2 November 2018

Progress of the Plan for Removal of Capital Controls
This report is published by the Minister of Finance and Economic Affairs as provided for inParagraph 2 of the Temporary Provision I in Act No. 87/1992 on Foreign Exchange, whichreads as follows:
The Minister shall make public a report on the progress of plans to remove restrictions
on cross-border capital movements and foreign currency trading at six-month intervals
until such restrictions are finally removed. The report referred to in the first sentence
shall be published for the first time within six months of the entry into force of this act.
Former reports are available at the website of the Ministry of Finance and Economic Affairs1.
The special reserve ratio decreases
Rules amending Rules no. 490/2016 on Special Reserve Requirements for New Foreign
Currency Inflows (SRR) were published on 2 November 2018 and took effect immediately.
The amending Rules entail that the special reserve ratio is decreased from 40% to 20%. Other
provisions, such as on the special reserve base, the holding period and interest rates on capitalflow accounts remain unchanged. The amendment is made possible as several advanced
economies have been normalizing their monetary policy while the Icelandic policy rate has
been coming down and is low by historical standards. As a result, the interest rate differential
has narrowed which, in turn, reduces the incentive for carry trading.
Remaining restrictions on capital flows
Although capital controls have largely been lifted, full liberalisation of the capital account has
still not taken place. Remaining restrictions on capital movements and foreign exchangetransactions are mainly twofold:
1. Offshore króna assets, which remain subject to special restrictions according to Act
no. 37/2016. Remaining offshore króna assets amount to 88 b.kr., i.e. 3.2% of GDP.
The assets amounted to 40% og GDP when capital controls were introduced in 2008.
2. Restrictions that are necessary in order for the Central Bank‘s SRR, sometimes
referred to as the capital flow management measure (CFM), to achieve its objective,
including restrictions on derivatives trading for purposes other than hedging.
The liberalisation of offshore króna assets, which require legislative amendments, is being
prepared. Furthermore, amendments concerning the permanent arrangement of the SRR arebeing prepared in the Ministry of Finance and Economic Affairs and the Central Bank ofIceland, in relation to amendments to Act no. 36/2001, on the Central Bank of Iceland,
introduced on October 11 this year. Lastly, a holistic revision of Act no. 87/1992, on Foreign
Exchange, is also being prepared.
As mentioned above, remaining offshore króna assets amount to 87 b.kr. Table 1 shows theirbreakdown by asset classes. In comparison, the current account surplus from 2017Q3 to2018Q2 is 73 b.kr. and the Central Bank‘s foreign exchange reserves amount to approximately
1

https://www.government.is/topics/economic-affairs-and-public-finances/progress-of-plans-to-remove-capitalcontrols/

2 November 2018
700 b.kr.
Offshore króna assets
Treasury bonds and bills and other bonds with gov‘t guarantee
Deposits and Central Bank CDs
Other securities and unit shares
Total amountMarket value (b.kr.)
39,935,812,087,7

The table shows the amount of offshore krona assets on 30 September 2018

Reduced turnover in the foreign exchange market
Net capital inflows for new investment by non-residents have eased this year. Inflows into
government bonds have been minimal and inflows into equities listed on the Nasdaq Iceland
exchange, which are not subject to the SRR, have significantly decreased. Net capital inflows
for new investment until the end of August amounted to 21 b.kr, down from 93 b.kr. for thesame period last year.
Capital flows due to registered new investment
25280

58,4 ma.kr. →

20240

15200

10160

5120

080

-540-1002015

2016

2017

2018

Inflows into gov't bonds (l.ax)

Inflows into listed shares (l.ax)

Other inflows (l.ax)

Outflows (l.ax)

Cumulative net flows (r.ax)
Other inflows in March 2017 derive almost entirely from non-residents‘ acquisition of a holding
in a domestic commercial bank

The turnover in the foreign exchange market has also decreased compared to last year. Total
turnover from January to September this year amounts to 120 b.kr., which is less turnover thanin the first quarter of the two previous years. The Central Bank bought substantial amounts offoreign currency in 2016 and in the beginning of 2017 in relation to the build up of the bank‘sforeign exchange reserves. However, even without the bank‘s interventions, the turnover in theforeign exchange market is still relatively low this year compared to previous years. TheCentral Bank intervened in the foreign exchange market in September for the first time thisyear, buying krónur corresponding to 1.2 b.kr. on one business day. The bank bought krónur
corresponding to the same amount on one business day in October. The interventions were inline with the bank‘s Monetary Policy Committee statement of 17 May 2017, which stated that
the Central Bank would intervene in the foreign exchange market to reduce fluctuations if it
deemed it necessary.