Market turmoil ups risks to Iceland recovery-IMF

STOCKHOLM Wed Aug 31, 2011 3:30pm BST

STOCKHOLM Aug 31 (Reuters) - The risks to Iceland's fragile recovery from a deep financial crisis have increased after recent international market turmoil, the International Monetary Fund said on Wednesday after its 33-month rescue programme for the country ended.

Last week, the IMF approved the final loan payment of the programme, saying the country had met its key objectives including the recapitalisation of its banking system, which collapsed in late 2008.

"There has been enormous achievement under the programme ... largely attributed to the strong ownership of the programme by the government and to the resilience of the people of Iceland in the face of a crisis of unprecedented magnitude," Julie Kozack, head of IMF's Iceland mission, told a news conference.

Iceland's recovery is still fragile, she said.

While Iceland and its markets have been largely unaffected by recent turmoil, the IMF warned risks to recovery would increase if global growth slows, financing for investment projects becomes more difficult, or commodity prices decline markedly.

The IMF, which will continue to monitor Iceland, applauded the central bank's decision earlier this month to hike interest rates amid an acceleration of inflation and urged the country to boost prospects for investment projects.

"Delays in investment projects continue to weigh on growth and business confidence," the fund said in a staff report on the last review of the programme.

"Looking ahead, it will be essential that the authorities provide greater clarity on their growth strategy, and notably the role of investments."

The IMF said Iceland must keep cutting budget deficits, although maybe at a slightly gentler pace than previously seen.

"Given the significant fiscal effort that has already taken place -- 10 percent of GDP in fiscal measures and a primary balance improvement of over 6 percent of GDP -- there is scope to adjust the balance between supporting the recovery and continued consolidation."

The IMF forecasts a budget deficit of 4.0 percent of GDP in 2011.

Iceland must also continue to gradually to ease capital controls while maintaining bond market and financial sector stability, and complete agreed reforms to further strengthen financial sector supervision, the IMF said.

"On private sector debt, the pace of restructuring finally appears to be accelerating, but efforts must continue until the process is brought to a close," it said.

The IMF also urged the country's financial watchdog to ensure the banks, which caused the free-fall in the economy, keep sufficient buffers to meet unexpected challenges. (Reporting by Anna Ringstrom; Editing by Anna Willard)

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