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Starting Tuesday, all Icelandic citizens, enterprises, and pension funds will be allowed unrestricted access to international money markets. The question is: Will the Icelandic residents
actually move their money out of Iceland? Amidst weak global economic growth, the Icelandic economy that grew 7.2pc in 2016 is a rather comfortable place to be. The krona dropped 3.7pc
against the euro on Monday. The Icelandic central bank might cut its base interest rate to 4.75 from 5pc on March 15, Arion banki said, in order to support further devaluation of the krona.
“The liberalisation should pave the wave for an upgrade and also a rate cut by the central bank,” Valdimar Armann of Gamma, a fund manager in Reykjavik, said. “The economy is in a robust
shape with healthy growth, low unemployment and a positive trade balance, which will continue to interest foreign investors to invest into Iceland.” According to the observations by the
international rating agency Standard & Poor’s made in January, the lifting of capital controls would contribute to further improvement of Iceland’s sovereign rating, currently at A-. The
nation already boasts a solid foreign trade surplus and solid central bank reserves, but the broader economy is at risk of overheating, the agency said. Another problem with the too strong
krona is that inflation is still below the central bank’s target, which hinders domestic consumption and subtracts points from GDP growth. It is yet unclear whether the removal of capital
controls will be enough to overcome the structural imbalances in the economy and prevent the systemic risks from unravelling further, but Iceland’s full reintegration into the global system
of international money flows is generally a positive development.