Capital controls
Capital controls were introduced in Iceland in autumn 2008, in the wake of the financial crisis that struck the country. The controls entailed the imposition of certain restrictions on outflows of foreign currency from Iceland. They were lifted in their entirety with the entry into force of the Foreign Exchange Act, no. 70/2021, and no restrictions on foreign exchange transactions, cross-border payments, or cross-border movement of capital are now in effect.
Capital controls in Iceland 2008-2021
Capital controls, or capital account restrictions, were introduced in November 2008, after Iceland was struck by an unusually extensive banking crisis in early October 2008. On 10 October 2008, in response to the emergency situation, the Central Bank imposed a temporary tempering of currency outflows by means of instructions issued to deposit institutions. It quickly became clear that this response would not suffice, and therefore, on 28 November 2008, Parliament granted the Central Bank of Iceland expanded authorisations to restrict foreign exchange transactions and cross-border movement of capital by means of a Temporary Provision in the Foreign Exchange Act, no. 87/1992. That same day, the Bank set the Rules on Foreign Exchange, no. 1082/2008, on the basis of this expanded authorisation. The Rules significantly restricted movement of capital and foreign exchange transactions not linked to trade in goods and services. It can be said that, with the rules, captial controls were put in place. The controls were modified over the years that followed, first with amendments to Central Bank rules and then with amendments to the Foreign Exchange Act. From the time the capital controls were imposed, the authorities attempted to create conditions that would allow for their removal. The controls were lifted in stages between 2015 and 2021: the authorities’ sequenced capital account liberalisation strategy was introduced in summer 2015; the failed financial institutions’ composition agreements were approved in early 2016; and the capital controls on households and businesses were lifted in late 2016 and the first half of 2017. The removal of capital controls on offshore króna assets had to wait until early 2019, however. When the new Foreign Exchange Act entered into force in summer 2021, the remaining capital controls were finally lifted in their entirety.
International obligations
The fundamental principle of free movement of capital is provided for in Articles 40 and 41 of the EEA Agreement. Article 43 of the EEA Agreement contains authorisations for exemptions to free movement of capital as described in Article 40. More specifically, Article 43, Paragraph 2 of the EEA Agreement stipulates that in instances when movement of capital leads to disturbances in capital market functioning in an EFTA state, the state in question is authorised to take protective measures in the field of capital movement. Furthermore, Paragraph 4 of the same Article states that when “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.”
The restrictions on movement of capital introduced in Iceland were supported with reference to these provisions and were considered to satisfy the requirements therein; cf. the advisory opinion of the EFTA Court in Case no. E-3/11 of 14 December 2011.
Previous laws and rules relating to the capital controls
Information on the modifications made to the capital controls between 2008 and 2021 can be found here, as can previous rules, bills of legislation, and amending legislation.
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Foreign Exchange Act
Capital controls in the Rules on Foreign Exchange
Rules on Foreign Exchange
Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions
Rules on the Treatment of Króna-Denominated Assets Subject to Special Restrictions
Act on a Stability Tax