The value of the Icelandic Króna has fallen by 11% since the end of July, and could continue to drop, according to economists. The value of the Króna is currently the lowest it has been in two years. The primary reason is uncertainty about the future of the Icelandic airlines due to tougher competition and rising oil prices. Slower growth in the tourism industry has also reduced the inflow of foreign currency.
Read more: Bankruptcy of WOW air would lead to serious recession, GDP would shrink by 3%
Ingólfur Bender, the chief economist of the Federation of Icelandic Industries, told the National Broadcasting Service RÚV that growing economic uncertainty, especially regarding the financial strength of the Icelandic airlines, but also fears that coming wage negotiations between the large unions and employers, could push the value of the Króna down even further.
Ásgeir Jónsson, Professor of Economics at the University of Iceland places the blame on labor unions, telling the local newspaper Fréttablaðið that the bold demands from the largest unions, Efling, VR and the Federation of General and Special Workers SGS, were the main reason for uncertainty. The unions have demanded that the minimum wage should be 425,000 ISK (x USD/X EUR) per month on January 1 2022.
See the joint demands of SGS and Efling to the federation of employers SA here, and the demands to the state here (pdf). The demands of VR are nearly identical.
A self fulfilling prophecy
Ingólfur told RÚV that expectations of further devaluation are becoming a self-fulfilling prophecy: Some big domestic investors have been moving money abroad to protect themselves against the possibility of a further drop in the value of the Króna, while exporters who have revenue in foreign currency are waiting before they change their Dollars or Euros into Króna. These developments have resulted in smaller inflows of foreign currency, and larger outflows, putting pressure on the Króna.
Stefán Broddi Guðjónsson, the Chief Economist of Arion Bank, agrees with Ingólfur and Ásgeir on the role of growing uncertainty, but adds that the Króna was probably overvalued. While the recent drop is steep, it should not have cme as a surprise. The surprising thing, he argues, is how long the Króna remained as strong as it did. The weaker Króna is therefore likely here to stay, and a major reversal or powerful appreciation is unlikely in the near future.
A silver lining: Cheaper to visit Iceland
While a weaker Króna means more expensive imports, which pushes up inflation and cuts into the purchasing power of Icelanders, there is a silver-lining, Ingólfur points out. As the Króna falls in value Icelandic exports become more competitive on international markets, which boosts exports. This also makes Iceland a more affordable destination for foreign travelers, which should lead to more tourist spending.
Read more: Icelandic Króna keeps falling in value: Means you'll get more value for your Euros, Dollars
Smaller imports also help boost GDP growth. The local newspaper Morgunblaðið reports that car dealerships have already begun to notice a significant drop in sales, registering a 30% drop in the sale of new vehicles in the past month.
The world's smallest currency
The Icelandic Króna is the world's smallest independent currency, managed by the Icelandic Central Bank. Due to the small size of the currency and the strong fluctuations of the Icelandic economy the value of the currency has always been very unstable. Since the Icelandic Króna was established as an independent currency, during the First World War, it has fluctuated wildly in value. As a consequence the currency has been propped up with capital and currency controls for most of its existence.
The value of the Icelandic Króna has fallen by 11% since the end of July, and could continue to drop, according to economists. The value of the Króna is currently the lowest it has been in two years. The primary reason is uncertainty about the future of the Icelandic airlines due to tougher competition and rising oil prices. Slower growth in the tourism industry has also reduced the inflow of foreign currency.
Read more: Bankruptcy of WOW air would lead to serious recession, GDP would shrink by 3%
Ingólfur Bender, the chief economist of the Federation of Icelandic Industries, told the National Broadcasting Service RÚV that growing economic uncertainty, especially regarding the financial strength of the Icelandic airlines, but also fears that coming wage negotiations between the large unions and employers, could push the value of the Króna down even further.
Ásgeir Jónsson, Professor of Economics at the University of Iceland places the blame on labor unions, telling the local newspaper Fréttablaðið that the bold demands from the largest unions, Efling, VR and the Federation of General and Special Workers SGS, were the main reason for uncertainty. The unions have demanded that the minimum wage should be 425,000 ISK (x USD/X EUR) per month on January 1 2022.
See the joint demands of SGS and Efling to the federation of employers SA here, and the demands to the state here (pdf). The demands of VR are nearly identical.
A self fulfilling prophecy
Ingólfur told RÚV that expectations of further devaluation are becoming a self-fulfilling prophecy: Some big domestic investors have been moving money abroad to protect themselves against the possibility of a further drop in the value of the Króna, while exporters who have revenue in foreign currency are waiting before they change their Dollars or Euros into Króna. These developments have resulted in smaller inflows of foreign currency, and larger outflows, putting pressure on the Króna.
Stefán Broddi Guðjónsson, the Chief Economist of Arion Bank, agrees with Ingólfur and Ásgeir on the role of growing uncertainty, but adds that the Króna was probably overvalued. While the recent drop is steep, it should not have cme as a surprise. The surprising thing, he argues, is how long the Króna remained as strong as it did. The weaker Króna is therefore likely here to stay, and a major reversal or powerful appreciation is unlikely in the near future.
A silver lining: Cheaper to visit Iceland
While a weaker Króna means more expensive imports, which pushes up inflation and cuts into the purchasing power of Icelanders, there is a silver-lining, Ingólfur points out. As the Króna falls in value Icelandic exports become more competitive on international markets, which boosts exports. This also makes Iceland a more affordable destination for foreign travelers, which should lead to more tourist spending.
Read more: Icelandic Króna keeps falling in value: Means you'll get more value for your Euros, Dollars
Smaller imports also help boost GDP growth. The local newspaper Morgunblaðið reports that car dealerships have already begun to notice a significant drop in sales, registering a 30% drop in the sale of new vehicles in the past month.
The world's smallest currency
The Icelandic Króna is the world's smallest independent currency, managed by the Icelandic Central Bank. Due to the small size of the currency and the strong fluctuations of the Icelandic economy the value of the currency has always been very unstable. Since the Icelandic Króna was established as an independent currency, during the First World War, it has fluctuated wildly in value. As a consequence the currency has been propped up with capital and currency controls for most of its existence.
