Iceland turns to Honohan for help with monetary policy review

Iceland, which returned to financial normality earlier this year by lifting remaining capital controls stemming from the 2008 crisis, has enlisted former Central Bank governor Patrick Honohan to help with a review of its future monetary policy direction.

Prof Honohan confirmed to The Irish Times on Wednesday that he has been asked by the Icelandic ministry of finance and economic affairs to co-write a report on the country's inflation targeting and challenges of conducting monetary policy. Prof Honohan is working with former Cypriot central bank governor Athanasios Orphanides on the report.

Their work is due to be completed by the end of this year, Prof Honohan said.

Iceland was forced to introduce capital controls, covering the movement of money flowing in and out of the country, nine years ago as it sought to stabilise one of the world’s smallest currencies after its three largest banks, whose assets were 10 times the size of the island nation’s economy, collapsed.

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Iceland's new coalition government, led by prime minister Bjarni Benediktsson, committed in January to reviewing the country's monetary and currency policy as its economy continued to rebound in recent years following the crisis, driven by tourism growth, and as the value of the krona appreciated as capital controls were loosened.

Inflation target

The review, being led by a committee of ministers, is assessing potential options such as an inflation target and switching to a fixed exchange rate.

The country’s finance minister, Benedikt Johannesson, said earlier this year that maintaining a freely-floating krona was “untenable” for the country.

The Icelandic government has also brought in Sebastian, an economics professor at University of California, Los Angeles, as well as Lars Jonung and Frederik Andersson, academics at Sweden's Lund University, to examine other aspects of monetary policy as part of the current review.

Prof Honohan returned to Trinity College Dublin in late 2015 as he retired as Central Bank governor after six years in the role. During his time with the regulator the economist oversaw a massive restructuring at the State’s banks, who were saved from following their Icelandic peers’ capitulation by virtue of a government guarantee and taxpayers committing a gross €64 billion to the system.

Prof Honohan has maintained links internationally since leaving the Central Bank, including a stint earlier this year as a visiting fellow with the Central Bank of Barbados.

Iceland received a $4.6 billion (€3.9 billion) bailout from the International Monetary Fund (IMF), its Nordic neighbours and Poland in 2008 and had repaid the money ahead of schedule by the end of 2015.

The IMF forecast in a report in June that the tourism help drive almost 6 per cent Icelandic gross domestic product growth this year, following on from 7.2 per cent expansion in 2016.

Iceland’s government presented a draft 2018 budget this week which focused on using the country’s strong economy to bring down its debt.

“It is important that the public sector take advantage of the favourable climate to reduce debt, rein in expenditure growth contributing to expansion, and ensure a surplus in public-sector operations,” the ministry of finance and economic affairs said.

The Icelandic government plans to cut its gross debt level from 35.8 per cent currently to below 30 per cent by 2019.