ICELAND - Capital controls are expected to remain in place in Iceland until 2015, according to the country's central bank.

In its new 'Capital Account Liberalisation Strategy' report, the central bank said it was highly unlikely the capital controls would have been lifted in full by the time the current statutory authority expires on 31 August, without assuming unacceptable risk of financial and exchange rate stability.

"Hence it is recommended that the statutory authority be extended by approximately four years, which should ensure that it is possible to lift the controls at a pace warranted by circumstances without generating instability, given appropriate prudential regulation," it added.

"Nevertheless, every effort should be made to lift the controls earlier if conditions permit."

But some market participants doubt the restrictions will have been lifted completely by 2015.

Gylfi Jónasson, managing director at Festa Pension Fund, said: "The controls will only be lifted with Iceland's accession to the EU."

The new strategy comprises two main phases. Phase I is the reduction of offshore króna positions, while phase II is the removal of controls on onshore króna.

The report warned that phase II and part of phase I of the liberalisation strategy could be delayed if the Icesave bill were rejected. It was rejected in the referendum on 10 April.

The restrictions have had a profound effect on the asset allocation of Icelandic pension funds, leaving them only limited room to manoeuvre, as they are unable to make new investments in assets denominated in foreign currencies.

As a result, the asset allocation of Icelandic pension funds today largely consists of government guaranteed paper and bank deposits.

The central bank had introduced measures to temporarily restrict currency outflows following the country's banking crisis in 2008.

A strategy for the removal of those capital controls was approved by the Icelandic government in August 2009, but made dependent on the fulfilment of certain conditions.