Iceland: lifting controls on movements of capital

The Government of Iceland has announced that it will lift the capital controls it introduced after the banking crash in October 2008. Since that date, in close connection with the International Monetary Fund, the Government has set the basis for gradually lifting controls. Now, thanks to new regulations, the controls have essentially been lifted for both citizens and enterprises. The residents of Iceland (including pension funds) can now hold financial assets abroad and the Icelandic krona is again fully convertible. Exceptions still remain: the trade of derivatives for purposes other than hedging, transactions in foreign currencies between residents and non-residents made without the intermediation of a financial institution, and, in some cases, loans by residents to non-residents in foreign currencies. The deregulation does not apply to the non-resident owners of huge amounts of securities and assets in Icelandic kronas “trapped” in the Country following the adoption of the restrictions (the so-called “offshore krona assets”), which are still under ad hoc regulations. As indicated by Benedikt Johannesson, Minister of Finance, and by Mar Gudmunsson, Governor of the Central Bank of Iceland, the Country’s Government and monetary authorities have now decided to proceed with a full liberalisation process because the measures gradually introduced in the last few months have not caused the much feared capital outflows. On the contrary, the currency reserves have increased significantly (from 600 to 800 billion Icelandic kronas in less than two years, that is, since the deregulation process began), thus allowing the Central Bank to proceed with the purchase of “offshore” assets.