Interview with Bjarni Benediktsson, Minister of Finance and Economic Affairs

Feb 2020 Interview with Bjarni Benediktsson, Minister of Finance and Economic Affairs

Prisma Reports: You have stated that the government’s actions and financing will help people and companies in trouble and create conditions for the growth of the economy. Could you give us an overview on the implementation post COVID19 and the distribution of resources according to ‘the latest’ priorities?

Mr. Bjarni Benediktsson: We initially started with a macro examination of what was happening, making our decisions based on statements announced by the most prominent institutions in the world, including the IMF. Looking at our former experience from the financial difficulties we had in 2008, when the banking sector collapsed, we entered our economic program with the IMF. This included tax measures but also adjustment on our expenditure side, as we needed to apply 53 austere measures.

I had clear in my mind that we needed to take a different approach on this occasion, even though at the end of the day, we came out stronger out of the financial crisis that we might not even want to consider to take another route. We decided to analyse the offers we had in our systems and we picked up the ratios that were most favourable for the Icelandic treasury. That made us realise the strength of the treasury, using it as the fiscal space that has been created to reduce the economic cost of the pandemic, based on the assumption that this was to be a temporary situation.

Specifically, one of the measures we came up with is an unemployment scheme which is made for companies, guaranteeing them the possibility to lay off people allowing them to maintain the employment. Thus, the employer-employee relationship was intact. Other countries have done similar initiatives, but our measure made sure that employees got most of their salaries, whilst employers who did not have use of the employees could lay them off partially. We have also included a temporary extension of six months of the unemployment benefits related to previous income. We have a very long unemployment benefits program which can last up to two and a half years, but for the first three months the benefits are related to previous income. We have extended that period from three to six months.

Another program we have extended is related to government guarantees, applying for the launch of corporations. We created one package for larger firms and another for smaller firms. In addition to that, we have also offered to take part in the severance pay for companies which their income has fallen dramatically. We have made sure we assist companies who may have lost over 90 percent of their income and help them comply with obligations when it comes to severance pay. This way, we can assist companies that have adjusted their costs down to zero in order to stay alive until they get back on track.

To a situation that has approached very rapidly we also needed a longer-term thinking. Subsequently, we put money aside and when the pandemic is over, we will be ready launching a campaign to attract tourism again. We had the procurement and have started cooperation with specialists in that area, working with advertising agencies while waiting for the right time to come.

The big challenge now is private investment and we want to address the fact that corporations are not investing. To tackle such problem, we will introduce tax incentives for companies to invest more, making sure they can benefit from investing sooner rather than later within at least the next two years. We hope that this will bring up investment and the tax incentives will help to keep more gains from their operations instead of paying higher taxes.

In the field of research and development and for start-ups in Iceland comes on top of the special focus that we have been putting on this area for the last five to six years. Since 2014, we have been steadily increasing funding and we see a lot of activity in that area. There are certainly exciting times arising for Iceland. There is also a much wider spectrum than only engineering or software programming sector, including biomedical products and other fascinating sectors.

To wrap up the above, we intended to use the physical space that has been created and a set of fiscal rules two years ago, which I presented to Parliament and that has been the foundation for our public finances. It is also worth mentioning that we have built a lot of other buffers in our system. Our large currency reserves are probably 10 times higher than they were in the financial crisis 10 years ago. The same applies for the financial sectors, as we have built buffers that have made us stronger. Consequently, we can give oxygen to the private sector. Household debts problem was one of the main political issues we had to deal with in 2008, which is not the case any longer, thanks to the buffers we have built in various areas of our public finances and the financial sector.

Prisma Reports: The U.S. is Iceland’s single largest trading partner and biggest investor. Until recently, U.S. investments in Iceland were mostly aimed at the aluminum sector thanks to Iceland’s abundant geothermal energy. However, U.S. investments have diversified to areas such as hotel chains, consumer goods and retail, with the entrance of several U.S. brands and franchises. What is your assessment of the overall state of U.S. – Icelandic relations, especially those concerning investments and economic partnership?

Mr. Bjarni Benediktsson: Looking back at what would have characterized Iceland as an investment opportunity, that was the fact that we had very little foreign direct investments, unless we did bilateral investment agreements. This was the case for the first smelters that came in, as they only came in for those big investment agreements, getting exemptions from a lot of the domestic rules relating to taxing and other important issues.

When we now look at the landscape where we are attracting foreign direct investment from other countries, but specifically the U.S., I am extremely happy about it. It is an example of growing strength, that Iceland has to do business with other countries. In part, it is related to the extensive connections that we have had in recent years through our airport in Iceland and all those very extensive flight connections to the U.S. This has created a lot of attention and we have attracted a lot of opportunities in recent years. In 2018, we had around half a million U.S. guests, which had a lot of spill over effect. A lot of people go back to their home country and they take with them ideas from what they have experienced in Iceland. The general environment in Iceland has been more favourable. We have had more stability in recent years and this will hopefully create more opportunities. On top of that we have things that the world is on the look for at the moment, such as clean water and sustainable energy production. I would like to believe that we have an image of very clean and healthy nation, this also in itself attracts attention and is something that investors are on the look for.

