Will the last bit of capital controls soon be removed?
Now that ordinary Icelanders can invest ISK100m abroad a year and buy one property abroad, life is returning back to normal after capital controls or at least for the 0.01% of Icelanders that will be able to make use of this new normal. This new CBI regime was put in place on the last day of 2016.
For all others, capital controls have for a long time not been anything people sensed in everyday life. The controls really were on capital, in the sense that Icelanders could not invest abroad, but they could buy goods and services, i.e. ordered stuff online and, mostly relevant for companies, paid for foreign services.
The almost only tangible remains of the capital controls regard the four large funds – Eaton Vance, Autonomy, Loomis Sayles and Discovery Capital Management – still locked inside the controls with their offshore króna (by definition króna owned by foreigners, i.e. króna owned by foreigners who potentially want to exchange it to foreign currency).
I’ve written extensively on this issue earlier, recently with a focus on the utterly misplaced ads regarding the policy of the Icelandic government (the policy can certainly be disputed but absolutely not in the way the ads chose to portray it; see here and here; more generally here). From over 40% of GDP end of November 2008, when the controls were put in place, the offshore króna amounted to ca. 10% of GDP towards the end of 2016 (see the CBI: Economy of Iceland 2016, p. 75-81.) The latest CBI data is from 13 January this year, showing the amount of offshore króna at ISK191bn, below 10% of GDP.
It now seems there have been high-level talks and as far as I can understand there is great willingness on both sides to find an agreement, which would most likely involve an exit rate somewhat less favourable than the present rate (meaning there would be some haircut for the funds, i.e. some loss) and also that they would exit over some period of time (they have earlier indicated that they are in no hurry to leave).
As before, the greatest risk here is political: will the opposition or parts of it, try to use this case to portray the government as dancing to the tune of greedy foreigners? Icelanders have had a share of the populism so prevalent in other parts of the world but Icelandic politics is by no means engulfed by it.
Arguments in this direction can’t be ruled out but the argument for solving the issue is that Iceland should be moving out of the long shadows of the 2008 collapse, the Central Bank has been buying up foreign currency in order to fetter the ever-stronger króna and this is a problem easier to solve now with the economy booming rather than at some point later in a more uncertain future.
Obs.: on 4 June 2016 the CBI announced a new instrument to “temper and affect the composition of capital inflows.” Some people call this a new form of capital controls. I don’t agree and see these measures, as does the CBI, as a set of prudence rules, announced as a possible course of action already in 2012. Over the last decades other countries have taken a similar course to prevent the inflow of capital that could in theory leave quickly.
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I’m not an economist, but I do try to understand this blog when I can. I note your sardonic comment about the lack of relevance that these changes in capital controls will have to most Icelanders. I apologize for the uneducated questions that arise in my mind.
One thing that I wonder about is that if the offshore funds want to return króna to Iceland in exchange for other currencies, wouldn’t that reduce the demand for króna by making more króna available? If the balance of supply and demand for the króna is changed, is that relevant to people other than the top 0.01%?
Will this reduce the exchange rate on the króna so that it becomes a little less expensive for visitors and a little more expensive to import goods? IOW, does this change in policy ultimately filter down to the population at large or does in always remain simply a question of profits among the top few?
Thanks.
Cougar Brenneman
11 Mar 17 at 11:44 pm
[…] now remains in place are hindrance on inflows – as I’ve said earlier some would call it another form of capital controls but I side with the CBI that already in 2012 […]
Capital controls abolished – offer to offshore króna holders at Sigrún Davíðsdóttir's Icelog
12 Mar 17 at 4:34 pm
This actually answered my downside, thanks!
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