Central bank chief: Iceland standing at crossroads

“The crossroads we are standing at concern the fact that we now need to change stability into investment, growth and employment. Most indications are that growth began again in the last part of last year. It was, on the other hand, not particularly vigorous and investment remains at a historic low,” Central Bank of Iceland governor, Mar Gudmundsson said in a speech today in Akureyri.

Gudmundsson began his speech by saying how good it was to be at the University of Akureyri, in Iceland’s second city. Such economic progress speeches have only ever been given in Reykjavik before; and as the Central Bank serves all of Iceland, it was especially pleasing to be in Akureyri, Gudmundsson said.

The Central Bank governor said that unemployment is still much higher than Icelanders are used to and involves significant unused capacity in the economy. In this regard, there are indications that the currency exchange controls which have helped stabilise the economy are now hindering investment and foreign trade opportunities and are increasingly working to slow economic growth.

“In any case, Icelanders are contractually bound by the EEA to stop the currency controls when the emergency that called for them is over,” Gudmundsson said. “It is therefore fortunate that the conditions needed to relieve the controls have improved in recent months. In the first case we can see that national economic stability has improved, as I discussed above. In the second instance, income to the state treasury has increased and debt demands upon it are going down and if it continues in this manner there is no need to fear any unsustainable debt burden upon it. Next, currency reserves have increased massively and fears over the state’s foreign debt position have reduced significantly. The principle thing needed now is for the situation of the banking system to be strong enough to finance itself outside of the currency controls. It is hoped that such a bill of health can be given in the coming months. It should be reiterated in this connection that, according to statements that appeared in November, and the material made public following a fourth review of the program with the IMF, a new plan for the abolition of capital controls is being worked on and is scheduled to be revealed at the end of February. Similarly it has been stated that nothing will be done in connection to removing capital controls until the plan has been made public; except the possible preparation of swap deals between offshore kronur held by foreign parties and foreign currency held by domestic parties and that overseas kronur could be repatriated in the form of investment in the economy, under certain conditions,” Gudmundsson said.