The Impact of Tourism in Iceland

Dr. Ásgeir Jónsson

Associate Professor, Department of Economics

University of Iceland

Economic impact

A paradigm shift

• In 2012 there was a paradigm shift in Icelandic tourism

– In three years the number of foreign visitors has almost doubled, from 560 thousand in

2011 to about one million in 2014.

– The underlying growth seems to be 20-25% in each year.

• The shift is not caused by any single reason

– Increased name recognition/brand awareness of both Iceland and Reykjavík caused by a

financial collapse, volcanic eruptions, Hollywood movies shot on location, Björk, and etc.

– Word of mouth praise from past visitors, leading to more visits.

– A great increase in flight availability – now Easy Jet flies to Iceland.

• The Tourist sector is becoming a leader in Iceland´s economy

– In the labor market as source of new jobs.

– In the currency market, as the main source of new export revenue

– In the housing market, as a new demand for small, centrally located apartments.

A doubling in three years

The number of foreign visitors, 1949-2014

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A new growth territory, 20-25%

The growth of foreign visits, from year to year

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- Fjölgun ferðamanna á hverju ári – í þúsundum.

Sívaxandi hagræn örvun frá ferðaþjónustu

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Foreign trade and currency

market

- Ársfjórðungslegur vöxtur einkaneyslu 1998-2015, þriggja fjórðunga hlaupandi

meðaltal

10% aukning kaupmáttar á einu ári – Íslandsmet í nánd?

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- Launakostnaður og framleiðni 2008 til 2015 og spá Seðlabankans fram til 2018

Bara launahækkanir engin framleiðni?

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Launakostnaður á framleidda einingu Framleiðni

Með hærri launum og stígandi krónu, tapast samkeppnishæfni

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Miðað við verðlag Miðað við laun

- Raungengi, á mælikvarða launa og verðlags 1986-2015

- Vöru- og þjónustujöfnuður, milljarðar króna á hverjum ársfjórðungi

Ferðaþjónusta er nú leiðandi í gjaldeyrissköpun

-80

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Þjónustujöfnuður Vöruskiptajöfnuður

- Viðskiptajöfnuður sem hlutfall af landsframleiðslu

Viðskiptajöfnuður – 5% af landsframleiðslu

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- ISK/EUR frá 2009 til 2016

Krónan eru undir þrýstingi – til styrkingar

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100 milljarða svigrúm til erlendra

fjárfestinga

• Greiðslujöfnuður er bókhaldsjafna fjárstrauma inn og út úr hagkerfinu:

Viðskiptajöfnuður + fjármagnsjöfnuður = greiðslujöfnuður

• Sterkir hagrænir hvatar halda greiðslujöfnuði á núlli þannig að útflæði og

innflæði nettast út og fjármagn fossar hvorki inn né út úr hagkerfinu.

• Þess vegna spegla fjármagnsjöfnuður og viðskiptajöfnuður hvorn annan;

afgangur annars þeirra leiðir til halla á hinum og svo öfugt.

• Þrátt fyrir ofurvöxt ferðaþjónustu hefur viðskiptajöfnuður haldist stöðugur – það

er 5%af landsframleiðslu sem er um 100 milljarðar.

• 5% viðskiptaafgangur gefur svigrúm fyrir 100 milljarða útflæði á

fjármagnsjöfnuði vegna erlendra fjárfestinga innlendra aðila.

Regional impact

16

Tourism is essentially a service industry

• Large population centers simply have an advantage in services, with

regard to quality, diversity and even price.

• Therefore, money from tourism is mostly earned in Reykjavik or other

large population centers – where you can actually buy something.

• Indeed, in many parts it is almost impossible for tourists to spend money

on other things than gasoline, hamburgers and perhaps accommodation.

• Foreign visits to the rural areas are confined to the summer months and

can thus not create a stable year long employment.

• Moreover, since tourists most often travel on foot their activities are very

clustered within the cities they dwell.

