The Central Bank of Iceland announced yesterday that the country’s harsh capital controls will be gradually lifted beginning in November, ending the current ‘managed float’ of the fragile Icelandic krona.
It is estimated that there are some USD 5 billion of foreign investments stuck in Iceland, half of which is held by so-called impatient investors, enthusiastic to remove their funds from the country as soon as possible.
If the controls were to be lifted in one, the krona would collapse to an unsustainably low level practically overnight.
Franek Rozvadowski, the IMF representative in Iceland, said the CBI’s plan can only work if carried out carefully and with a suitable foreign-reserves-buffer in place. He said in an interview with Reuters yesterday that such a buffer will be in place provided the IMF decides to pay out the overdue second tranche of its USD 2.1 billion loan to Iceland soon.
Meanwhile, Central Bank governor Svein Harald Oygard said that the small size of Iceland’s economy makes monitoring and regulating the outflow of capital relatively easy – a fact he hopes will enable the Bank to fully lift the restrictions without serious depreciation of the krona.
There is no official confirmation of how long the process will take and it is believed the plan is divided into stages which will happen only when the economy and currency are deemed ready. Iceland’s parliament has already approved the CBI plan.