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Iceland Mag

Economy

Value of Króna drops by 3-4% as capital controls are lifted

By Staff

  • A 3-4% drop The lifting of the capital controls has resulted in uou getting a few more extra Krona for your currency. Photo/Valgarður Gíslason

The value of the Icelandic Króna has dropped by 3-4% today after the Icelandic government announced the complete lifting of the capital controls which were imposed following the 2008 financial collapse. 

Economists who spoke with the local newspaper Fréttablaðið said it is unlikely the value of the Króna will drop much more as a result of the abolishment of capital controls, or that the decision will lead to wild fluctuations in the value of the currency. The value of the Króna dropped by 3-4% on Monday morning. The value of Euro in Icelandic Króna rose by 2.91% and that of the US Dollar by 2.85%. The Euro is now 118.4 ISK and the Dollar 110.9 ISK.

The Króna has appreciated significantly in value in the past few months, as a result of strong economic growth and a significant surplus in the balance of payments, thanks to booming tourism. The Icelandic export industries have been calling for a devaluation of the Króna to improve their competitiveness.

Capital controls abolished
At a press conference on Sunday afternoon, the Prime Minister of Iceland, The Minister of Finance and the Director of the Central Bank announced that the last remaining components of the capital controls imposed in the fall of 2008 would be abolished tomorrow, Tuesday. Tomorrow there will be no limits on currency transactions in Icelandic Króna. Individual investors, companies and institutional investors like the Icelandic pension funds, will be able to invest freely abroad and to transfer funds in and out of the country.

Read more: Report: Icelandic economic growth tops all but one OECD country in 2016: GDP grew 7.2%

At the same time the Central Bank announced that it had reached an agreement with most of the remaining foreign owners of Króna assets. The Central Bank will purchase these assets thus eliminating the danger of a sudden withdrawal of funds which could lead to a sharp drop in the value of the Króna. 

Public hasn't felt the impact of controls for some time
The capital controls were imposed as a temporary measure on October 10 2008, as the Icelandic banking system crashed. On October 28 a law was passed which imposed strict currency and capital controls to protect the Icelandic currency which was in free fall. As part of the controls Icelanders who wanted to purchase foreign currency in Iceland had to present proof that they were going to be travelling abroad.

Read more: A 40% exit tax to be imposed on foreign investors

Originally the controls were to be in effect for two years, but it was only in June 2015 that the government unveiled a plan to abolish the controls. By that time the capital controls were primarily an issue for a handful of wealthy individuals, institutional investors and corporations which wished to transfer large sums out of Iceland or invest abroad. Tomorrow's action has been awaited by the Icelandic pension funds which have been severely restricted in their ability to diversify their holdings as they have been limited to investing in Iceland.

 

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