Year in Review 2020: Business & Economy

This year’s business and economy news undoubtedly centred on the COVID-19 pandemic and its impact. Here are Iceland’s biggest business and economy stories of 2020.

Tourism (and Icelandair)

As everywhere else in the world, the COVID-19 pandemic has had a devastating impact on the tourism industry, one of Iceland’s largest industries. Despite some government assistance and a trickle of visitors during the summer, Iceland’s tourism industry has come to a near-complete stop. Locals made up for a portion of the losses by travelling domestically this summer, encouraged by a government gift certificate, but the industry will likely take years to recover.

The country’s only commercial passenger airline, Icelandair, also struggled this year, as airlines did the world over. It let go 2,000 employees in April, setting an Icelandic record for the largest mass layoff. Further layoffs followed throughout the year. Icelandair’s contracts with pilots, mechanics, and cabin crew were also up this year and renegotiating them in the shadow of the pandemic was tumultuous, to say the least. The airline even let go all of its cabin crew after their union rejected one contract offer, later being condemned for “union-busting practices.”

Thanks to a combination of government support, a successful public stock offering, and other financial restructuring measures, the airline has weathered the storm, at least for the time being. Icelandair CEO Bogi Nils Bogason says the company’s position is now strong enough to make through to 2022.

Government Responds to Recession

Starting in March, the Icelandic government presented several economic response packages intended to mitigate the effects of the pandemic on businesses and individuals. The first package included support for businesses in the form of partial employment benefits for staff whose work hours were reduced, as well as investment in public construction projects. The second package provided additional investments in innovation and research, as well as subsidies for businesses forced to close. These early measures were criticised by some for being geared toward businesses rather than individuals, as well as for leaving out vulnerable groups such as self-employed workers.

While some of the measures provided immediate relief, others were mired in red tape and took months to come through. Some funding was geared toward specific struggling industries, such as a new fund to support media companies.

These response measures are expected to result in a treasury deficit in 2021. In December, the government announced its intention of selling state-owned Íslandsbanki to finance further social investment.

Collective Crisis

The year 2020 started out with strikes among labour unions, affecting schools and other services in the capital area. Once collective agreements were signed, it seemed that things had calmed down. Yet conflict on the labour market re-emerged in the fall when businesses argued that the economy had suffered so drastically they could no longer provide employees the working conditions outlined in collective agreements. The government eventually stepped in to resolve the dispute, successfully stabilising the labour market.

Central Bank Lowers Interest Rates

The Central Bank of Iceland did not sit idly by as the recession deepened this year, but implemented measures in support of the economy. The Bank lowered interest rates repeatedly throughout the year to encourage investment, and its key interest rate now sits at a historically low 0.75%. https://www.icelandreview.com/business/icelands-central-bank-lowers-interest-rates-once-more/ The bank’s economic outlook remains highly uncertain, as it stated in November, “economic developments will depend to a considerable degree on the path the pandemic takes.”

Success in Dire Times

Not all industries in Iceland have suffered during to the pandemic: as people around the world started looking for ways to pass the time at home, wool export shot up by 70%.  Thanks to Iceland’s success in containing the pandemic locally, and the instituting of strict regulations, Iceland’s film industry was one of the only to keep productions rolling throughout the year.

With more people spending their free time at home, it may not come as a surprise that the annual Christmas Book Flood was even more successful than usual, with sales reportedly up by 30%. Real estate sales have also remained strong all year, despite the recession. Finally, one Icelandic company is expanding directly due to the pandemic. Controlant is tracking vaccine distribution across the world for COVID-19 vaccine manufacturer Pfizer.

Icelandic Businesses Still Waiting for Loans Promised by Government

No Icelandic companies have received loans via the Icelandic government’s COVID-19 response package, RÚV reports. Three months after the government announced state-backed loans for struggling businesses, banks have yet to make them available. The government also announced it would help businesses pay severance packages two months ago, but an application for the initiative is still not available, though the deadline to apply passed last week.

