Central Bank of Iceland preparing to remove currency exchange restrictions

The governor of the Central Bank of Iceland says that preparations are now being made to remove the country’s capital controls, which have served to stabilise the krona currency, but are also hampering inward investment.

The impacts of removing Iceland’s currency control restrictions have not been taken into account in the new set of Central Bank of Iceland economic forecasts (which are more positive than previous forecasts), the governor says — adding that a team of people are working on ways to remove the exchange restrictions without impacting economic recovery.

Despite the ongoing turmoil on international markets, the Central Bank of Iceland has allowed itself a positive tone in its report, which was published yesterday. The new document holds more positive forecasts in most areas than previous predictions the bank has made. It says that the krona has strengthened and that the terms of trade for households and businesses have improved and the rate of economic growth is increasing. Property market demand has risen and it is predicted that increasing private consumption will be one pillar of next year’s economic growth.

The major elephant in the room is still the currency exchange restrictions; but CBI governor Mar Gudmundsson says that preparations are now in their final stages — both legally and practically — to remove them. According to the plan offshore kronur (Icelandic kronur held by foreign investors unable to exchange them for foreign currency since 2008) would be offered to other investors, with conditions attached. The idea being that Iceland’s strengthening economy will make the currency more attractive than it was.

Gudmundsson told RUV that the CBI plans to remove the restrictions in a way which has minimal impact on inflation and the strength of the krona. He hopes that the removal of the restrictions will cause a wave of investment into Iceland, as well as the inevitable flow of money outwards; but says it is too early to make forecasts for such eventualities. It is likely that the removal of the restrictions will result in lower unemployment levels, Gudmundsson believes.