The next steps in capital account liberalisation
This afternoon the Icelandic Minister of Finance and Economic Affairs, Bjarni Benediktsson, submitted before Parliament a bill of Law that sets forth the next steps towards liberalisation of capital controls in Iceland.
The bill is a part in the comprehensive capital account liberalisation strategy introduced by the Icelandic authorities in June 2015. The first step in that strategy was to solve the problem created by the failed financial institutions' estates, and that problem has now been solved in full.
In accordance with the authorities' action plan, the current phase addresses the problem created by the so-called offshore krónur. Offshore króna assets currently total over ISK 300 billion and are considered highly likely to seek an exit from the Icelandic economy with potentially negative consequences for the balance of payments and financial stability. Examples of such assets are deposits, funds held in custodial accounts, bonds, and bills. The offshore króna assets will continue to be subject to special restrictions, and the main objective of the bill of legislation is to segregate them more clearly and securely than is currently the case.
If the bill if passed into law, the Central Bank of Iceland aims to hold a foreign currency auction in which all owners of offshore krónur will be given the option of exchanging their offshore króna assets for euros.
Those offshore króna assets that are not used in the Central Bank auction will be subjected to the restrictions outlined in the bill of legislation.
For nearly eight years, the capital controls have put restrictions on risk diversification in resident investors' asset portfolios and have limited domestic firms' ability to participate in collaborative projects with non-residents and to seek investments abroad. The resulting economic complications grow greater over time.
This phase in the authorities' capital account liberalisation strategy paves the way for further steps, which will focus on households and businesses in Iceland.
- Bill of Legislation on the treatment of króna-denominated assets subject to special restrictions
- Q&A (1. Act on the treatment of króna-denominated assets subject to special restrictions 2. Central Bank of Iceland foreign currency auction)