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SA publishes capital account liberalisation strategy
Yesterday, the Confederation of Icelandic Employers (SA) published its own capital account liberalisation strategy, claiming that the Central Bank of Iceland (CBI)'s strategy for lifting capital controls is not credible and will not achieve the desired results. The SA wants a shift in emphasis and to replace the cautious unscheduled steps that are designed to minimise the risks of a rapid depreciation of the króna with a scheduled strategy designed to respond to the repercussions of a temporary depreciation of the króna.
The impetus for SA's strategy comes from the fact that, next October, Icelandic parliament will be passing a law for the abolition of capital controls that will come into effect on 1 January 2013. Before that date is reached, the trading of non-residents' frozen króna assets will have to have been mostly settled and, in its strategy, SA outlines how these liberalisation measures would be articulated.
Many of SA's proposals have been heard in debates before, including, among other things, the idea that the Treasury would issue 10-20 year foreign-currency denominated bonds to be offered to non-resident holders of ISK denominated Treasury bonds. What is new, however, is that SA proposes that banks should also be authorised to issue foreign-currency denominated 5-10 year bonds and permitted to convert non-residents' króna deposits into bonds of this kind or foreign-currency denominated time deposits.
Another new element in SA's proposals is the idea that trading linked to the lifting of capital controls should be taxed to prepare the ground for the drop in the exchange rate that would follow liberalisation. SA proposes that a 2-5% turnover tax be levied on both Treasury and bank bond transactions and that a temporary exit tax be imposed on the currency purchases of non-resident holders of government guaranteed Treasury bonds and deposits, once foreign currency trading is liberalised again. These tax collections would be used to protect indebted households against increases in the payments of indexed loans with special interest rebates.
Many aspects of SA's capital account liberalisation strategy are unclear and require considerably more detailed discussions and explanations before they could be implemented. This is, nevertheless, an interesting document, which contains many interesting points that are worthy of further examination. Any discussion of capital controls and their abolition is very important at the moment, particularly in view of the fact that the credibility of the CBI's capital account liberalisation strategy has substantially diminished since it was first published and there is clearly a need for a fresh approach and thorough discussion.
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