Excerpts from the Ministry's Weekly Web Release December 20, 2001.

The inflation outlook for the coming months
The unions have recently decided not to invoke the abroagation clause in the current wage agreements. Their decision is to a considerable extent based on the belief that inflation will decelerate rapidly over the next few months. It is estimated that the consumer price index will not exceed 222.5 in May 2002, which means that the average rise per month for the next five months may not exceed 0.27%. A rise in the króna exchange rate is crucial for the fulfilment of this goal. The króna exchange rate rose as soon as the agreement between the Confederation of Employers, the Federation of Labour and the Government was completed, and has now risen by more than 4% since the signing. This supports the Ministry of Finance's opinion that the recent decline in the exchange rate was not in line with economic fundamentals.

However, it is interesting in this respect to look at the recent development of specific items of the CPI, especially the period when the króna exchange rate has been in decline. From mid last year, when the exchange rate index was at a minimum, and until the middle of this month, it has risen by more than 34% which is equivalent to a 25% decline in the króna exchange rate. During this time, the CPI has risen by almost 11% and the wage index by about the same. The decline in the króna exchange rate has therefore not in every respect been reflected in the price level development.

Given that the exchange rate develops according to expectations, there is a good chance that the set inflation goals can be reached. Uncertainty on the labour market has been eliminated, a foreign trade balance is imminent, there are good prospects for the inflow of capital from privatisation, and in addition the Government's policy on loans and debt management will cause the króna exchange rate to rise next year. Furthermore, the price development so far gives reason for optimism about the favourable price development of imported goods, especially foods and beverages, if the króna exchange rate continues to rise.

Treasury finances, January-November 2001
The Treasury's less favourable performance this year than the last reflects three factors: Firstly, the influence of reduced economic activity reflected in lower revenue from indirect taxes. Secondly, the influence of wage agreements and a decline in the króna exchange rate on the expenditure side of the Treasury. Thirdly, specific decisions on increased Treasury expenditure, i.e. payments to the newly created Childbirth Leave Fund, the Municipal Equalisation Fund, pensions etc.

Great changes have occurred in Treasury borrowing, largely due to the authorities' emphasis on strengthening the foreign exchange reserves by borrowing abroad and thereby strengthening the currency and in turn reducing inflation. For this purpose, the Treasury borrowed 27 billion krónur in October, which in addition to strengthening foreign exchange reserves, was used to increase the Central Bank's equity capital pursuant to the new Central Bank Act. Furthermore, the Treasury continued to pay into the Government Employees Pension Fund to meet future commitments

The Treasury's total revenue amounted to over 196 billion krónur in the first eleven months of this year. The increase from last year is 12 billion krónur, or 6.5%, and is largely due to an increase in personal income taxes. This is in large part due to wage increases between the two years. Net wealth taxes also increase from the previous year, reflecting the rise in real property prices in 2000.

The Treasury's total expenditure amounted to 200 billion krónur in the first eleven months of the year, and increased by almost 25 billion from last year. Two thirds, or 16 billion, thereof went to increased expenditure on health, social security and education. The rest is mainly due to special contributions to the Municipal Equalisation Fund, increased capital expenditure and increased interest payments due to a decline in the króna exchange rate.

The outcome is that the cash deficit from operations was just under 4 billion krónur during the first eleven months of the year. The overall cash balance, on the other hand, was positive by more than 8 billion krónur, entirely due to an increase in foreign borrowing.

An agreement on the division of labour due to pensions
On 19 December, the Minister of Finance and the Financial Supervisory Authority of Iceland signed an agreement on the division of labour due to pensions. The Minister of Finance implements the law on the mandatory insurance of pension rights and the operation of pension funds, and the Financial Supervisory Authority supervises the operations of pension funds and custodians of pension savings. The division of labour and communications between the Minister and the Financial Supervisory Authority is treated further in the agreement. Furthermore, the agreement stipulates the establishing of a working group that is to monitor the experience gained from the Pension Act and make a note of those aspects that need to be considered when the Act will be reviewed.


The next Excerpts from the Ministry of Finance will be released on 11 January 2002.



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Weekly Web Release, Arnarhvoll, 150 Reykjavik, Iceland