was substantially below a level reconcilable with long - term equilibrium. this occurred at a time when the price of key exports was very high, making the years 2000 and 2001 especially favourable for the export sector and in fact also for import competing sectors. enterprises in these sectors now understandably feel the effects of the rise in the exchange rate. it is not to be expected, however, that the same conditions will again arise in these sectors as prevailed, for example, during 2001 and in the early part of 2002. in this connection it could be mentioned that, based on the predictions on performance made by financial enterprises, the contribution margin in fisheries companies will be fairly good this year, although not as good as in 2001 and 2002, which were quite exceptional. in the february issue of its monetary bulletin, the central bank published an analysis of the proposed major construction projects in east iceland and possible responses for economic management. the article concludes that unless economic counter - measures are taken, the projects will create overheating in the economy, inflation and instability. although their scope will be considerable, the projects are not so large that economic stability cannot be preserved and inflation contained by means of appropriate responses in economic management. mitigating measures would be most effective if they involved both monetary and fiscal restraint, as well as internal adjustment of the national economy, including a rise in the exchange rate. the more restraint shown on the fiscal side, the less need there will be to raise interest rates. a higher krona exchange rate also means less cause to raise interest rates. the exchange rate was fairly stable from the spring of 2002 until early this winter. it then began to rise and continued to do so steadily until early february of this year. the central bank has stated its view that the exchange rate rise in recent months has been primarily due to the effect of the proposed major construction projects in east iceland. the operations of the aluminium smelter will likely cause the equilibrium exchange rate for the krona to be higher than otherwise. furthermore, it appears evident that the influx of foreign currency in connection with these projects will be considerable, with higher domestic interest rates than otherwise. all of this affects market expectations and makes the krona exchange rate higher than it would be in the absence of plans for major development in east iceland. the economy could thus be said to have already begun adaptation to the coming projects, i. e. the exchange rate adjustment has begun and is even well on its way. in view of what has

davið oddsson : the challenges of globalisation for small open economies with independent currencies opening address by mr davið oddsson, chairman of the board of governors of the central bank of iceland, at a conference on the challenges of globalisation for small open economies with independent currencies, reykjavik, 1 june 2007. * * * on behalf of the board of governors of the central bank of iceland i welcome the cooperation between the bank and the international monetary fund on organising the conference that is now commencing. in fact i consider the theme of this conference very apt and take the liberty of stating that a better location for such discussion could hardly be found. this claim is not only based on the fact that iceland is currently staging a kind of practical experiment in this field. while it can be argued that such experiments are taking place in many other countries, the advantage of iceland ’ s experiment is that its economic developments happen to have been quite notable over the past few years. certain aspects of recent events raise significant questions for this conference. there is no question that iceland was a relative latecomer to the top league of active market economies : for a long time, iceland ’ s rules and norms did not qualify it for inclusion. but iceland ’ s economic framework has been completely transformed in the space of a relatively few years and its business world has undergone enormous upheavals at the same time. looking at just the past four or five years, there is no doubt that certain laws of economics have been stretched to their limits and, in order to convince outsiders that the stakes have not been set too high, we have had to insist – and rightly so, i hope – that iceland ’ s economic environment has various advantages that are not immediately obvious to those who are accustomed to operating in larger and more restrictive conditions. here there is great flexibility, official measures are very transparent and channels of communication are shorter, which enables easier decision - making so that households, businesses and the authorities are quicker to respond to economic incentives or challenges than is the case elsewhere. to give you all a more complex and interesting topic to discuss at a conference such as this, the government itself promoted a number of measures that will benefit iceland and its people in the long run. however, their timing and scope may have been more questionable. thus the government itself was mostly responsible for attracting the largest single investment that has ever been made in iceland, to which the state - owned power company, landsvirkjun, had