Capital controls

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.


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  • Cross-border movement of domestic currency in certain case

    Cross-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 ge.gagnaskil@sedlabanki.is

  • Foreign exchange transactions without the intermediation of a financial undertaking

    Foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking are prohibited.

 

Exemptions

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 gjaldeyrismal@sedlabanki.is, 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.  


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  • Application form and guidelines

    According to Article 7, Paragraph 1 of the Foreign Exchange Act, no. 87/1992, cf. Article 13(o) of the same Act, the Central Bank of Iceland is authorized to grant exemptions from prohibitions on Capital movements upon submittal of an application requesting an exemption. After evaluating a request for an exemption, the Central Bank shall consider the consequences of the capital controls for the applicant, the objective of the capital controls, and the impact that an exemption will have on monetary and exchange rate stability; cf. Article 7, Paragraph 2 of the Act.

     

    Application form for an exemption

     

    The applicant shall fill out the form electronically where appropriate. The applicant shall then print and sign the application and send it by postal mail. Applications for exemptions according to the Foreign Exchange Act, no. 87/1992, shall be sent in writing to the Central Bank of Iceland, together with documents pertaining to the case; cf. Article 13(o), Paragraph 1 of the Foreign Exchange Act.

     

    Applications shall be sent to:
    Central Bank of Iceland
    Att'n: Capital Controls Surveillance Unit
    Kalkofnsvegur 1
    150 Reykjavík
    Iceland

     

    Every effort is made to process exemptions requests as quickly as possible. If further data or information must be obtained from the applicant in order to process the exemption request, the processing time can be expected to increase accordingly. Processing time is longer when a case is one that sets precedent or involves large amounts of money, where the Bank’s assessment, cf. Article 7, Paragraph 2 of the Foreign Exchange Act, is prepared in collaboration with other Bank departments.

    It should be noted that the principle of non-discrimination is applied in all cases, and comparable cases receive comparable handling and generate the same results.

  • Exemption statistic

    Statistics on processing of requests for exemptions from the Foreign Exchange Act are published in the Central Bank’s Annual Report.

    Year 2009 
    The Central Bank received 390 requests for exemptions from the then-current Rules on Foreign Exchange in 2009. Of that total, 127 were approved and 27 rejected, and 94 were handled with instructions and guidelines or were withdrawn because there was no need for an exemption. At year-end, 88 submitted requests were still pending. 

    Year 2010 
    The Central Bank received 762 requests for exemptions from the then-current Rules on Foreign Exchange in 2010. Of that total, 431 were approved, 178 were rejected, and 28 were rejected in part. The remaining 83 were withdrawn or concluded through issuance of guidelines or in another manner. At the end of the year, 42 exemption requests were pending final processing. 

    Year 2011 
    The Central Bank received 971 requests for exemptions from the Foreign Exchange Act and the Rules on Foreign Exchange in 2011. During the year, 946 requests were processed: 688 were approved, 112 rejected, 23 approved in part, and 123 were withdrawn or concluded through issuance of guidelines or in another manner. 

    Year 2012 
    The Central Bank received 973 requests for exemptions from the Foreign Exchange Act in 2012. During the year, 711 requests were processed: 557 were approved, 15 approved in part, 39 rejected, and 100 withdrawn or concluded through issuance of guidelines or in another manner. 

    Year 2013 
    The Central Bank received 883 requests for exemptions from the Foreign Exchange Act in 2013. During the year, 880 requests were processed by the Exemption Unit: 526 were approved, 26 approved in part, 86 rejected, and 242 withdrawn or concluded through issuance of guidelines or in another manner.

    Year 2014 
    The Central Bank received 1044 requests for exemptions from the Foreign Exchange Act in 2014. During the year, 922 requests were processed by the Exemption Unit: 617 were approved, 41 approved in part, 95 rejected, and 169 withdrawn or concluded through issuance of guidelines or in another manner.

    Year 2015

    The Central Bank received 1080 requests for exemptions from the Foreign Exchange Act in 2015. During the year, 1040 requests were processed by the Exemption Unit: 741 were approved, 23 approved in part, 93 rejected, and 183 withdrawn or concluded through issuance of guidelines or in another manner. 

    Year 2016

    The Central Bank received 1020 requests for exemptions from the Foreign Exchange Act in 2016. During the year, 995 requests were processed by the Exemption Unit: 631 were approved, 11 approved in part, 80 rejected, and 273 withdrawn or concluded through issuance of guidelines or in another manner. 

    Year 2017

    The Central Bank received 92 requests for exemptions from the Foreign Exchange Act in 2017. During the year, 315 requests were processed by the Exemption Unit: 152 were pertained to cases not requiring exemptions, 82 were approved, 41 were withdrawn, 22 rejected, and 18 were concluded in another manner. 

    Year 2018

    The Central Bank received 6 requests for exemption from the Foreign Exchange Act in 2018. The reduction in the number of requests received is due to the virtually complete removal of capital controls in 2017. During the year, 9 requests were processed by the Central Bank: 3 didn´t need an exemption, 3 were approved, 1 was withdrawn, and 2 were rejected. In view of the reduction in the number of exemption requests received, the Exemption Unit of the Capital Controls Surveillance Unit was abolished in August 2018.