Iceland exits capital controls eight years after banking crash

Government hopes move will help ease capital ‘inflow problem’

Iceland’s Central Bank governor Mar Gudmundsson (left), Prime Minister Bjarni Benediktsson, and Finance minister Benedikt Johannesson announcing the end of capital controls. REUTERS/Geirix

Iceland’s Central Bank governor Mar Gudmundsson (left), Prime Minister Bjarni Benediktsson, and Finance minister Benedikt Johannesson announcing the end of capital controls. REUTERS/Geirix

 

Iceland is back. The government at a hastily called press conference on Sunday in Reykjavik announced that, effective Tuesday, it will lift almost all of the remaining capital controls, allowing its citizens, corporations and pension funds full access to the global capital markets.

The move ends an eight-year struggle to clean up after the 2008 banking collapse, which triggered the worst recession in more than six decades and enveloped the north Atlantic island of 340,000 people in political turmoil.

Prime minister Bjarni Benediktsson said this final step would “create more trust in the Icelandic economy”, with the most significant move being the removal of a requirement for businesses to return foreign exchange. “That will make direct foreign investment easier,” he said in an interview after the press conference.

The controls are being lifted as Iceland is booming, helped by a record surge in tourism. The economy is even at risk of overheating with money flowing back into the economy as the controls have been eased in steps.

Unemployment down

The economy last year surged 7.2 per cent, driven by household spending and investments. Unemployment is down at about 3 per cent and inflation is under control. The krona has rallied about 18 per cent against the euro over the past year, in part as traders have been attracted to the nation’s higher interest rates.

The government hopes these next moves will ease pressure on the currency to appreciate, according to Benediktsson.

“We don’t have any exact hints as to what comes next,” he said. While pension funds have taken full use of exemptions that were granted in the past years, the public hasn’t rushed to invest abroad after other controls were eased, he said.

“We’ve rather been dealing with inflow problems,” he said. “I hope that with the strengthening of the krona over the past few months we’re seeing a situation forming where the pension funds are motivated to increase their foreign investments.”

The central bank may lower its benchmark rate again on March 15th to 4.75 per cent from 5 per cent, according to Arion Bank. It has cut rates twice since August to cool krona gains as inflation fades.

The government also announced on Sunday that the central bank bought about 90 billion kronur (€783 million) at 137.5 krona per euro from remaining offshore holders of the currency to “safeguard the economy against monetary, exchange rate, and financial instability”. There now remains about 100 billion kronur in such holdings. The krona traded at 114.95 per euro as of Friday.

Restrictions will still be in place for some of the funds that won’t sell the central bank their offshore kronur at 137.5 per euro. They have another two weeks to complete the transactions, the central bank said.

The central bank also tightened rules to “create a special reserve base for parties subject to special reserve requirements” to limit inflows to Iceland and keep the krona in check.

– Bloomberg