Iceland is to ease the capital controls imposed at the height of the financial crisis in 2008, marking a crucial step in the financial rehabilitation of the nation.
The prime minister, Sigmundur Davíð Gunnlaugsson, and the finance minister, Bjarni Benediktsson, are due to make the announcement at midday GMT on Monday, in the capital, Reykjavik.
Capital controls were introduced in November 2008 after the failure of the Icelandic banking system brought the country to the brink of financial meltdown. The three largest banks – Glitnir, Landsbanki and Kaupthing – collapsed in October 2008, having amassed assets worth 10 times more than Iceland’s annual economic output.
The government hopes the ending of the controls will allow the country to draw a line under the financial crisis, which poisoned relations with European neighbours.
It fell out with the UK and the Netherlands over bank guarantees given to British and Dutch savers who had ploughed money into Icesave, part of Landsbanki’s international banking operations.
After Landsbanki collapsed and its guarantees proved worthless, the British and Dutch governments had to use their own taxpayer funds to compensate ordinary savers, triggering a rancorous four-year legal dispute.
In 2013, an international court upheld Iceland’s decision not to reimburse British and Dutch governments, raising questions about the effectiveness of bank-guarantee schemes.
Iceland’s economy is now growing again, boosted by tourism and the fishing industry. The International Monetary Fund said in March that the government had made good progress in improving financial stability but gaps remained in banking supervision and financial safety nets.
On Sunday, Iceland’s parliament voted 56-0, with one abstention, in favour of a plan seen as paving the way for the end of capital controls. Although the measures tighten controls on some transactions related to failed banks, they are intended to stop people circumventing the controls before they are finally lifted.
The controls, introduced to protect the krona, have become a headache for the centre-right government, which took power in April 2013, on the promise of ending austerity and bringing debt relief to households.
Authorities are also keen to ensure capital controls do not become a permanent fixture, because they deter foreign investment and increase borrowing costs. But some are concerned that lifting them too quickly could jeopardise the country’s fragile economic recovery.
The government is expected to introduce rules to ensure a managed – not free – float of the krona and could also tax the removal of cash to prevent investors rushing to the exit.
Other plans under discussion include offering foreign investors inducements to keep their money in Iceland. The central bank governor, Mar Gudmundsson, told Reuters in March that authorities planned to offer investment opportunities that “will greatly reduce the likelihood of instability when the controls are lifted”.
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