Iceland lifts capital controls from 2008 crisis

Economy recovers with 7.2% growth

REYKJAVIK: Iceland is back.

At a press conference on Sunday in Reykjavik, the government announced that, effective today, it would lift almost all of the remaining capital controls, allowing its citizens, corporations and pension funds full access to the global capital markets.

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.

Prime Minister Bjarni Benediktsson said this final step “will 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 press 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 in as restrictions were eased in stages.

The economy last year surged 7.2%, driven by household spending and investments. Unemployment is down at about 3% and inflation is under control.

The krona had rallied about 18% 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, according to Benediktsson.

“We don’t have any exact hints as to what comes next,” he said. “While pension funds have made full use of exemptions that were granted in the past years, the public hasn’t rushed to invest abroad after other controls were eased.’’

“We’ve rather been dealing with inflow problems,” Benediktsson said. “I hope that with the strengthening of the krona over the past few months we’re seeing a situation forming where the pension funds are motivated to increase their foreign investments.”

“The liberalisation should pave the wave for an upgrade and also a rate cut by the central bank,” said Valdimar Armann, chief executive at Gamma, a fund manager. “The economy is in a robust shape with healthy growth, low unemployment and a positive trade balance, which will continue to interest foreign investors to invest into Iceland.”

The central bank may lower its benchmark rate again on March 15 to 4.75% from 5%, Arion Bank has forecast. It has cut rates twice since August to cool krona gains.

The government also announced on Sunday that the central bank bought about 90 billion kronur ($834 million) at 137.5 krona per euro from remaining offshore holders of the currency to “safeguard the economy against monetary, exchange rate, and financial instability.”

“There remains about 100 billion kronur in such holdings,’’ the bank said. “Restrictions will still be in place for the funds that didn’t sell the central bank their offshore kronur at 137.5 per euro. They have another two weeks to complete the transactions.’’

The exchange rate was 28% higher than Iceland offered in a largely failed transaction to buy back offshore kronur in June. The country 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 krona in check.