Iceland Curtails Capital Controls From 2008

The Icelandic Ministry of Finance and Economic Affairs revealed on March 14 that the government curtailed all capital controls on individuals, businesses, and pension funds. The controls were in place to limit flow of capital in and out of Iceland following the 2008 financial crisis. With the capital controls lifted, Icelandic citizens and capital firms have almost full access to global markets for the first time since 2008. Statistics from the Central Bank of Iceland (CBI) reveal that by the third quarter of 2008, Icelandic banks had accumulated $38 billion in external debt, prompting capital controls that prevented foreign investors from pulling assets out of Iceland, which would have further plunged the currency, the króna (ISK), and the Icelandic economy into despair.

Since the Ministry’s announcement to close the ISK-EUR foreign exchange market on March 14, the króna depreciated by 2.07 percent. If the króna continues to depreciate, tourists could enjoy cheaper travel, further strengthening Iceland’s tourism industry.

Furthermore, the depreciation of the króna could bolster the CBI’s foreign exchange reserves, used to purchase offshore króna assets to mitigate economic instability. Now able to procure offshore króna, the CBI has estimated that “offshore króna assets amount to approximately [$23 billion],” and acquiring this capital from abroad would mitigate the “risks associated with a large stock of offshore króna assets.”

Finance Minister Benedikt Jóhannesson heralded the “larger than ever before” Icelandic economy, diversified through its tourism, fisheries, and renewable energy sectors. According to research conducted by the Icelandic Tourist Board, tourism is up 163.84 percent since 2010, with an average growth rate of 21.6 percent each year since. Tourism strengthens other industries, including construction, and is the largest employing sector, accounting for one tenth of jobs. With the lifting of capital controls, Iceland is showing more confidence in its economy.