Urbanisation in Iceland throughout the twentieth century led to a population concentration in the capital area, with 70% living near Reykjavik by the end of the century. Iceland currently has 63 municipalities, many of which are small, with 46% having fewer than 1000 residents. Municipal autonomy is constitutionally protected, resulting in voluntary, state-driven amalgamations rather than mandatory reforms. Horizontal coordination among municipalities occurs through regional associations and the Icelandic Association of Local Authorities, which play vital roles in policy coordination and service provision. Despite their growing importance, these associations often operate with limited staff and resources. Recent reforms focus on strategic planning for municipal affairs up to 2033, emphasising infrastructure, financial stability, and civic participation. Challenges include managing rapid population growth, housing shortages, and balancing development between the capital and rural areas. Proposals like recognising Akureyri as a city aim to decentralise resources and opportunities. The rapid increase in immigration and the evacuation of Grindavík due to volcanic activity highlight the need for strategic planning and intermunicipal cooperation to address these ongoing challenges.