withdrawing monetary policy stimulus. Steering inflation and inflation expectations back to target will require further policy rate hikes and strengthening liquidity management to improve monetary policy transmission. Vigilance and data driven policy rate decisions are required, considering the evolution of

International Monetary Fund. African Dept.

reducing domestic arrears is welcome, and needs to be followed with concrete action. The BoU is successfully steering inflation . Monetary policy has space for further easing, with food prices and the exchange rate being the main risks to the outlook. Overall, the banking sector remains well capitalized, despite elevated NPLs . The BoU has appropriately taken over an under-capitalized systemically important bank. Effective and swift resolution of this bank is a key priority. Near-term risks are to the downside . Uganda remains exposed to risks from adverse weather