Outgoing monetary remittances have increased

As the chart shows, a modest secondary income deficit is the rule, not the exception, in balance of payments figures. Secondary income captures items such as Government contributions to international institutions and charitable causes, cross-border monetary remittances to family and friends, pension payments to individual who receive benefits from a country other than their country of residence, cross-border payments of insurance compensation, etc. Although it has fluctuated relatively little in the recent term, over the past few decades it has shown a steadily increasing deficit.

As the chart indicates, part of this is due to inflation in the various subcomponents, which increases the nominal amount of the deficit, all else being equal. Interestingly, the crater in Q3/2015 is due to the Financial Institutions’ Insurance Fund’s (TIF) settlement with foreign entities following the collapse of the banks seven years earlier.

One item stands out, however: remittances from residents of Iceland to related parties abroad. In the past decade, such remittances have ballooned from about ISK 1bn per quarter to an average of nearly ISK 14bn per quarter in the recent past. For the most part, they probably represent money sent by immigrant workers back to family members in their home countries. In 2015, immigrants accounted for 8% of the population, according to figures from Statistics Iceland (SI), but by 2024 they accounted for 18%. There were just over 27,000 immigrants living in Iceland in 2015, but by 2024 there were nearly 70,000.

This trend is a manifestation of the fundamental shift that has taken place in Iceland’s labour market and society, with population growth sustained primarily by immigration. The vast majority of these immigrants have moved to Iceland to improve their lot in life, while simultaneously participating in generating increased export revenues and filling a large share of jobs in sectors such as construction and various domestic services in the public and private sectors.

Primary income surplus a mixed blessing

The subcomponent that took us perhaps most pleasantly by surprise this time was primary income, which was in surplus for the fourth quarter in a row. To a degree, this is a mixed blessing, as it probably stems in fair measure from the weak performance of Iceland’s foreign-owned aluminium smelters. Aluminium prices plunged earlier this year but have rebounded recently. That should be good news for the current account balance as a whole, although a stronger performance by the smelters has a negative impact on primary income.

The H1 deficit is not cause for major concern

The H1/2025 current account deficit totalled ISK 139bn, as compared with ISK 73bn in the same period of 2024 – nearly doubling between years. But data centre investments are a major contributor to this outcome, and in the most recent issue of Monetary Bulletin, the CBI estimates that the trade balance would probably turn out close to neutral this year if the data centres were set aside.

In May, we projected that the current account would show a deficit of just under ISK 100bn in 2025 as a whole and then become better balanced over the period thereafter. That forecast still seems valid despite the fat deficit in H1, as Q3 usually makes a handsome contribution to the current account balance because of the peak tourist season. Furthermore, the outlook is for the pace of data centre investment to ease and the goods account deficit to narrow in H2. As a result, we are not deeply concerned that a wide, persistent current account deficit is becoming entrenched, although anything is possible in that department.

Sizeable net external assets are a sign of strength

This morning, the CBI also published data on Iceland’s international investment position as of end-June. The NIIP was positive by ISK 2,089bn at mid-year, or just under 44% of GDP. It deteriorated by ISK 91bn (1.9% of GDP) in Q2, due mainly to financing the current account deficit, as external liabilities grew more than external assets by about ISK 95bn. Once again, this is a sign of the strong impact of investments in data centres, which are largely foreign-owned. Like the aluminium smelters, though, they will eventually generate net added value for the domestic economy in the form of energy sales, employment income, services purchases, and public levies, among other things.

It is impossible to overstate how much Iceland’s NIIP has improved in the past decade. Until the mid-2010s, it was always negative and had been so consistently since official record-keeping began. In a manner of speaking, this meant that the domestic economy was running an overdraft with the rest of the world and was therefore at the mercy of foreign creditors as regards preventing a currency crisis driven by capital flight. That risk materialised in the wake of the 2008 banking collapse.

But these days, the risk of a currency crisis is virtually nonexistent, as domestic entities hold a large stock of assets to offset external liabilities. Not least of these assets is the CBI’s international reserves, which totalled ISK 893bn as of mid-year, not to mention the pension funds’ foreign assets, which came to ISK 3,265bn at the same time. We are of the opinion that this change for the better has had a significant positive effect on the ISK exchange rate, as increased confidence in the underpinnings of the currency is likely to reduce fluctuations due to short-term currency flows. If the current account deficit does not become entrenched, the ISK’s underpinnings should remain robust.