The Arctic Chamber of Commerce notes the announcement of the Icelandic Government that capital controls have been lifted with effect on Tuesday.
The Government of Iceland today announces that capital controls on the country's individuals, firms, and pension funds have been lifted with effect on Tuesday. The removal of the capital controls, which stabilised the currency and economy during the country's unprecedented financial crash, represents the completion of Iceland's return to international financial markets.
The Central Bank of Iceland also today announces it has acquired approx. 90bn króna from offshore holders of the currency, a move which will safeguard the economy against monetary, exchange rate, and financial instability. The Central Bank will buy offshore króna assets using its foreign exchange reserves, which are at an all-time high.
The removal of the capital controls has also been supported by updates to the rules on foreign exchange and requirements for special reserve requirements for new foreign currency inflows.
Benedikt Jóhannesson, minister of finance and economic affairs says: “Iceland's careful, measured approach to lift capital controls was developed and approved with domestic and international support. As a result of this structured plan, our diversified economy is larger than ever before and expected to continue to grow at a robust pace this year. Our sustainable fisheries, tourism, tech start-ups and renewable energy sectors have grown rapidly, providing a strong backbone to our economy.”
“This move is the critical first step in the new Government's strategy for the country's financial future, and we can now look ahead with a healthier, stronger and more diversified economy.”
The implementation of capital controls in 2008 prevented a widespread economic crash, shielding the economy from severe depreciation. This decision, made with the support of the International Monetary Fund, reduced the impact on foreign holders of króna, insulating Icelanders and non-residents from the severe short-term turbulence.
For the past year, the Government and Central Bank of Iceland have been lifting these controls through an incremental, measured process that focused on protecting the currency, addressing a balance of payments problem and tempering shocks to the Icelandic economy.
Offshore króna holders will be invited to conduct transactions with the Bank at the same exchange rate provided for in the agreement over the next two weeks. Those offshore króna not sold to the Central Bank will remain subject to restrictions until the applicable law has been reviewed and amended.
The Government has also created a taskforce dedicated to reviewing monetary and currency policies with a view to creating a framework for the country's economic success. The taskforce, which includes economists Dr. Ásgeir Jónsson and Ásdís Kristjánsdóttir, and former minister Illugi Gunnarsson, will review and analyse the country's GDP growth, inflation, interest rates, exchange rates, unemployment and inflation to ensure stable economic progress, providing the conditions to attract long-term business investment.
Following the 2008 financial and currency crisis and, after years of significant cross-border bank flows and pre-crisis inflow surges, Iceland was faced with an unprecedented balance of payment challenge. Following approval from the International Monetary Fund (IMF), Iceland took protective measures in the form of capital controls which prevented excessive capital flight and stabilised the Icelandic economy. The enforcement of controls reduced the impact on foreign holders of króna, insulating Icelanders and non-residents from further shock. This decisive intervention prevented a widespread economic crash, shielding resident savings and pension funds from severe depreciation.
Although the capital controls were necessary, they have placed an onerous burden on Iceland‘s citizens, companies and pension funds. The economy also had to deal with restrictions on foreign-denominated investment and repatriation requirements. This was particularly detrimental to cross-border companies and start-ups with capital controls requiring substantial administrative costs and indirect expense.
In spite of this, the Icelandic economy has recovered strongly in recent years. Many of the problems which caused the crash have been resolved. Concurrent with this, the capital controls have been eased in several steps. The capital account liberalisation strategy presented in 2015 included an auction of offshore króna to be held in summer 2016. The measures announced today are the final element in that strategy.
Capital flows to and from Iceland are now unrestricted apart from restrictions to carry trade and derivatives denominated in ISK. Individuals, companies, and pension funds can now invest abroad without restrictions. This is important for the pension funds which need to diversify risk in their investment portfolios.
The liberalisation of capital controls effected now is laid down in new rules on foreign exchange issued by the Central Bank. After the liberalisation of controls, prudential rules to restrict carry trade are still in effect, carry trade having been the biggest contributor to the offshore króna overhang. Also, the offshore króna holders that have elected neither to participate in Central Bank auctions nor to participate in this agreement will not be able to move their assets.