STOCKHOLM, July 10 Iceland's economy should expand at a healthy pace in the next few years but household debt relief and potential balance of payments pressures pose risks, the IMF said on Thursday.
The Nordic island, recovering from its worst-ever financial crisis following the collapse of its top banks in 2008, is set for economic growth of 2.9 percent this year and around 3 percent annually in the medium term thanks to domestic demand and rising exports, the International Monetary Fund said.
But potential balance of payments pressures - contained by capital controls introduced during the crisis to stem a massive outflow of funds from the country - remain significant, it said.
The IMF and other lenders had to bail out Iceland as the north Atlantic island's economy contracted more than 10 percent over 2009 and 2010 following the collapse of its financial system.
Peter Dohlman, head of the IMF's mission to Iceland, said on a call with journalists that the country had made good progress in lowering its debt and reducing the crown overhang, noting that it has already paid back 60 percent of loans received during the crisis.
The key challenge for the small, highly exposed economy was capital account liberalisation, he said.
"We continue to support a conditions-based approach to capital account liberalisation, and for the pace to be dependent on the size of the potential outflows and balance of payment prospects...," he said.
In a first significant step towards removing capital controls by the centre-right government elected in 2013, Iceland said on Wednesday it had hired advisors to work on liberalisation plans.
"We think the authorities should push ahead with their agenda," said Dohlman.
He said it was too early to predict any timing of a possible outcome from liberalisation plans but he believed authorities hoped to make significant progress on the issue this year. (Reporting by Mia Shanley; Editing by Susan Fenton)