Icelandic króna gains 4.8% despite 150 billion deficit

The Icelandic króna has strengthened by 4.8% this year despite a deficit of around 150 billion krónur in transactions with foreign countries during the first six months, according to mbl.is.

Landsbankinn’s Hagsjá economic report says such a large external deficit would normally be expected to weaken the currency, all other things being equal. It identifies several possible explanations for the unexpected appreciation.

One factor is the extensive construction of data centres this year and last year. The investments are so large that they distort economic statistics for the economy as a whole.

“Imports of office machinery and computers, which mostly consist of computers for data centres, amounted to 101 billion krónur during the first six months of the year,” the report says.

There has also been investment in infrastructure and energy production. As with the data centres, this investment is financed from abroad. Some of the related costs are domestic, requiring foreign currency to be exchanged into Icelandic krónur, which has strengthened the currency, according to the report.

The report also shows a deficit of 37 billion krónur in primary income during the first six months. This category includes investment income and expenses.