We are seeing an increase in foreign direct investment and we hope that we will continue to develop our business relationship with the U.S. This can be difficult for a relatively scarcely populated nation as ours, as bilateral talks with all of the European Union countries go through a single channel. They have decided that those who are in the Union will handle everything through a single channel, whilst we rely on our bilateral talks individually. It can be challenging to get the attention necessary to conclude a new foreign trade agreement with the U.S.

Prisma Reports: The 2008 debt crisis had a severe impact on Iceland, but, at the same time, it forced the country to change and innovate. Iceland staged a remarkable recovery from this crisis, which had a very positive impact on the country’s international reputation. Would you agree with this statement? What are the types of comments you receive outside Iceland from international investors, partners and business leaders?

Mr. Bjarni Benediktsson: It all started with a very big decision early on, which was that we would not nationalize the private depth of the financial institutions. In that sense, just like sometimes banks state that they are ‘too big to fail’, our state was ‘too big to save’. It was not realistic for the state to try and save them.

Secondly, I think we have a case which is an example of the benefits you can have from having your own currency. We had increased competitiveness overnight by the appreciation of our own currency. We also applied capital controls, which initially were only intended to last for six months but lasted more than eight years. On the one hand, having your own currency at times of economic difficulties can be critical. On the other hand, we have here a case where capital controls can work tremendously well to protect the economy households and businesses and give shelter for necessary adjustments.

There are entities in Iceland, which were not that affected by neither the banking crisis nor the COVID-19 crisis which we are dealing with now. We have adjusted the fisheries industry which has been a fundamental industry for Icelanders and was almost the single pillar of the economy in the first half of the 20th Century. Besides this, energy intensive industries also being raised in Iceland as well as tourism being the third pillar. Fisheries which had been traditionally a strong supporter of the economy, continues to create a lot of value for us in Iceland.

Prisma Reports: During the last decade, Iceland has positioned itself as an emerging tourist destination, a sector that also contributed greatly to the economic recovery following 2008. However, tourism and travel at the global level is one of the most affected sectors by COVID-19. What is the overall strategy to regenerate this critical industry for Iceland, taking into account travel restrictions and testing requirements?

Mr. Bjarni Benediktsson: The tourism sector and its reactivation pose a huge challenge. The strategy that we are applying is to assist those companies through the most difficult period. We have assisted them in laying off people, in delays in due dates for public taxes this year. For the entire sector, we have assisted them in minimizing their operating costs. We are giving loan guarantees for those that have a longer-term viability, putting money aside to start the marketing campaign for Iceland.

The capacity of the tourism sector is very significant, as we could accommodate 2 million tourists again without building new hotels or anything similar. People, roads, hotels, knowledge and the airport are here. Restaurants and many other services are in place and we are ready to welcome everyone when the skies open again. If this tracks along and there is no tourism in 2021, we will see even more bankruptcies and more difficulties. My belief is that we will bounce back quickly but it is not all reliant on what we are doing ourselves, but also the reliance on the willingness of tourist to travel again and for travel connections to be in place again.

Iceland has a competitive advantage over many others while and after the pandemic. It will be more attractive to come to an exclusive place like Iceland, where you have clean air, fresh water and the vastness we can offer. You can stand in the middle of nowhere, watching the rivers run, seeing the newest lava, or the glacier and compare that to being in a big city anywhere in the U.S. or in Europe.

Prisma Reports: Iceland is a member of Nordic cooperation, chaired in 2019, European Free Trade Association (EFTA) and the European Economic Area (EEA). What would you highlight as some of the priorities in your current agenda as part of these three organizations?

Mr. Bjarni Benediktsson: Our participation in the Nordic Corporation has had increased importance because we have seen an increasing tendency to isolationism in many other countries. We find that there is a strong push back in all of the North region against any such development. We believe that the Nordic corporation is a good model of international cooperation. In our 2019 presidency we were focusing mostly on youth, including gender quality, sustainable tourism, which is an issue, not only for us in Iceland but is also a big issue for the High North. We are strongly focusing on the oceans; an area were all of those nations in the Nordics rely a lot on. Ultimately, climate changes without a doubt is one of the big focus areas that we all in the Nordic agree that needs to be very high on the agenda and on the top of that, because climate change will occur in the north faster than elsewhere. We believe that our prosperity is, to a great extent, based on faith.

The European Free Trade Association (EFTA), is a key organization for us. It has allowed us to create the foundations and negotiate agreements with over 70 countries and territories, having bilateral talks where we can find trading partners and push for new agreements around the globe. We have been very successful and now the most significant agreement relating to this is the EEA agreement between the relevant States and the European Union. This agreement gives access to the internal market of the EU and it can be challenging for the after states which are not members of those big institutions to come up with a mirror distance of speak. Even though it can be a big challenge for us being relatively scarcely populated to apply all of the relevant rules and implement them into domestic law, we put great importance in being a very active VIP Member.

Prisma Reports: What would be your final message to the readers of Foreign Policy around the globe?

Mr. Bjarni Benediktsson: We have come across with a global issue and this pandemic has highlighted the importance of good international relations and the need to push back when we see signs or a tendency for further isolation. I think cooperation between countries is key to solving those big issues at hand. Nobody will be unaffected or isolated from the harm to economies that will follow if we are unsuccessful in leading growth again. I strongly believe we need to spread this message today, proving signs of our belief in the future. We cannot withdraw and just ‘prepare for the worst’ to come. We ought to believe and create the best out of that situation, as it is in our hands to do that.