The Republic of Iceland's prosperity and flexibility to react to economic challenges, as witnessed by the swift and nonrecessionary reduction of external imbalances in 2001, endow the country with an eminent capacity to absorb economic shocks. This capacity is further supported by a consensual and proactive political culture. Iceland has also made important progress in consolidating its public finances and is expected to continue on this course after the current hiatus. External debt, however, has rapidly risen to levels well above those of Iceland's peers in the 'A' rating category. Despite a faster-than-expected decline in the current account deficit, net external debt is expected to reach 246% of current account receipts (CARs) in 2002 and will decline only gradually to
