Includes how foreign exchange is managed and implications for U.S. business;
Last Published: 2/18/2019
The 1996 Act on Investment by Non-residents in Business Enterprises states that "non-residents who invest in Icelandic enterprises shall have the right to convert into any currency, for which the Central Bank of Iceland maintains a regular exchange rate, any dividends received or other profits and proceeds from sales of investments." In 2008, however, the Central Bank of Iceland temporarily imposed capital controls to prevent a massive capital outflow following the collapse of the financial sector; those restrictions were largely lifted in March 2017.  Transactions involving imports and exports of goods and services, travel, interest payments, contractual installment payments and salaries were still permitted under the capital controls.

The Central Bank published its Capital Controls Liberalization Strategy in 2009 and later updated it in 2011. The strategy stated that the controls would be lifted in stages. The first step, permitting the inflow of foreign currency for new investments and the outflow of capital derived from such investments, was implemented in November 2009. The second step was to conclude the resolution of the estates of the fallen banks, which occurred in February 2016 when all the estates of the failed banks agreed to the government plan for a stability contribution in exchange for exemptions from capital controls.

There remain offshore krona held by funds who declined to participate in the previous auctions. Entities holding such assets will be given the option of exchanging them for a long-term bond in either EUR or ISK, or potentially offered another auction at the discretion of the Central Bank. Until then, the offshore ISK are locked into a non-interest bearing account at the Icelandic Central Bank.

On March 12, 2017, the cabinet and the Central Bank lifted capital controls affecting households and businesses effective March 14, involving “foreign exchange transactions, foreign investment, hedging, and lending activity,” although some permanent protections against foreign exchange instability remain in place (https://www.ministryoffinance.is/news/iceland-lifts-capital-controls). This liberalization is expected to help attract new investment to Iceland, and allow established Icelandic companies access to foreign currencies that they need to invest or expand abroad.

The Rules on Special Reserve Requirements for New Foreign Currency inflows were introduced in 2016 to restrict foreign investment in Icelandic bonds and bills. The rules state that those who invest in bonds or bills shall reserve 40% of the capital in a special reserve accounts within two weeks of the date the new inflows of foreign currency are converted to domestic currency or the reinvestment has taken place. The holding period is 12 months and capital flow accounts bear 0% interests. For more information see https://www.cb.is/foreign-exch/capital-flow-measures/.

The Central Bank of Iceland publishes the official exchange rate on its website https://www.cb.is/statistics/official-exchange-rate/. “The exchange rate of the Icelandic króna is determined in the foreign exchange market, which is open between 9:15 hrs. and 16:00 hrs. on weekdays. Once a day, the Central Bank of Iceland fixes the official exchange rate of the króna against foreign currencies, for use as a reference in official agreements, court cases, and other contracts between parties that do not specify another reference exchange rate; cf. Article 19 of the Act on the Central Bank of Iceland, and fixes the official exchange rate index at the same time. This is done between 10:45 hrs. and 11:00 hrs. each morning that regulated foreign exchange markets are in operation. Under extraordinary circumstances, the Central Bank may temporarily suspend its quotation of the exchange rate of the króna.”

The Annual Report on Exchange Arrangements and Exchange Restrictions 2016, published by the International Monetary Fund (IMF), describes exchange restrictions and multiple currency practices in Iceland in the following way: “The IMF staff report for the 2014 Article IV Consultation and Fifth Post-Program Monitoring Discussion with Iceland states that as of February 23, 2015, Iceland maintained exchange restrictions arising from limitations imposed on the conversion and transfer of (1) interest on bonds (whose transfer the foreign exchange rules apportion depending on the period of the holding); (2) the principal payments from holdings of amortizing bonds; and (3) payments on the indexation of principal from holdings of amortizing bonds. (Country Report No. 15/72)”
 

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Iceland Market Access Foreign Exchange