people leaving the unemployment register at present are going back to work. on the other hand, my concerns from last year concerning the low investment level and relatively weak export growth have not disappeared. it is true that business investment excluding energy - intensive industry and ships and aircraft is strengthening and, according to the forecast, will grow by 8 % this year, while total business investment as a share of gdp will rise over the forecast horizon, to about 11 % in 2014. it will still be below the 30 - year average of 12½ %, however. on the other hand, exports of goods and services will grow by about 2½ % this year and by an average of just under 2 % per year in 2012 and 2013. this is not a very cheery prospect, given that the real exchange rate of the krona is currently over 20 % below the historical average. it is important to bear in mind that low investment levels and weak export growth are related phenomena. a large share of iceland ’ s exports ( marine products and aluminium ) are subject to capacity constraints, and in some instances, increased export levels would require substantial investment. thus it is important to facilitate investment in export sectors. those who believe that monetary policy has been a critical factor after the real policy rate fell to the current – 1 % are mistaken, however. much more important are risk aversion in the markets, limited access to foreign credit, an uncertain operational environment, and impaired corporate balance sheets. bis central bankers ’ speeches chart 1 chart 2 chart 1 shows, on the one hand, how the economic recovery looks so far and how it compares with the central bank ’ s forecast through 2014 and, on the other, developments in unemployment over the same period. according to these data, gdp was similar to q4 / 2006 levels in q3 / 2011 but will rise back to the peak of the boom years towards the end of the forecast horizon. at the same time, unemployment will decline steadily to 4½ % near the end of the forecast horizon, and according to the forecast, the slack in the economy will have vanished by 2014. it is highly uncertain, however, just how much slack exists at this juncture. but inflation is the big change from the outlook around this time last year. instead of falling slightly below target and remaining there for some time, inflation has taken quite a jump in 2011. it did fall below target, but it stayed there only three months before taking off again, peaking at 5. 7 % in

the treasury ’ s finances appear to have been close to balance in 1997. the treasury repaid debt during the year. amortization of foreign debt exceeded new borrowing by 6. 5 billion kronur, or the equivalent of 5 percent of the treasury ’ s foreign debt ; this marked the first time since 1986 that amortization of foreign debt exceeded new borrowing. domestically, new borrowing exceeded amortization by 3. 4 billion kronur. while this turnaround in the treasury ’ s finances is certainly to be welcomed, it is, nonetheless, a somewhat mixed blessing. it is a matter of concern that the budgeted improvement in the treasury ’ s finances in 1998 is less than warranted by the automatic stabilizers alone and that, all other things equal, the degree of fiscal restraint on domestic demand in 1998 will be less than last year. in preparations for the 1999 budget it is therefore of paramount importance, in light of economic conditions, to aim for a substantial treasury surplus. the same considerations, of course, apply to the implementation of the 1998 budget, and any excess revenue should be used to improve the financial balance rather then end up as extra spending. i say this because there are limits on what monetary policy can accomplish to restrain domestic demand in the current circumstances. local government finances deteriorated somewhat in 1997. the combined revenue deficit of the 14 largest municipalities was 2. 9 billion kronur. it is estimated that local government debt increased from 36 billion kronur to 42 billion kronur in 1997. general government debt in relation to gdp declined from 56 percent in 1996 to 52. 7 percent in 1997, which, in light of the maastricht limit on government debt of 60 percent of gdp, is a fairly good debt position. monetary developments the central bank ’ s principal target remains price stability. the bank ’ s monetary instruments primarily influence inflation in the long run, and it is generally accepted that price stability is an important precondition for economic growth and improved living standards. domestically there is a good consensus about this goal, as is the case in most countries where central banks pursue the same or a similar objective. in an open economy such as the icelandic one a stable exchange rate is necessary for favourable price developments. a stable exchange rate has, therefore, been an intermediate target for monetary policy. the central bank implements monetary policy mainly by setting its own interest rates and by intervening on the money market. in the short run the bank can also influence the exchange rate