Capital control legislation passed

The Icelandic Parliament ('Alþingi').

The Icelandic Parliament ('Alþingi'). Photo: Ómar

A parliamentary bill laying the ground for lifting the capital controls currently in force in Iceland has been passed during a late-night session of the Icelandic Parliament (‘Alþingi’) this evening.

Capital controls in their current form have been in place in Iceland since November 2008. They were put in place in response to the collapse of all three of the country’s major privately owned commercial banks and the ensuing financial crisis.

Bill quickly passed

The bill (on amendments to Act No 87/1992 on foreign exchange, as amended), was passed with near unanimity, with 56 of 57 MPs present voting in favour.

Parliamentary sessions on a Sunday evening are a rare occurrence. Tonight’s session was organised in order to reach a conclusion in the matter before the markets opened tomorrow morning.

Parliamentary procedure usually dictates that such bills go to committee as part of the adoption procedure. This was not necessary in this case as the bill originated from the committee itself (in this case, the Economic Affairs and Trade Committee) and the bill passed through Alþingi in just 47 minutes.

Toughening controls before lifting them

This bill, the first of several expected to be needed to fully lift Iceland’s currency restrictions, actually toughens controls in preparation for their removal.

Until now, a loophole has enabled associated companies to get around controls and obtain foreign currency by means of short-term loans between each other. This bill closes that loophole.

The explanatory memorandum to tonight’s bill states that “[t]he legislative amendments proposed in this bill are intended to address any possibilities of circumventing rules when capital controls are lifted, in order to safeguard stability in exchange rate and monetary policy”.

More legislation on the way

It also recognises that “[t]he main problem with lifting capital controls is the risk of immediate capital outflows. Heavy capital outflow, as compared to the possible inflow, could once again lead to balance-of-payment problems and the depreciation of the Icelandic króna, owing to one-sided pressure on the foreign exchange market”.

Two more bills paving the way for the lifting of currency restrictions will be presented to the parliamentary parties, the public and Alþingi tomorrow morning.

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