• The center of the tourist growth is now 101 Reykjavik – the downtown –

which has become a new hub for economic activity and export earnings.

• Thus, the downtown long suffering from suburbanization and re-direction

of commerce into malls, has been re-vitalized

17

Tourists spent their time in the rural areas… but

their money in Reykjavik

Days spent in Reykjavik% of total days spent in Iceland

Earned income from tourism in Reykjavik% of total earned income from toursm in Iceland

18

Only 11% of earned income from tourism is not spent in

close approximity to either Reykjavik or Akureyri – the main

population centers of Iceland

76%

8%

5%

11%

Reykjavik

< 1 hourfrom Reykjavik

Akureyri & Eyjafjörður

other areas

19

Earned income ISK from each night spent on paid

accommodation of a foreign visitor (figures from 2003)

- 10.000 20.000 30.000 40.000 50.000 60.000

Reykjavik

Akureyri

< 1 hour driving dist.

from Reykjavik

< 1 hour driving dist.

from Akureyri

Other areas

20

A new promise for rural areas?

• The population of many rural areas in Iceland has been shrinking very

rapidly for the past few years.

• This is particularly true for townships in the East, West (Vest fjords)

and North, which lie at sea and are surrounded by mountains.

• For townships in these parts of country a 10-30% total population

decline since 1980 is not uncommon.

• In these areas, the local service economy has collapsed.– partly due to better transportation and better connection to large population areas

– partly because population has gone below the threshold needed to sustain commerce

and services.

• Although, Reykjavík is taking the largest slice from the tourist revenue,

there is plenty to go for the other smaller players.– The service sector is re-vitalizing the rural service economy with new demand for

groceries, food, and etc.

– This is particularity observable along the main roads leading south-east and north-west

from Reykjavík, which are the most frequented by tourists.

Future challenges

22

The benefits of scale

• The population of Iceland is almost too small to support the

infrastructure and specialization needed for a developed economy.

• Foreign visits have similar effect as a population increase, without the

welfare costs.

• The main thrust of the taxation is Iceland indirect, both through a very

high value-added tax and levies alcohol and gasoline which one has to

pay to use the road system.

• Iceland would also be unable to maintain an international airport with

the current flight frequency or number of destinations without the

foreign visits.

• So, for the growth of the tourist industry has been almost like a free

lunch for the state – since the foreign visitors are just the infrastructure

that is already in place and pay a lot of taxes.

• That might be changing.

The end of free lunch in tourism

• The tax revenue from tourism is collected centrally – however the costs are

incurred locally. – May local governments are feeling strained by an increase in population that is not really paying

any local taxes. A new cost-sharing is needed between central and local government.

• Iceland´s delicate natural wonders can only sustain a limited number of

tramplers – that limit has been reached in some areas– Many traditional rights in Iceland, like a free and unbridled access to the highland are under

threat for both safety reason and natural preservation.

• With 1 million visitors – Iceland’s infrastructure has reached its limits. – For continued growth, very expensive investments are needed with a larger airport, improved

roads and extended security in the highland and etc.

• Iceland’s own inhabitants are getting increasingly more irritated by the

increased number of visitors. – The foreign tourist are crowding out Icelanders from many areas of their own country.

Conclusion

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The Pros and Cons

• The surge in tourism in 2012 came at very favorable time – Icelandic economy had shrunk considerably after the banking collapse of 2008 and the

export industry was stagnant despite a much lower currency.

– The tourist sector has been leading the economic recovery in past three years.

• The increased export revenue came at little cost– All the infrastructure was already there.

• Now, it’s the end of free lunch– After the 1 million mark, there is a great need for infrastructure investments and re-

organization of various sorts.

• The tourist sector can not be a future growth leader for Iceland.– Most of the jobs created are low-paying, low skill service employment that is being met by

importing cheap foreign labor.

– Iceland can not welcome an unlimited number of tourists – as it will create burden for

the population as well as the precarious nature.

• In not so distant future, Iceland will probably place limits to the growth of

the tourist sector.