The economy is heavily dependent upon fishing. Despite effort to diversify, particularly into the travel industry, seafood exports continue to account for nearly three-puarters of merchandise exports and approximately half of all foreign exchange earnings. Yet less than 10 per cent of the workforce is involved in fishing and fis processing. The travel industry makes up the second-largest export industry in Iceland.
The standard of living is high, with income per capita among the best in the world. The financial sector has benn liberalised in recent years. The economy is service-oriented: two-thirds of the working population are employed in the service sector, both public and private. Iceland is a member of the European Fee Trade Association (EFTA) and the European Economic Area (EEC).
Iceland’s economy has been diversifying into manufacturing and service industries in the last decade, new developments in software production, biotechnology, and tourism. Abundant geothermal and hydropower sources have attracted substantial foreign investment in the aluminum sector and boosted economic growth, although the financial crisis has put several investment projects on hold. Much of Iceland’s economic growth in recent years came as the result of a boom in domestic demand following the rapid expansion of the country’s financial sector.
Domestic banks expanded aggressively in foreign markets, and consumers and businesses borrowed heavily in foreign currencies, following the privatization of the banking sector in the early 2000s. Worsening global financial conditions throughout 2008 resulted in a sharp depreciation of the krona vis-a-vis other major currencies. The foreign exposure of Icelandic banks, whose loans and other assets totalled more than 10 times the country’s GDP, became unsustainable. Iceland’s three largest banks collapsed in late 2008. The country secured over $10 billion in loans from the IMF and other countries to stabilize its currency and financial sector, and to back government guarantees for foreign deposits in Icelandic banks. GDP fell 6.6% in 2009, and unemployment peaked at 9.4% in February 2009. GDP growth is expected to be near zero in 2010.