Einkavæðingar plan AGS

11. There are headwinds to the recovery, although some upside is also possible. The

main short-run risks are further delays in investments in energy-intensive sectors, high fiscal

multipliers (to the extent that the

distressed private sector cannot

offset the impact of necessary fiscal

restraint on domestic demand), and

possible emigration. Constraints on

the reallocation of resources from

non-tradable to tradable sectors—

lack of financing and certain aspects

of regulatory policies—may impede

recovery in the medium term. On

the other hand, there is ample

potential for higher FDI in response

to the improvements in competitiveness. And program projections for current account related

income receipts are very conservative (and to the extent they are higher, this would mean less

pressure for adjustment through the trade balance, more real appreciation, and a balance

sheet related boost).