At a press conference yesterday, Icelandic Prime Minister Bjarni Benediktsson and Minister of Finance Benedikt Jóhannesson announced that all capital controls for individuals, companies and pension funds will be lifted tomorrow, RÚV reports. They have been effect since November of 2008. This will be accomplished, not by passing new laws, but with new rules on foreign exchange, set by the Central Bank of Iceland. Thus, restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency have largely been lifted.
The Central Bank of Iceland has concluded an agreement with owners of offshore króna assets. Under the agreement, the Bank will purchase offshore króna assets from them in the amount of equivalent of close to ISK 90 billion at an exchange rate of ISK 137.50 per Euro, which is about 20 percent more than the exchange rate reported on Friday, last week. Offshore króna holders who have not made an agreement with the bank will be invited to do so in the next two weeks.
Since the bill of legislation on capital account liberalization was passed on October 2016, restrictions on households and businesses have been eased substantially without significant outflows of foreign currency. At the same time, the foreign exchange reserves have grown markedly. This, together with the above-mentioned agreement, reduces the risk accompanying continued liberalization.
From June 2015, when the three-phase capital account liberalization strategy was introduced, through the end of February 2017, the Central Bank’s foreign exchange reserves grew from about ISK 600 billion (USD 5.38 billion, EUR 5.05) to about ISK 800 billion (USD 7.18 billion, EUR 6.74 billion) in spite of foreign loan payments, the appreciation of the króna, and the June 2016 foreign currency auction. The build-up of the reserves enables the bank to participate in the above-described transactions. After the transactions, the reserves will be of an amount well above the threshold specified during the prelude to the liberalization process.
According to the Bank’s assessment, offshore króna assets amounted to approximately ISK 200 billion (USD 1.8 billion, EUR 1.68 billion) at the end of February 2017. After the transactions announced here are complete, the outstanding stock of offshore króna assets will total about ISK 100 billion (USD 0.9 billion, EUR 0.84 billion). The amendments made yesterday to the bank’s rules on foreign exchange do not affect offshore króna holders’ authorizations, and those not participating in the agreement will be invited to conduct transactions with the Bank at the exchange rate provided for in the agreement over the next two weeks.
The transactions stave off the risk of large-scale outflows of offshore krónur through the foreign exchange market upon liberalization of capital controls. Therefore, they reduce the systemic risk associated with a large stock of offshore króna assets, which, in the bank’s opinion, could have caused monetary, exchange rate, and financial instability.