The currency played a significant role, both in the build-up to the crisis and during subsequent stabilisation and recovery. The currency crisis materialised in an over 50% depreciation of the króna over the course of 2008. It hit highly indebted corporate and household sectors, a large share of whose debt was either denominated in or linked directly to foreign currency, or linked indirectly to it through price indexation at a time of strong and rapid exchange rate passthrough. The contractionary balance sheet effects of the currency depreciation were therefore substantial. Hence the need to stabilise the exchange rate, which was achieved in the middle of 2009. But the real depreciation – which took the real exchange rate to around 30% below its historical average for a time and left it at the current level of around 20% below that average – compressed imports and provided some stimulus to exports, thus helping to turn a double-digit current account deficit into an underlying surplus. But the stimulus to exports is limited by the fact that Iceland’s major export industries, such as fisheries and energy-intensive metal smelters, face capacity constraints that can only be lifted through investments that have been rather limited so far. 4  BIS central bankers’ speeches  BIS central bankers’ speeches  5  A very important and somewhat novel element of the successful policy response was the interplay of fiscal consolidation, monetary policy, and capital controls. The crisis dealt a heavy blow to government finances in Iceland, as can be seen from Figure 5.

We can distinguish between financial, political and administrative elements of accountability. The exercise of accountability requires a system of laws, regulations and codes of conduct. In addition, mechanisms should be established for monitoring compliance and deviations, and institution of corrective measures. Financial accountability, which tends to be the main focus in this context, pays special attention to budgetary processes. It is deemed a necessary condition for good governance; prudent management of public resources; reduced corruption; better delivery of services; and a support to efforts at poverty alleviation. Strengthening financial accountability requires reforms almost across the board, touching on the parliamentary, judicial and administrative structures and modalities of government, and could thus entail a far-reaching revamping of governance systems. Governance and development We may now wish to address some thoughts on the reasons for the recent emphasis on governance in the development discourse. We have already alluded to the relationship between changes in the development paradigm and the evolution of the governance concept. Specifically in the context of World Bank interventions to foster development in the third world, various strategies had been pursued since about the 1960s, but the effort had not yielded the expected results. In grappling with this problem, the perception gained ground that the institutions of the state were fundamental to the development process and the use of aid, hence the “institutions matter” perspective that eventually emerged. The 1989 “crisis of governance” in Sub-Saharan African report was a landmark in this evolution, which triggered the mainstreaming of governance in the Bank’s development work.