Since late March, the Icelandic government has presented three economic response packages intended to mitigate the effects of the COVID-19 pandemic in Iceland. The packages represent a collective investment of more than ISK 350 billion ($2.5 billion/€2.2 billion), but some of the largest measures have yet to take effect. These include so-called bridging loans for larger businesses, to be administered through banks, as well as loans available for smaller businesses through island.is, the government-run public services website – neither has been implemented.

Tourism Companies Struggling to Pay Salaries

Companies in tourism are particularly hard-hit by the drop in international travel that the COVID-19 pandemic has caused. “It of course has a very negative effect,” stated Jóhannes Þór Skúlason, Managing Director of the Icelandic Travel Industry Association (SAF). “There are companies that have been dealing with no income for just about three months and they desperately need financial help.”

Most Icelandic workers are guaranteed a three-month severance period thanks to their collective agreements. In April, the government announced that businesses could apply for assistance with severance pay costs from May 1 – but the application portal has yet to be opened, although the deadline for applications passed on June 20. “And then you’re coming pretty close to the goal being jeopardised,” stated Jóhannes Þór. “Because the goal was to help businesses manage salary payments through the termination period since they didn’t have money. So it’s very difficult for the vast majority of companies to finance payrolls at the turn of this month. That is a major concern in my opinion.” The Tax Office told RÚV that efforts are underway to open the application portal as soon as possible, and the application deadline will be extended.

Minister of Finance Bjarni Benediktsson stated that there was nothing more the government could do to speed up the availability of bridging loans, as “the ball is in the banks’ court.” As for the smaller loans available through island.is, Bjarni stated that preparations were nearly complete and it should be possible to process applications within a few days.

All Icelanders to Receive Gift Certificate for Domestic Tourism

Icelandair Marina Hotel

Icelandic residents 18 and older will each receive a voucher worth ISK 5,000 ($36/€33), redeemable at hotels and tourism companies around the country between June and December of this year. Minister of Tourism Þórdís Kolbrún Reykfjörð Gylfadóttir said the measure was “first and foremost symbolic,” but that it would make a difference to smaller companies. The measure was first announced as part of the government’s first economic response package to the COVID-19 pandemic.

The Icelandic Travel Industry Association and the Icelandic Tourist Board held an information meeting presenting the measure this morning. The voucher will likely be distributed via a smartphone app to all adult residents, who number around 250,000. The total cost of the measure will therefore be around ISK 1.5 billion ($10.8 million/€9.8 million).

The credit will be redeemable for accomodation, transporation, dining, and activities within the tourism industry. It will also be transferable, though no individual will be allowed to redeem more than 15 vouchers. Tourism companies will also have a cap on how many vouchers they may accept, though the cap is relatively high at 20,000 vouchers, or ISK 100 million ($723,000/€656,000).

Tourism Minister Þórdís Kolbrún stated that the government recognised the measure was not in and of itself enough to save struggling companies. “We realise that 5,000 krónur to all Icelanders 18 years and older does not change whether companies live or die. This is first and foremost a symbolic measure. But it will matter, especially for companies with smaller capacity.”

Icelandic Students Call for Access to Unemployment Benefits

Háskóli Íslands University of Iceland

The Icelandic government will set aside ISK 2.2 billion ($15 million/€13.9 million) to create 3,400 summer jobs for students in response to the economic impact of the COVID-19 pandemic. The National Union of Icelandic Students has criticised the response as insufficient and called for student access to unemployment benefits.

Iceland’s Minister of Education Lilja Alfreðsdóttir and Minister of Social Affairs Ásmundur Einar Daðason announced the measures intended to support student employment in the coming months. The 3,400 jobs created in government institutions and municipalities will be temporary positions, active between June 1 and August 31. “If it is found that this number of summer jobs and other resources does not reach a sufficient number of students, ways will be sought to create more jobs and/or secure other means of support,” a government notice on the initiative stated.

Students Pay Into Unemployment Funds But Cannot Access Them

The National Union of Iceland Students (LÍS) has released a statement criticising the measures as insufficient, pointing toward recent surveys that showed thousands of students had not yet found summer jobs. “If unemployment among students is actually as high as the [surveys] indicate, this remedy will be short-lived,” the statement reads.

