- is the high external debt position of the economy. since the treasury has been retiring its foreign debt over the past few years, the ratings agencies ’ comments are addressed elsewhere, in particular to the banks. cautionary remarks based on such arguments should of course be heeded by all the banks in iceland that have been borrowing abroad recently. it is in everyone ’ s interest to safeguard iceland ’ s credit ratings and, where possible, strengthen them. payment and settlement systems at the central bank ’ s annual meetings in recent years i have outlined the work it has undertaken in development of payment and settlement systems. two types of payment system are in operation in iceland, both of them settlement systems, i. e. the central bank ’ s real - time gross settlement system and the netting system operated by fjolgreiðslumiðlun hf. settlements of securities transactions are processed by the former system. participants are the commercial banks, savings banks and central bank. the icelandic banks ’ data centre provides software services for both systems and the central bank acts as a settlement provider. these systems are described in detail in the central bank ’ s annual report. since 2001, the central bank has been working in close collaboration with fjolgreiðslumiðlun, the icelandic banks ’ data centre and credit institutions on development of payment systems with the aim of bringing them into compliance with the bis ten core principles for systemically important payment systems. this work has focused on clarifying the qualifications and responsibility of management and netting system participants. settlement processes have been reviewed with respect to finality of payments and timing of settlements. risk management has been strengthened by defining and monitoring risks, making debt positions visible, restricting debt positions and requiring collateral for settlements. arrangements for oversight, communication of information and contingency plans have also been reviewed. an important landmark in the development of these systems was reached last year when two sets of rules were adopted, on the central bank of iceland ’ s real - time gross settlement system and on activities of netting systems. at the end of the year the systems were designated and notified to the efta surveillance authority. the real - time gross settlement system and netting system have thereby been recognised as legitimate payment systems in iceland and across the european economic area. also in 2003, the central bank and fme [ financial supervisory authority ] signed a cooperation agreement on oversight and prudential supervision of payment and settlement systems. i would like to express my special thanks for the good cooperation

the current account deficit was equivalent to 5½ % of gdp. a recession in exports was a strong contributing factor, along with rising imports driven by private consumption, but much of the widening current account deficit may be ascribed to imports of investment goods for a hydropower project. in this respect the deficit is benign in origin, although the pace of increase so early on in the upswing is a cause of some concern. as is commonly the case at the onset of a growth episode, the increase in demand for labour was fairly slow during the year. the unemployment rate came down more slowly than had widely been expected given the surge in vacancies registered with employment agencies. seasonally adjusted unemployment began to decline slowly from the autumn onwards. on the other hand, the number of vacancies doubled last year and demand for foreign labour picked up as the year wore on. in february 2004, seasonally adjusted unemployment was 2. 9 % and had gone down by 0. 1 % per month since september 2003. productivity growth appears to have been exceptionally high last year. as in recent years, domestic wage rises outstripped those among iceland ’ s main trading partner countries. measured by the wage index, domestic wages rose by 5½ % in 2003, which represents 3½ % growth in real terms. exchange rate developments and foreign reserves under the new monetary framework, iceland abandoned a fixed exchange rate regime and the krona was floated in the market. every so often the argument is put forward that the central bank can determine the exchange rate, and some people criticise it if the exchange rate develops along different lines from what they had expected. such debate was far less prominent in 2003 than the year before, which definitely indicates a growing awareness that the central bank cannot exert a decisive impact on the exchange rate of the krona. for the first part of the year the krona strengthened, probably as the result of expectations of currency inflows in connection with investments in hydropower and aluminium. around the middle of the year the krona depreciated again. uncertainty about revenues from the keflavik nato base and about the norðural aluminium smelter expansion, and perhaps to some extent stepped - up central bank currency purchases, are probable explanations. around the same time, currency inflows diminished in connection with credit movements. the krona began to appreciate again in september, around the time of reports that the norðural expansion looked more likely to go ahead and less uncertainty about operation