The Icelandic government on Sunday announced that it would lift almost all of the remaining capital controls, allowing Icelanders, corporations and pension funds full access to the global capital markets, effective tomorrow.
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.
Icelandic 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 news 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.
The economy last year surged 7.2 percent, driven by household spending and investments. Unemployment is down to about 3 percent and inflation is under control.
The Icelandic krona has rallied about 18 percent 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, Benediktsson said.
“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 has not 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 kronur 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 might lower its benchmark rate again on Wednesday from 5 percent to 4.75 percent, Arion Bank said.
It has cut rates twice since August last year to cool Icelandic kronur gains as inflation fades.
The government also said that the central bank bought about 90 billion Icelandic kronur (US$837 million) at 137.5 Icelandic kronur 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 Icelandic kronur in such holdings, the bank said.
Restrictions will still be in place for the funds that did not sell the central bank their offshore Icelandic kronur at 137.5 per euro. They have another two weeks to complete the transactions, the central bank said.
The exchange rate was 28 percent higher than what Iceland offered in a largely failed transaction to buy back offshore Icelandic kronur in June last year.
Iceland has since been embroiled in a legal battle with US funds Eaton Vance Corp and Autonomy Capital LP, who have argued the imposed discount is illegal.
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 Icelandic krona in check.
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