Without a doubt, the year 2020 will linger long in our memory. COVID-19 made its presence known early on, and as soon as March the virus had developed into a global pandemic affecting most of the inhabited world. The impact was felt here in Iceland when demand for international flights collapsed as one country after another imposed a variety of travel restrictions. The global tourism industry was brought to its knees in a matter of days, and the Icelandic economy felt the effects very quickly. Other public health measures and restrictions on public gatherings put a damper on the economy – and the entire society, actually.
The imminent economic contraction was softened by the Government's strong foreign currency position and prudent economic policy in recent years, however. With various measures, the authorities managed to slow the rise in unemployment and protect the economy as a whole from severe shocks. Many companies had scope to respond to the contraction, and households were able to show resilience. As is discussed in Íslandsbanki's newly published macroeconomic forecast, a strong rebound can be expected in the next few years.
A vigorous economy with strong infrastructure
The COVID-19 pandemic has done considerable economic damage, particularly in tourism and related sectors, but it is important to remember that the damage is unlikely to be long-lasting. Iceland has a vibrant economy and possesses extensive knowledge in important sectors such as energy, fishing, and tech manufacturing, to mention but a few.
The tourism industry is well positioned to recover quickly once international travel resumes. Iceland's captivating natural surroundings will still be here once the pandemic has receded, and in recent years there has been enormous development in tourism infrastructure: hotels, restaurants, recreational activity providers, cross-border networking, and so forth. All of this is still in place and will generate foreign exchange revenue for the long term. The same is true of Iceland's marine products, energy-intensive industry, and knowledge and ingenuity. Seldom has emphasis on innovation and entrepreneurship been as strong as it is right now. This emphasis will foster the development of new companies, new sectors, new jobs, and new revenue-generating projects. Economic diversity is on the rise, and there is every reason to expect it to keep growing in the years to come.
Simpler – and simply better – service
Not all of COVID-19's side effects have been negative. On the plus side, the pandemic accelerated the digital communications trend that had already begun, and both technological advances and the embrace of new technological possibilities have taken place more rapidly than many could have imagined. This has also affected financial services. It has simplified communications and streamlined case handling, and the associated increase in automation and simplification of processes will help the Bank provide even better service.
With simpler and more targeted service, the Bank strengthens its competitive position vis-à-vis fintech companies and other new players in the financial market. This was put to the test when we had to respond in a variety of ways to the COVID-19 pandemic. It is clear that the Bank has strengthened its position as an efficient and effective provider of comprehensive financial services.
Íslandsbanki's response to the pandemic has changed the behaviour of its customers, who now consider it much more natural to conduct their key banking transactions using their phones and computers than to visit a branch to seek assistance or advice. This shift had already started, but the pandemic clearly expedited the process. This is extremely positive, and it gives the Bank and its employees the chance to provide even better and more personal service to customers seeking assistance with major decisions.
Bank tax reduction a necessary move
The reduction of the bank tax was approved by Parliament in 2019. At that time, the tax rate was 0.376% of the book value of commercial banks' liabilities, and the plan was to lower it to 0.145% in three increments from 2021 to 2024. When the pandemic struck, however, the reduction was expedited, and the tax rate was down to 0.145% by the end of 2020.
This long-awaited tax cut will deliver increased streamlining and healthier operations. Even so, the bank tax is still high – about five times the rate in neighbouring countries. The tax is levied on the banks' loans, thereby distorting market competition vis-à-vis other financial companies and pension funds, which grant loans but are exempt from the tax. In essence, the bank tax is a levy on private sector borrowing in Iceland. In the current situation, lowering the tax even further would have stimulated the economy more and enabled it to recover more strongly.
The bank tax and other levies that are higher in Iceland than in neighbouring countries reduce the likelihood of our being able to attract foreign investment – not least in connection with the potential sale of Íslandsbanki in coming years. A small economy with an independent currency does not need taxes and levies that ultimately distort its competitive position.
At the end of 2020, Icelandic State Financial Investments proposed that the Minister of Finance and Economic Affairs begin the process of selling the State's holdings in Íslandsbanki, and at the end of January 2021 the Minister decided to do so, in accordance with the recommendation. It is clear, then, that another eventful year is in the offing for Íslandsbanki as it prepares for the sale.
Sustainability integrated into the Bank's operations
Over the course of 2020, the Bank made significant progress in implementing its sustainability strategy, which had been approved at the end of 2019. Increased emphasis on sustainability accords well with Íslandsbanki's profitability objectives and other financial targets, but primarily it has strengthened the Bank's operations and its position in the community. Examples of the milestones we are proud of include the publication and application of our Sustainable Financing Framework and the successful green and sustainable bond issues that followed. The Bank has also set ambitious sustainability objectives centring on both the expansion of our sustainable product offerings and the neutralisation of our carbon footprint. We are determined to be a model of sustainable operations as well as a force for good in the community.
Friðrik Sophusson stepped down from his position as Chair of Íslandsbanki's Board of Directors last year, after a decade at the helm. I would like to thank him in particular for the tireless work he has done for the Bank during his tenure on the Board, often tackling demanding projects under equally demanding circumstances. Auður Finnbogadóttir, Tómas Már Sigurðsson, and Flóki Halldórsson also left the Board during the year, and we wish to thank them for their contribution as well. Frosti Ólafsson, Guðrún Þorgeirsdóttir, and Herdís Gunnarsdóttir have joined the Board, and I would like to thank them and their fellow Board members – Anna Þórðardóttir, Árni Stefánsson, and Heiðrún Jónsdóttir – for fruitful collaboration over the past year.
The COVID-dominated year 2020 has been challenging for the Bank's managers and employees, who have done their jobs under extraordinary and often extremely taxing circumstances requiring innovative responses and hard work. In closing, I would like to thank the management and staff of Íslandsbanki for their dedication and outstanding performance during a very difficult year. With a team of employees and exceptional as ours, Íslandsbanki can be optimistic about the future.