According to a new report from the International Monetary Fund (IMF) on Iceland, operations related to the aluminum industry, such as construction of power plants, mark the beginning of the overexpansion of the Icelandic economy.
The report states that while the long-standing expansion of the economy was caused by investments in the aluminum industry, it was maintained with increased private consumption and easy access to capital. That resulted in an imbalanced national economy and a vulnerable financial system towards outside factors, Fréttabladid reports.
“Yes, they say that operations related to aluminum smelters initiated the overexpansion, pushed the ball which then kept on rolling,” said Gunnar Haraldsson, director of the Institute of Economic Studies at the University of Iceland. “However, I believe that they also list other factors that had an impact on the situation.”
Former Minister of Industry Valgerdur Sverrisdóttir dismissed the IMF’s arguments as oversimplification of the situation. “Of course there were extensive operations in relation to heavy industry projects.”
“According to the government’s plans there were not supposed to be operations in the east and west at the same time, which is what happened, but that couldn’t be helped,” Sverrisdóttir continued.
“However, we can say today that it was very fortunate that these operations were undertaken at that point because they create value and bring in foreign currency for the nation,” Sverrisdóttir stated, listing other factors that had caused the overexpansion in her opinion, such as the banks entering the housing market.
Steingrímur J. Sigfússon, chairman of the Left-Greens, the largest opposition party, described the IMF’s report as interesting. “It is what we warned against the entire time. Large-scale power plants and heavy industry investments were the primary causes of the expansion.”
“It is what made the inflation spiral upwards and interest rates increase,” Sigfússon continued. “Unfortunately, the worst thing that we imagined actually happened, including the dropping price of aluminum and energy. All bets were put on aluminum.”
Click here to read more about the plummeting world market price of aluminum.
