24th May 2022

Iceland capital controls to be lifted this year

  • Many Icelanders lost their savings during the crisis (Photo: Christine Zenino)

The first major steps towards lifting capital controls in Iceland, in place since the economic crisis hit the country in the autumn of 2008, will likely be taken later this month.

The capital controls were implemented as key part of an economic plan which the Icelandic government organised in cooperation with the International Monetary Fund (IMF) in the wake of the crisis.

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They were meant to prevent capital outflow as the country faced both banking and monetary crisis after the fall of country's three major banks.

Initially the controls were only meant to last for a relatively short period of time but have now been in place for over six years.

Certain steps have been taken during that time which were initially mostly aimed at minimising the offshore currency problem.

Later the government became more focused on the problem linked with settling the estates of the failed banks.

But a large amount of capital, up to 900 billion Icelandic kronur (ISK) according to a report from the finance ministry, is likely to leave the country, since around 95 percent of the banks creditors are foreign.

This has raised fears that it will cause economic and financial instability.

Never closer to lifting the controls

Last summer the government hired a team of domestic experts and foreign advisers, headed by financial adviser Glenn V. Kim, to work on a comprehensive solution for lifting the controls.

The team handed in their suggestions in early December. This prompted Finance Minister Bjarni Benediktsson to tell Icelandic parliament that the government had never been closer to lifting the capital controls.

Lee Buchheit, a senior government adviser, also stated in an interview with the newspaper Morgunbladid that it was realistic to assume that the government could introduce its plan early this year.

In his New Year's Eve address Prime Minister Sigmundur Davíd Gunnlaugsson said the biggest obstacle to lifting the controls were the estates of the failed banks which had been in operation for far too long.

No further burden for the Icelandic people

Icelandic authorities have been in talks with the winding-up committees of the failed banks about what conditions they have to meet to be able to get exemptions from the capital controls.

But those talks have not been successful. The authorities have not, however, been in direct talks with the creditors of the failed banks.

According to Morgunbladid there has been talk about somehow forcing the exchange of offshore currency and implementing an exit tax of around 35 percent on all transfers out of the country.

As is, this could mean that the estates of the failed banks would have to pay some hundreds of billion kronur to the Icelandic state if they want to settle the claims as their assets are valued at around 2,600 billion kronur.

The winding-up committees have pledged to challenge that tax, arguing that it amounts to confiscation of assets.

Although it is not yet clear what measures will be taken, the prime minister has promised that it will not involve further financial burden for Icelanders, many of whom lost their life savings in the crisis.

The island also saw unemployment rise to 9 percent, amid tax hikes and public spending cuts. More recently the economy has been showing signs of recovery.

Unemployment was 3.1 percent last November and 3.3 percent growth is forecast for this year.

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