Pandemic Helped Iceland Cut Reliance on Tourism, Central Banker Says

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The fallout from the pandemic has brought unexpected benefits for the Icelandic economy by reducing its reliance on the tourism industry, according to central bank Governor Asgeir Jonsson.

While the travel industry has recovered faster than expected, a “weak currency and low rates have stimulated our economy and other sectors are now stepping in,” Jonsson said in an interview. 

The land of fire and ice, which provided the stunning backdrops to Game of Thrones, has through the years sought to diversify an economy formerly dominated by fishing. Tourism soared in the past decade to become the growth engine after the 2008 financial crisis saw the country’s outsized banking sector crumble.

Pandemic Helped Iceland Cut Reliance on Tourism, Central Banker Says

Jonsson, speaking on Wednesday after Sedlabanki raised interest rates to 1.25%, said there are long-term benefits in diversifying away from tourism, which was “very imposing on the economy“ due to its fast growth, he said.

That changed during the pandemic, when the share of the tourism industry of Iceland’s gross domestic product fell by more than half.  

“Basically the pandemic has helped the Icelandic economy to diversify,” Jonsson said. “It was a harsh medicine but nevertheless it has been effective.” 

While the central bank raised its growth forecast for 2021 to 4% from 3.1% seen in May, the contraction of 6.6% last year means the north Atlantic island would clearly trail other Nordic nations that have returned to pre-pandemic output levels.

Unemployment has dropped to just over 6% from about 12% at the beginning of the year. Still, a shift toward other sectors might mean that current labor shortages will persist as demand for skilled workers is growing, Jonsson said.

©2021 Bloomberg L.P.

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