Less Painful to Drop Capital Controls Quickly?

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Less Painful to Drop Capital Controls Quickly?

Money - Icelandic Króna

Photo: Páll Kjartansson

A new report claims that Iceland’s capital controls, imposed at the start of the financial crisis, should be removed quickly rather than slowly.

Removing the capital controls quickly would be painful for Iceland and its economy, but less painful than dragging the process out. This is according to a new report by the international analysis and consulting company KPMG, which was released today.

There is a lot of uncertainty about the removal of controls on the flow of currency into and out of Iceland. KPMG got a group of business leaders and business experts to create four different scenarios on what might happen. The scenarios are based on how quickly the controls are lifted, and what trading conditions will be like in Iceland’s biggest trading partner nations over the next five years.

The prediction is least optimistic in the scenario involving recession in partner nations and a gradual lifting of Iceland’s currency controls, RÚV reports. This scenario has been named The Pits. The other three scenarios are more positive. Sveinbjörn Thoroddsen, a partner in the consulting department at KPMG, says that the results point to a situation whereby it would be more advantageous in the long term to speed up the removal of the controls. “If the controls are removed very quickly, it is obvious it won’t be painless. But the worse option is for it to happen very slowly over a long time.”

The longer the controls linger, the worse the impact on the economy in the long term. “We find ourselves in an environment where companies flee the country, we live with persistent inflation, high interest rates and lowering purchasing power.”

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