This morning the Government agreed to present to Parliament a bill of legislation from the Minister of Finance and Economic Affairs, which provides for amendments to the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016, and the Foreign Exchange Act, no. 87/1992.
Liberalisation of capital controls on offshore króna holders
The amendments to the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions that are proposed in the bill of legislation entail permission for owners of offshore krónur either to close out their offshore króna positions in full by exchanging them for foreign currency in the onshore market or to hold them as unrestricted onshore króna assets in cases involving continuous ownership from the time before the capital controls were imposed. If the bill is passed into law, this will provide expanded authorisations for withdrawals from accounts subject to special restrictions. These expanded authorisations are of three types. First is a general authorisation for all holders of offshore krónur to release their offshore króna assets in order to purchase foreign currency and export it to an account abroad. Second is an authorisation for offshore króna holders that have owned offshore króna assets continuously since 28 November 2008 to release those offshore króna assets from the legal restrictions. Third is an authorisation for individuals to withdraw up to 100 m.kr. from accounts subject to special restrictions. The amendments proposed here are based on the requirement that the efficacy of the special reserve requirement on capital inflows not be undermined. Therefore, those offshore króna holders that have not owned their króna assets continuously since before the capital controls were introduced and wish to invest in Icelandic bonds must exit through the foreign exchange market and then re-enter, subject to the special reserve requirement. Otherwise, foreign investors would not all be treated equally.
The Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016, entered into force on 22 May 2016. The Act was an important element in the authorities’ capital account liberalisation strategy. When the Act entered into force, it was foreseen that the restrictions it provided for would be temporary measures and that the authorities would once again aim to lift the capital controls on offshore króna assets once resident entities’ asset portfolios had been better rebalanced and conditions allowed for liberalisation without excessive risk to economic and financial stability. The authorities have worked systematically and in various ways to solve the problem represented by offshore króna assets during the capital account liberalisation process, and the stock of offshore króna assets has been reduced substantially, or from 319 b.kr. to 84 b.kr. Economic conditions now warrant lifting the capital controls on offshore króna assets.
Changes in implementation of the special reserve requirement on capital inflows
The bill of legislation also proposes amendments to Temporary Provision III of the Foreign Exchange Act, which authorises the Central Bank of Iceland to impose special reserve requirements on capital inflows. This authorisation, passed into law in 2016, was an element in the authorities’ capital account liberalisation strategy. The proposed amendment allows for increased flexibility in the form of the special reserve requirement on new inflows of foreign currency, but it does not provide for changes in the holding period or the special reserve ratio.
Until now, the parties concerned were required to satisfy the special reserve requirement by depositing funds to a term deposit account with a deposit institution. This arrangement is considered, among other things, to have complicated matters for investors interested in investing in Iceland, as in some instances they are not authorised to invest if they cannot sell the investment at any time. In order to respond to this, it is proposed that it be made possible to satisfy the special reserve requirement via repo transactions with Central Bank certificates of deposit. Furthermore, the new arrangement allows investors to release funds during the holding period by settling with a financial institution. It will remain possible to satisfy the special reserve requirement by depositing funds to a term deposit account in the same manner as before.
Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.