How much it will contract is uncertain, however, particularly because investment remains undetermined, largely due to uncertainty about access to foreign credit. The adjustment following the overexpansion of recent years has run its course, for the most part, and in some areas it has overshot the mark. If we include the Central Bank’s forecast for 2010, public expenditure has contracted by nearly one-third since 2007, which is virtually unparalleled in other countries, as other countries did not experience the overheating Iceland did. Iceland’s huge current account deficit has turned to a surplus, excluding calculated interest in the estates of the failed banks, which may not be paid. The plunge in the currency has been arrested, and other things being equal, inflation will fall sharply in the next few months. The latest inflation measurements, published earlier this week, change nothing in this regard, as they were foreseen by the Central Bank, and because the year-on-year rise in inflation is due largely to the drop in the CPI in March 2009. A number of economic variables have now overshot the mark, as often happens when imbalances like those in Iceland correct themselves. The most important of these is the real exchange rate of the króna, which is currently one-third below its historical average and probably considerably below its long-term equilibrium. The real exchange rate will therefore rise in the quarters to come.
I would also like to thank the Minster of Economic Affairs and his Ministry for successful co-operation in recent months. I want to extend my thanks to other Ministries and institutions as well, not least the Financial Supervisory Authority and the Ministry of Finance. Other collaborators, including financial institutions and non-governmental organisations, and the staff of the International Monetary Fund, also deserve thanks for their co-operative efforts. And last – but certainly not least – I would like to thank the employees of the Central Bank for their work. Without them, there would not be much wind in my sails today. And in closing, I wish to say this: Iceland has been faced serious economic difficulties in the recent past, and there are certain dangers ahead. But we have the power to steer clear of them. We could be at the bottom, poised to rise up again and move forward, if we play our cards right. But we must ensure that we avoid turbulent waters and establish long-term stability. In order to do so, we must demonstrate the patience and resilience to allow the recovery of the economy and the financial system to play out. History teaches us that pride goeth before a fall – but it also teaches us that the darkest hour is just before the dawn. Let us bear that in mind as we welcome the spring. BIS Review 39/2010  9