LÍS particularly criticised the fact that since January 1, 2010, Icelandic students have not had access to unemployment benefits, despite paying into the national unemployment insurance fund. According to a Europe-wide study, 87% of students in Iceland work during study breaks and 68% during the lecture period. “A part of people’s salaries are paid into the unemployment insurance fund and the insurance fund for self-employed individuals, including the salaries of students. However, students are not entitled to payments from the fund due to unemployment, even though they have been working and payments flowed into the fund because of their work.”

LÍS has launched a petition calling for the government to ensure students the right to unemployment benefits, which at the time of writing is near to reaching its goal of 2,500 signatures.

Companies Return COVID-19 Aid Funds to Icelandic Government

origo

Six Icelandic companies have announced they will either return or stop taking advantage of the government’s partial unemployment funds intended to help companies avoid layoffs due to the economic impact of COVID-19. Mbl.is reports that none of the companies are facing operational difficulties and as a result have decided to pull out of the initiative, whereby the government pays up to 75% of employee salaries.

Computer support and services company Origo put 50 employees on the partial benefits scheme on the same day it announced an ISK 425 million ($2.9 million/2.7 million) first-quarter profit. Origo then backtracked on the decision to seek government support last Monday. Company Esja Gæðafæði ehf. decided to repay the ISK 17 million ($117,000/€107,000) it had received from the government through the initiative. Seafood company Brim, fuel company Skeljungur, and retailer Hagar have also decided to repay the government funds they received. Retail company Festi also decided to stop its participation in the scheme.

Iceland’s Directorate of Labour was criticised for failing to monitor whether companies who were taking advantage of the government funds had in fact lost profits and therefore required the funds to pay salaries. The organisation’s director has stated that the Directorate’s efforts were focused on minimising layoffs, but a review of companies who have participated in the scheme will begin in the fall at the latest.

Icelandic Government Presents Third COVID-19 Response Package

Katrín Jakobsdóttir Bjarni Benediktsson Sigurður Ingi Ráðherra

Iceland will extend its partial employment benefits scheme, streamline the financial restructuring process for businesses, and help companies pay severance packages to mitigate the economic impact of COVID-19. The measures are part of the government’s third COVID-19 response package, which was presented by Prime Minister Katrín Jakobsdóttir at a press conference in Reykjavík’s Culture House this morning.

Partial employment benefits extended throughout summer

Katrín stated that 35,000 workers are already receiving partial employment benefits through a government scheme instituted last month in order to help businesses avoid layoffs. The scheme was originally scheduled to last until May 31, but will be extended until the end of August. While currently, the government has taken on up to 75% of salaries for struggling businesses, that ratio will be lowered to 50% from July 1.

While the partial employment benefits cannot be applied to employees that have received a notice of termination, the third response package introduces financial help for companies that must resort to layoffs. Companies that have seen a drop in income of 75% or more can now apply for government funds toward severance pay, which in Iceland corresponds to three months’ salary for most employees. This measure is intended to help failing companies avoid bankruptcy.

The government will also temporarily streamline rules on financial restructuring for businesses. The changes are aimed at providing companies with support while assessing their status and until more certainty is reached about future prospects.

Measures should help tourism industry, say ministers

When questioned on whether the government was considering specific measures to help Icelandair stay afloat, Katrín Jakobsdóttir responded that the third response package measures are useful to the airline as well as other businesses in tourism. Other ministers present confirmed that while the government has been following Icelandair’s situation closely, it is the company’s management and shareholders who are responsible for the privately-owned airline’s operations.

Over 20,000 Apply for Benefits Due to Reduced Employment

Reykjavík

Over 20,000 Icelandic residents have applied to the Directorate of Labour for benefits due to reduced employment ratio, RÚV reports. An additional 5,000 have applied for standard unemployment benefits. The Icelandic government has promised to temporarily pay up to 75% of salaries for businesses that reduce their employees’ hours in response to the coronavirus pandemic in order to encourage them to retain staff.

