ICELAND - Iceland has been preparing for the liberalisation from its capital controls, which will eventually conclude with the lifting of currency restrictions.

The Icelandic government approved a strategy for the removal of capital controls this summer, after they were introduced last autumn in response to the country's economic collapse.

But in order to avoid further instability of the Icelandic economy and the króna, the liberalisation phase was made dependent on a significant reduction in the perceived risk of investments in Icelandic assets.

And so over the past few months, steps were taken to support these pre-conditions, such as the adoption of a medium-term fiscal plan, progress on the bank recapitalisation process, the signing of the loan agreements with the Nordic countries, a monetary policy focused on currency stability and a stability pact between the government and its social partners.

"On top of that, exports have proven stronger and imports weaker than expected, changing a sharp drop in domestic demand into a relatively moderate drop in GDP combined with a positive trade balance," said Stefán Jóhann Stefánsson, editor at the Central Bank of Iceland's (CBoI) governors' office.

"Against this background, the stage should be set for the fulfilment of the pre-conditions over the next few months. It is the view of the CBoI that the necessary pre-conditions will be in place by 1 November for stage one of the capital control liberalisation."

Stage one is the liberalisation of foreign exchange inflows, while stage two extends to foreign exchange outflows.

Among the capital controls were currency restrictions, which meant that Iceland's pension funds were no longer able to make any new investments in foreign currency denominated assets.
When the capital controls are eventually lifted, Icelandic pension funds will again be able to channel some of their funds into foreign currency denominated assets.

"They are expected to carefully consider the benefits of resuming investments in foreign assets," said Ólafur Ísleifsson, assistant professor at the School of Business at Reykjavik University.

"The [pension] funds are likely to make a judgement on the probable development of the króna exchange rate and make their foreign assets-based investment decisions on those scenarios."

On a different note, Icelandic pension funds have until 15 October to decide whether to join the Icelandic Investment Fund (IIF), a private equity pension fund vehicle estimated to be worth ISK50bn (€272m), and scheduled to be set up so funds may invest in domestic businesses that have suffered in the economic crisis. (See earlier IPE story: Icelandic pensions to set up specialist fund)

More information on pensions in the Nordic region will be available in the November edition of IPE.

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