Iceland warns over capital controls
The top civil servant in charge of Iceland’s finance ministry has warned that countries imposing capital controls should start thinking about a strategy for lifting them immediately.
Iceland introduced capital controls – measures that can be used to order banks to impose strict limits on daily withdrawals and to restrict people’s ability to exchange local currency for foreign money – soon after the banking crisis in 2008 thinking they could be lifted within a few months.
But, while the government drafted a strategy aiming to eliminate capital controls in early 2012, it was not until 8 June this year that it announced how it concretely intends to lift the controls – more than six years after they were first put in place.
Speaking in an exclusive interview with Global Government Forum, Guðmundur Árnason, permanent secretary of Iceland’s Ministry of Finance and Economic Affairs, said that there are lessons to be learnt from Iceland’s experience: “Everybody should realise that imposing capital controls is a relatively simple thing to do. However, removing them or even loosening them is something that is complicated and will take time, and the difficulty associated with lifting capital controls will increase over time,” he said.
He added: “Capital controls tend to become entrenched, and they create an artificial shelter which can become overly comfortable for some.”
Countries imposing capital controls, he said, “should bear in mind that when they are put on, then you immediately need to set yourself a realistic timeframe and a realistic strategy for how you are going to ease them again, and at least create the conditions that are absolutely indispensable for lifting the controls.”
His comments come after Greece imposed capital controls on 29 June 2015, following an announcement by the European Central Bank that there would be no increase in emergency funding.
The controls were planned to be in place until 6 July but have yet to be lifted. All Greek banks closed when the controls were imposed and have not reopened since.
As part of the capital controls, Greeks are no longer able to buy goods abroad because this would count as a “currency export”, which the government wants to prevent. This means that in many cases Greek bank-cardholders can no longer buy books abroad on Amazon or use their cards when on holiday abroad.
Another country, that imposed capital controls recently is Cyprus. It took the step in 2013 after a banking crisis and a subsequent bailout deal with the EU and International Monetary Fund. There, though, the limits were far higher, with daily withdrawals capped at €300 of cash per person per day.
Why did it take Iceland almost seven years to plan a gradual lifting of its capital controls? Find out in our full interview with Guðmundur Árnason, permanent secretary of Iceland’s Ministry of Finance and Economic Affairs