Iceland sets plan for lifting capital controls

July 31, 2009

Iceland's Prime Minister Johanna Sigurdardottir (file) By Niklas Pollard and Adam Cox
STOCKHOLM, July 31 (Reuters) – Iceland’s central bank on Friday outlined plans to lift capital controls in the next few months to get the economy functioning more normally, roughly 10 months after the island country’s financial system tottered amid fallout from the global financial crisis.
Also on Friday, the International Monetary Fund and Iceland reached an agreement on economic policy measures under the country’s IMF loan programme.

The IMF said the deal would allow a first review of Iceland’s programme to go to the IMF board for approval in late August or early September, and free up the next loan disbursement of about $162 million to the government.

“With the additional time, the authorities have been able to fully articulate their policy plans, including towards fiscal consolidation and capital control liberalization, and to advance financial sector restructuring work,” said Poul Thomsen, deputy director in the IMF’s European Department.

The IMF had originally set a tentative date of Aug. 3 to review the funding program, but on Thursday had said the review would be delayed.

Meanwhile, the central bank unveiled a phased timetable to remove the restrictions put in place after the country’s financial meltdown last year.

Icelandic media had suggested the IMF hold-up was linked to delays in Parliament approving a deeply unpopular bill ensuring that Britain and the Netherlands are repaid for billions lost in Icelandic “Icesave” deposit accounts last autumn.

The central bank said in a statement on its website the government had approved the capital plan.

“Many important steps have been taken,” it said. “These should make it possible to begin lifting the controls in the next few months.”

Restrictions on foreign currency inflows for new investment will be removed first. The central bank said new capital will be able to move out of Iceland once again, provided investments have been registered with the central bank.

“It is expected that this first stage of liberalisation will have limited or positive impact on the foreign exchange reserves,” it added.

The central bank said it will give more details as well as information on the next phase of the plan to remove capital outflow restrictions on Aug. 5.

Iceland introduced sweeping capital controls after its outsized and heavily indebted commercial banks went under as the global financial crisis saw credit dry up, leading to a collapse of the Icelandic crown.

The controls were needed to ensure the island could continue to import essential goods such as food and medicine.

Easing the capital controls has been a key goal for the centre-left coalition government in its efforts to lead the country out of its worst recession in decades.

A $10 billion aid package tailored by the IMF, part of which has already been disbursed, is being used to bolster currency reserves ahead of the liberalisation of the rules.

But if Icelandic politicians fail to ratify the government’s plan to pay back Britain and the Netherlands, either of those countries could raise objections to further IMF assistance.

Icelandic Prime Minister , in a statement on Friday, called the delay in the IMF’s first loan review “regrettable” but said that as long as it was only a few weeks it should not have a material impact on efforts to rebuild the economy.

She did not refer to the Icesave issue in her statement.

The government thrashed out the plan to pay back the two countries but it needs approval in Parliament and many lawmakers have voiced opposition. Icelanders are still angry with Britain in particular after it used anti-terrorist legislation last year to seize Icelandic assets at the height of the crisis.

Iceland’s parliament is expected to reconvene in mid-August.

The Sedlabanki, Iceland’s central bank, said that within a few months it was likely its foreign exchange reserves would be large enough to withstand any potential temporary instability in currency market.
“The capital account restrictions will not be lifted until these preconditions have been met, but the liberalisation strategy assumes that this will have been achieved by November 1, 2009,” the bank said.

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