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Ministry of Finance and Economic Affairs

Measures to curb the negative effects of inflows of foreign currency

This afternoon, Bjarni Benediktsson, the minister of Finance and Economic Affairs, presented a bill to the Althing regarding amendments to the Foreign Exchange Act, the Act on the Handling of ISK Assets which are subject to special restrictions, and the Act on the special tax on Financial Undertakings.

The bill is directly linked to the Government's comprehensive plan to liberalize capital controls, since its main objective is to define and adopt into legislation solutions for the Central Bank of Iceland to regulate the inflow of capital into the country and to have an impact on its composition.

The adoption of legal provisions regarding some kind of prudential tool in connection with the so-called carry trade has been under consideration by the Government for some time now. As is known, this kind of trading can jeopardise the equilibrium of the real economy within the financial system, as well as the normal implementation of economic policy in the areas of monetary and fiscal policy.

The bill proposes that the Central Bank be authorised to set rules which stipulate a reserve requirement  for certain new inflows of currency. This primarily concerns inflows due to inward investments into bonds and bills, as well as new bank deposits where investors are interested in the short-term gains to be made from the interest rate differential between Iceland and other countries and exchange rate fluctuations. The Central Bank can therefore impose governmental instructions which entail a reserve requirement on capital inflows for an amount of up to 75% of the investment, in an account at the credit institution in Iceland for a period of up to five years.

The measure is designed to reduce the risk which substantial capital inflows can create and to strengthen other elements of domestic economic policy.

 

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