Iceland is tempering the goal of lifting capital controls now as the new Government has announced that it is going to keep some restrictions in an attempt to stop speculations over the currency. According to the Finance Minister, Bjarni Benediktsson, Iceland is expected to impose limits on the derivative trades with the currency, just like some other countries. Apart from that, Island may also impose limit on the banks of the country on gathering foreign exchange in the foreign branches. This may seem to be sort of restriction on the capital flows, however, Benediktsson thinks that this is normal part of managing any particular currency.
Before the elections which were held on 27th April, Benediktsson, along with the Prime Minister, Sigmundur Gunnlaugsson, had pledged to target a swift removal of the capital controls. However, they are currently redefining their earlier set goals as the Euro zone is attempting to plot an exit from its controls in Cyprus. The current path of Iceland promises to serve as a guideline for nations learning that such regimes are easier to be put into a place than they are easier to escape from.
The balancing act of when to exit from the currency controls is one of those which prompted a review at the International Monetary Fund. According to International Monetary Fund officials, if such limits are kept for quite a long period of time, the same can distort the markets. At the same time, efforts to stop speculation risk may also end up hitting the wrong group.
The Deputy Director of the Research Department of the International Monetary Fund, Jonathan Ostry, stated that a country may have the best intentions of targeting the hot money flows, however, it may end up targeting a broader class of flow and hence, some collateral damage can be made. Ostry added that the intentions may be right, however, the practical difficulties cannot be underestimated in anyway.
In the past, Island has shown that it’s ready for taking extreme measurements with the investors. The bondholders in some of the biggest banks of the country were forced to accept a default worth $85 billion, thereby dwarfing the $14 billion Gross Domestic Product of the country in 2008, after the financial industry of the same imploded. Offshore creditors who represent around $8 billion have been trapped by the capital controls in last 4 years.