Introduction of the capital controls
The capital controls were introduced in November 2008, after Iceland was struck by an unusually severe banking crisis in October 2008. The ensuing collapse of confidence in Icelandic financial assets created the risk of massive capital outflows, with potentially dire consequences for the exchange rate of the króna, which had already fallen steeply. Heavy capital outflows (both immediately and later on) could have triggered an even deeper decline in the exchange rate, pushing inflation even higher than it actually was. Because households and businesses were heavily leveraged, with a large proportion of foreign-denominated and inflation-indexed debt, this could have catalysed a wave of default, with serious consequences for the domestic economy. Because of this, the Central Bank of Iceland took action on 10 October 2008, temporarily restricting foreign currency outflows. In view of the enormous risk to the economy, it was thought that capital controls, while unfortunate, were an inevitable element in a plan of action aimed at stabilising the króna once the interbank foreign exchange market opened again in early December 2008.
The Basis for the capital controls
The fundamental principle of free flow of capital is provided for in Articles 40 and 41 of the EEA Agreement. The restrictions on capital movements imposed in Iceland have been rationalised with reference to the provisions of Article 43 of the EEA Agreement, which authorises the contracting parties to take such action if it proves necessary in order to respond to various types of difficulties or disturbances in the financial markets of the country concerned.
Article 43 of the EEA Agreement provides for exemptions from the free movement of capital as described in Article 40 of the Agreement. According to Article 43, Paragraph 2, in instances where movement of capital will lead to a disturbance in capital markets in EFTA states, the country concerned may take protective measures in this area. Furthermore, Paragraph 4 of the same Article states that “[w]here an EC Member State or an EFTA State is in difficulties, or is seriously threatened with difficulties, as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardize the functioning of this Agreement, the Contracting Party concerned may take protective measures.”
With the EFTA Court ruling in Case no. E-3/11, handed down on 14 December 2011, the Court issued an advisory opinion on questions referred to it by the District Court of Reykjavík concerning the interpretation of Article 43 of the EEA Agreement, which authorises deviations from the rules on free flow of capital. The Court concluded that the substantive conditions for taking protective measures according to Article 43, Paragraphs 2 and 4 of the EEA Agreement had been fulfilled, and that the Icelandic restrictions on movement of capital that were under scrutiny in that case were in compliance with the Agreement.
Statements and reports on capital accounts liberalisation strategy:
On 23 October 2019, the Minister of Finance and Economic Affairs posted a report on the progress of the capital account liberalisation strategy on the Ministry´s website. The Minister´s report can be found here.
Previous reports can be found here.
What is restricted?
With the Rules on Foreign Exchange, no. 200/2017, which took effect on 14 March 2017, most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted. Since then, households and businesses have not been affected by the restrictions provided for under the Act. This page discusses the restrictions currently in effect.
Cross-border movement of domestic currency in certain caseCross-border movement of domestic currency due to transactions with offshore króna assets falling under Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions are prohibited.
Derivatives trading for purposes other than hedging
It is only permissible to conduct derivatives transactions with financial undertakings in Iceland, where domestic currency is used in a contract against foreign currency, for the purpose of hedging against risk, provided that a foreign exchange imbalance exists over the duration of the derivative contract and the Central Bank of Iceland has confirmed that the transaction is a hedging instrument. It is required that such hedging instruments reflect the foreign exchange imbalance, and contracts shall be amended accordingly if the premises for them change; i.e., underlying assets are sold or debts settled prior to maturity. Derivatives transactions are also subject to the condition that the contracts may not be transferred, directly or indirectly, to a third party prior to maturity.
The term derivatives transactions refers to transactions with financial instruments pursuant to Article 2, Paragraph 1, Items 2(d)-2(h) of the Act on Securities Transactions.
Derivatives transactions due to hedging in connection with bonds issued abroad in domestic currency do not fall under the above-described exemption.
The Central Bank may revoke its confirmation that a transaction is a hedging instrument if it concludes that the premises for the hedging no longer exist.
The contents of requests for confirmation according to the above shall be as is provided for in Article 13 of the Rules on Foreign Exchange, no. 200/2017.
Requests for confirmation of derivatives trading for hedging purposes shall be sent in electronic form to the Central Bank at the e-mail address firstname.lastname@example.org
Foreign exchange transactions without the intermediation of a financial undertakingForeign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking are prohibited.
The Capital Controls Surveillance Unit (CCSU) was established as an independent unit within the Central Bank in 2009. In 2011, the department was divided into three units focusing on exemptions, surveillance, and investigation. The main task of the exemption unit was to process exemptions from the Foreign Exchange Act, no. 87/1992, and respond to queries received by e-mail at email@example.com, or by telephone at +354 569-9600. In view of the reduction in the number of exemption requests received in the wake of the liberalisation of capital controls, the exemption unit discontinued operation in August 2018.
In the years 2010-2016, the CCSU received 800-1000 requests annually for exemptions from the Foreign Exchange Act, no. 87/1992, with individuals and legal entities applying for exemptions in roughly equal proportions. The processing ratio ranged between 75% and 100% of submitted queries per year, with about 300 cases in processing at any given time in the years 2010-2016. The number of queries submitted fell sharply in the wake of the liberalisation of capital controls, first with amendments to the Foreign Exchange Act that entered into force on 21 October 2016 and 1 January 2017, and most recently, with the adoption of the Rules on Foreign Exchange, no. 200/2017, on 14 March 2017.
Application form and guidelines