Benefits paid out by April 7

More than half of those who have applied for benefits from the Directorate of Labour have been reduced to a 25% employment ratio, says Unnur Sverrisdóttir, its director. Applications continue to stream in, mostly from those employed in the tourism industry. “These are a vast amount in passenger transportation and all kinds of transportation of people both in the air and on land and these are hotels, hostels, car rental agencies, and restaurants and just all these services that are connected to tourism,” Unnur stated.

Due to the sheer number of applications, it is not possible for the Directorate of Labour to pay out all benefits by April 1, but Unnur says the plan is to do so by April 7.

Hundreds laid off nevertheless

Around 4,500 people have lost their jobs in Iceland this month, and must therefore apply for standard unemployment benefits. Unnur says it is difficult to predict how many more will be laid off in the coming weeks.

Despite government measures intended to preserve jobs, some large employers have resorted to layoffs in addition to reducing staff’s employment ratio. Icelandair has laid off 240 employees, the Blue Lagoon has laid off 164, and airport services company Isavia has laid off 101. All three companies have reduced the working hours of all or most of their remaining staff.

All three companies have a high proportion of employees based in Reykjanesbær, Southwest Iceland, which has in recent years experienced a higher unemployment rate than anywhere else in the country. That rate has now spiked to 14%.

The town’s mayor Kjartan Már Kjartansson says the rates may be higher than following the 2008 banking collapse, but the town is ready to take on the challenge. He points out, however, that the town has experienced rapid population growth in recent years and calls on the government to allocate funding to its institutions in accordance with the number of residents. “We’re talking about the Suðurnes Hospital and Health Centre, we’re talking about the police, junior college, transport and more. Because population growth has been, as has often been stated, extremely rapid here in recent years. And government agencies have not received funding that is in line with population growth.”

Icelandic Government Presents Economic Response Package to COVID-19 Crisis

Icelandic Government COVID-19 package

The Icelandic government presented an ISK 230 billion ($1.6bn/€1.5bn) response package to the COVID-19 crisis last Saturday. The package is equivalent to just under 8% of Iceland’s GDP, and its measures are intended to mitigate the effects of the COVID-19 pandemic by safeguarding the economic livelihood of individuals and businesses, protecting the welfare system, and boosting the economy.

Prime Minister Katrín Jakobsdóttir, Finance Minister Bjarni Benediktsson, and Minister of Transport and Local Government Sigurður Ingi Jóhannsson announced the first-phase response measures to mitigate the effects of the ongoing COVID-19 pandemic at a press conference in Harpa last Saturday. As part of the measures, the government will take on up to 75% of salaries for struggling businesses, back bridging loans for companies, and defer tax payments, as well as accelerating public projects.

Government takes on up to 75% of salaries

In an effort to project jobs, part-time employees will be allowed to claim up to 75% of unemployment benefits in order to avoid job losses. This means that those who are under threat of losing their jobs can move to part-time hours as low as 25% of their previous hours and boost their earnings with Government support up to a combined level of ISK 700,000 ($4,975/€4,620) per month. The overall aim of this legislation is to encourage businesses to keep employers on their payrolls rather than lay them off. Self-employed and freelance workers are also eligible for this benefit.

Taxes postponed

Companies can delay the payment of taxes until next year and hotel taxes will be abolished until the end of 2021. Reduction in bank taxes and state guarantees on loans are aimed to encourage banks to lend to companies that require loans to continue operations.

Measures for households

During the next 15 months, individuals may withdraw a monthly sum from their voluntary pension savings to a maximum of ISK 800,000 ($5,680/€5,280). Families with children under the age of 18 will receive a one-time child benefit payment on June 1, 2020 of ISK 20,000 ($140/€130) or ISK 40,000 ($285/€265) per child, depending on their income.

Public investment

The measures also include an ISK 20 billion ($142m/€132m) investment initiative toward transport, public construction, technology infrastructure, research, and science in collaboration with municipalities.

The government will also create a marketing campaign to encourage Icelanders to travel domestically within the coming months. This campaign will include giving each Icelander 18 years and older a gift certificate valued at around ISK 5,000 ($35/€33) that can be redeemed at Icelandic hotels and tourism businesses.

A detailed English-language FAQ on the response package is available on the Icelandic Government’s website.