Photographer: Arnaldur Halldorsson/Bloomberg

Iceland Takes ‘Large Step’ in Exiting Capital Control Regime

Iceland eased restrictions on investments abroad for households and opened up for outward direct investments as it took another step in removing its almost eight-year-old capital control regime.

In a bill that will be introduced Wednesday, the government proposed individuals be allowed to invest 100 million kronur ($850,000) in securities a year and also to buy at least one property abroad. Outward foreign direct investments will be unrestricted, but subject to confirmation by the central bank, the government said. A slew of other restrictions were also eased and limits will be lifted further on Jan. 1, according to the bill.

Bjarni Benediktsson

Photographer: Arnaldur Halldorsson/Bloomberg

"This is a very large step in gaining normalcy in capital movements to and from Iceland,” Finance Minister Bjarni Benediktsson said in an interview Tuesday after a press conference in Reykjavik. “This is a rational continuance of what we’ve been doing so far -- preparing the capital controls’ removal process.”

Central bank Governor Mar Gudmundsson said that currency reserves, banks and households were resilient enough these steps. Estimates suggest that the easing could trigger outflows of 40 billion kronur to 165 billion kronur in first and second steps, he said at the press conference. Iceland had foreign currency reserves of 680 billion kronur at the end of July.

The krona was little changed, trading at 132.15 per euro. It has risen more than 5 percent over the past three months against the European common currency and the dollar.

The krona restrictions were imposed in 2008 after Iceland’s three biggest banks collapsed under a mountain of $85 billion in debt. The government late last year freed creditors in the failed banks and this year held an auction for offshore krona holders.

"In the past two years we’ve seen a complete turnaround in all our economic circumstances," Asgeir Jonsson, associate professor in economics at the University of Iceland, said in a telephone interview. "Iceland has a huge current account surplus, which has backed up the krona enormously. We now need some capital to exit the economy. We need outflow just to ensure a balance in the system."

Successive Icelandic governments have won praise from economists and the International Monetary Fund for their handling of the crisis, which has included writing off consumer debt and forcing haircuts on foreign investors. The economy has now largely recovered, with growth above 4 percent, unemployment down to 2 percent and inflation near 1 percent.

For the majority of Icelanders “it’s very unlikely that they’ll ever bump into the capital controls in their daily life after this bill has been passed,” Benediktsson said. “Icelanders have until now mostly noticed the controls when they’ve been traveling abroad. Those rules will be significantly changed in the new year."

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