The Central Bank of Iceland has today issued the publication Balance of Payments, External Position and vulnerabilities 2025. The publication outlines developments in Iceland’s balance of payments and capital flows and explores the impact of changes in flows on the external position of the economy, and the foreign exchange market.
The global economy has suffered a series of shocks in recent years, including the pandemic, surging energy and food prices following the invasion of Ukraine, and elevated political uncertainty. Among the consequences have been the highest inflation in decades in advanced economies, followed by high interest rates. Added to this were tariff hikes in the US, and rising uncertainty surrounding global trade. The króna has appreciated despite turbulence in global markets, and exchange rate volatility has been modest in international context.
The current account deficit has measured between 1% and 2½% of GDP since 2021 but has widened in tandem with increased domestic investment. Iceland’s investment-to-GDP ratio is now higher than that in most of its main trading partner countries. A widening current account deficit has affected the króna less than could have been expected, as it stems primarily from investments financed with foreign capital. Iceland’s net international investment position (NIIP) has seldom been more favourable than in Q2/2025, standing at a positive 44% of GDP, supported by pension funds substantial assets. The Central Bank’s international reserves equalled 19% of GDP, and are ample in terms of inter-national reserve adequacy benchmarks. Iceland’s external liabilities totalled 98% of GDP at mid-year, the lowest ratio since the turn of the century.
In the scenario described in this publication, the current account deficit increases in 2025 but decreases in 2026. At the end of 2025, the international reserves are projected to equal 19% of GDP and to decrease marginally in 2026. The NIIP will remain strong in historical and international context. The domestic economy is therefore well prepared to withstand unexpected shocks.
Iceland‘s Balance of Payments, External Position and vulnerabilities was last published in 2023 and forms part of the Central Bank of Iceland’s regular publication on developments in the balance of payments, the exchange rate, and foreign exchange market. The objective is to provide a detailed overview of Iceland’s external position and shed light on the evolution of key economic risk factors.