Amending bill of legislation on liberalisation of capital controls on offshore króna holders and implementation of special reserve requirement on capital inflows

This morning the Government agreed to present to Parliament a bill of legislation from the Minister of Finance and Economic Affairs, which provides for amendments to the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016, and the Foreign Exchange Act, no. 87/1992.

Liberalisation of capital controls on offshore króna holders

The amendments to the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions that are proposed in the bill of legislation entail permission for owners of offshore krónur either to close out their offshore króna positions in full by exchanging them for foreign currency in the onshore market or to hold them as unrestricted onshore króna assets in cases involving continuous ownership from the time before the capital controls were imposed. If the bill is passed into law, this will provide expanded authorisations for withdrawals from accounts subject to special restrictions. These expanded authorisations are of three types. First is a general authorisation for all holders of offshore krónur to release their offshore króna assets in order to purchase foreign currency and export it to an account abroad. Second is an authorisation for offshore króna holders that have owned offshore króna assets continuously since 28 November 2008 to release those offshore króna assets from the legal restrictions. Third is an authorisation for individuals to withdraw up to 100 m.kr. from accounts subject to special restrictions. The amendments proposed here are based on the requirement that the efficacy of the special reserve requirement on capital inflows not be undermined.

The Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016, entered into force on 22 May 2016. The Act was an important element in the authorities’ capital account liberalisation strategy. When the Act entered into force, it was foreseen that the restrictions it provided for would be temporary measures and that the authorities would once again aim to lift the capital controls on offshore króna assets when conditions warranted it. The authorities have worked systematically and in various ways to solve the problem represented by offshore króna assets during the capital account liberalisation process, and the stock of offshore króna assets has been reduced substantially, or from 319 b.kr. to 84 b.kr.

Changes in implementation of the special reserve requirement on capital inflows

The proposed amendment allows for increased flexibility concerning the form of the special reserve requirement on new inflows of foreign currency, but it does not provide for changes in the holding period or the special reserve ratio.

Until now, the parties concerned were required to satisfy the special reserve requirement by depositing funds to a term deposit account with a deposit institution. This arrangement is considered, among other things, to have complicated matters for investors interested in investing in Iceland, as in some instances they are not authorised to invest if they cannot sell the investment at any time. In order to respond to this, it is proposed that it be made possible to satisfy the special reserve requirement via repo transactions with Central Bank certificates of deposit. Furthermore, the new arrangement allows investors to release funds during the holding period by settling with a financial institution. It will remain possible to satisfy the special reserve requirement by depositing funds to a term deposit account in the same manner as before.