Outlook for improvement in the current account balance

Our newly published macroeconomic forecast includes a discussion of external trade and its relationship with exchange rate movements. After a sustained surplus lasting through most of the 2010s, the current account has been persistently in deficit since 2021. That deficit averaged just over 2% of GDP in 2021-2024. It began to grow in 2025, reaching ISK 140bn over the first nine months of the year, as a handsome surplus on services trade did not fully offset the large goods account deficit and a moderate deficit on net transfers to and from the country.

In this case, however, it should be borne in mind that a significant share of the goods account deficit was due to enormous imports of computer equipment for data centres. These imports are financed in full by the data centres’ foreign owners and customers and therefore put no pressure on the ISK exchange rate.

We estimate the current account deficit for 2025 as a whole at just over ISK 170bn, or 3.5% of GDP for the year, Iceland’s highest deficit-to-GDP ratio since before the collapse of the banks. Nevertheless, the figures are strongly affected by the aforementioned computer equipment imports.

If external trade is to improve, however, the ISK must not strengthen appreciably. Furthermore, if tourism suffers a deeper slump in coming quarters than we anticipate, the recovery could lose pace, at least temporarily.

Stable ISK despite current account deficit

The fact that the ISK should hold stable during a sizeable current account deficit is due to several factors. As is noted above, trade-related foreign currency flows have been far more favourable than might have been surmised at first glance, as a large share of the current account deficit was financed directly by non-residents. Furthermore, a buoyant peak tourist season affected the FX market more than it would have otherwise because such a small share of the summer’s FX revenues were sold in forward contracts earlier in the year. Moreover, the pension funds bought only modest amounts of currency in 2025, and companies borrowed reasonably large sums in foreign currency.

ISK set to weaken in the coming term

As before, the ISK will be supported by a number of factors in the near future. The outlook is for the current account deficit to narrow. Iceland’s international investment position is strong, and its net external assets totalled ISK 2,101bn, or 43% of GDP, at the end of September 2025. Furthermore, the CBI’s international reserves are ample, the foundations of the economy are sound, and the interest rate differential with abroad will remain fairly wide. In the short run, the biggest uncertainty centres on how the tourism industry will fare as summer approaches, as a sluggish peak season could cause the ISK to depreciate later in the year.

The real exchange rate is therefore likely to remain historically high, provided that export sectors do not suffer more of a setback than we have projected. Because wages and prices tend to rise faster in Iceland than in trading partner countries, however, the nominal exchange rate will have to give way over time; otherwise, the real exchange rate could overshoot, damaging Iceland’s competitiveness and external balance. The nominal depreciation of the ISK could occur either slowly and gradually or, as has sometimes happened in the past, with a larger correction later on.

The exchange rate projections in our new macroeconomic forecast are based on the former assumption, with the caveat that unforeseen shocks on the exports side could call forth a more abrupt depreciation such as the one occurring at the onset of the pandemic. If our assumption holds, the ISK will depreciate slowly and steadily, ending the forecast period roughly 5-6% weaker than at the end of 2025. This equates to an EURISK exchange rate of 156-157 and a USDISK exchange rate of approximately 133, based on the two currencies’ end-2025 rates. As before, however, it is worth remembering that currencies can be unpredictable, so it is best to take this forecast with a generous grain of salt.