The Central Bank of Iceland has published questions and answers about the recent changes in the Foreign Exchange Act of 1992 and the Bank’s new Rules on Foreign Exchange.
Q: What is the purpose of the Rules on Foreign Exchange?
A: The purpose of the Rules is to stop, on a temporary basis, capital outflows that could result in immoderate weakening of the króna when restrictions on foreign exchange transactions related to commercial activities are lifted. It is foreseeable, however, that the inflow of foreign exchange from exports will soon exceed the outflow due to imports. Therefore, an excess of foreign reserves will gradually accumulate, and it will be possible to sell this to foreign parties and thereby enable them to close their króna positions.
Q: What is meant by the term “movement of capital”?
A: Movement of capital refers to the transfer or conveyance of money between countries in connection with:
1. Transactions with and issuance of securities, unit share certificates in UCITS and investment funds, money market instruments, and other transferable financial instruments.
2. Deposits to and withdrawals from accounts with credit institutions.
3. Lending, borrowing, and issue of guarantees not related to cross-border trade with goods and services.
4. Importation and exportation of securities and foreign and domestic currency.
5. Futures contracts, derivatives contracts, options contracts, currency and interest rate swap agreements, and other related foreign exchange transactions involving the Icelandic króna as the only currency or one of the currencies.
6. Gifts and subsidies and other capital movements comparable to those listed in Items 1-5.
Q: Are there any restrictions on the importation or exportation of goods?
A: No
Q: Are there any restrictions on the importation or exportation of services?
A: No
Q: Are there any limitations on foreign exchange for travel purposes?
A: No, but banks are free to decide to limit the sale of foreign currency in cash if their supply of banknotes is not sufficient. However, it is permissible to sell foreign currency in cash for a maximum of 500,000 kr. per calendar month per individual party
Q: What is the obligation to submit foreign currency?
A: All foreign currency that domestic parties acquire, either from the sale of goods and services or in another manner, must be submitted to a domestic financial institution within two weeks of the time the foreign currency was acquired or could have been acquired by the owner or his agent or representative. If the party in question cannot submit the foreign currency within this time limit, he or she must explain the reason to a financial undertaking. The obligation to submit foreign currency according to the first sentence above can be fulfilled by depositing the currency to a foreign currency account with a financial institution in Iceland. This requirement does not apply to domestic parties that have a fixed residence abroad for purposes of work or study.
Q: What is a foreign currency account?
A: A foreign currency account is an account at a commercial or savings bank where the deposit balance is listed in foreign currency.
Q: Are there any restrictions on deposits to foreign currency accounts?
A: No, but it is not possible to purchase foreign currency in order to deposit it to a foreign currency account.
Q: Are there any restrictions on withdrawals from foreign currency accounts?
A: Withdrawals from foreign currency accounts in Iceland are subject to the requirement that the party in question demonstrate that the funds will be used in accordance with the Rules on Foreign Exchange. It is prohibited to withdraw foreign currency in cash from a foreign currency account without demonstrating that the funds will be used to pay for goods or services, including travel.
Q: Is it absolutely forbidden to invest abroad?
A: No. It is permissible to invest in real estate and other assets not listed below. Domestic parties are prohibited from investing in securities, unit share certificates in UCITS and investment funds, money market instruments, or other transferable financial instruments denominated in foreign currency. However, domestic parties that have invested in such financial instruments prior to the entry into force of these Rules are permitted to reinvest abroad. Domestic parties are prohibited from settling, in foreign currency, transactions with securities or other transferable financial instruments denominated in Icelandic krónur.
Q: May foreigners invest in Iceland?
A: It is prohibited to invest in securities, unit share certificates in UCITS and investment funds, money market instruments, or other transferable financial instruments, if such investments involve the movement of capital to Iceland. It is prohibited to carry out foreign exchange transactions or other movement of capital in foreign currency through withdrawals from króna-denominated bank accounts at domestic financial institutions or the Central Bank of Iceland. Movement of capital due to the transfer or conveyance of funds out of Iceland in connection with the sale of direct investments is prohibited.
Q: Is it forbidden to take out a loan in another country?
A: It is generally prohibited if the amount borrowed is greater than 10 million Icelandic krónur. Exceptions to this are loans related to trade in goods and services and loans between companies in the same conglomerate.
Q: Why is it forbidden to provide guarantees over a specified amount?
A: It is considered extremely easy to create simulated contracts in order to circumvent the Rules. Guarantees related to trade with goods are permissible, as are guarantees between companies in the same conglomerate.
Q: Is all trading with derivatives forbidden?
A: Derivatives trading is limited if the Icelandic króna is one of the currencies involved in the derivative contract. This does not apply, however to derivatives related solely to trade with goods and services.
Q: May I no longer purchase foreign currency to pay a foreign loan?
A: Yes, this is possible. Interest, indexation, dividends, capital gains on investments, and contractual payments are not considered movement of capital in the sense of the Rules on Foreign Exchange. Therefore, it is possible to purchase foreign currency in order to make payments on foreign-denominated loans. Wages are not considered movement of capital in the sense of the Act; therefore, it is permissible to purchase foreign currency to pay wages abroad. However, prepayment of loans is considered movement of capital and is therefore prohibited.
Q: What about subsidies and charities?
A: Individuals and legal entities are prohibited from moving capital out of the country for gifts, subsidies, or other purposes, in amounts exceeding 10,000,000 kr. per calendar year.
Q: Is it possible to get an exemption from the Rules?
A: The Central Bank may authorise exemptions in exceptional cases, but an application for such an exemption must be submitted to the Bank, together with the relevant documentation, through the intermediation of a financial institution.
[…] Questions and answers about foreign exchange matters […]
Chris,
By now there is no excuse for a bill to remain unpaid.
If it is still unpaid just ask for such a reason to be confirmed by contacting the importers Bank.
From the beginning of last October,
afaia the shipping companies would not accept goods unless they were pre-payed.
The normal way to conduct business (even with trusted business partners) to a country in crisis or severe currency restrictions is to fax the invoice to the importer, The importer applies to their bank who then transfers the currency to the foreign supplier.
When all that is done, the Ice importer can get the goods shipped to Iceland and clear customs.
i am a business man and i do sell my products in iceland. now my client in iceland is unable to send me the money due to financial crisis and that the government does now allow foreign money transfer.
i would like to know when the banks will allow for foreign money transfers.
Thanks.
@Knowless,
I also don’t get this logic about ISK supply drying up. Iceland is heavily indebted (not the government), so there are probably a lot of bonds and similar paper, nominated in ISK. Foreigners will try to pull the money out of iceland debt instruments, I think.
Now, central bank may forbid this, but this, again is not how true market for krona looks like… forbid foreigners to cash their ISK denominated debt instruments, and then open the market? Obviously only in iceland this counts as “free”.
@Knowless,
honestly,
I check here often the iceland financial news, because I still hope that the krona will float and that I can spend a week in Reykjavik Hilton next May holidays for a bargain.
I reckon the prices will shot up (in ISK) as soon as the floating makes its way through the system, so I guess there will be a small window to reserve at current ISK prices & good exchange rate. Or before all hotels are booked full…
On the two exchange rates for the Kronur, the home rate 180 kr/EU 180and the foreign markets 300kr/EU
this article
http://www.mbl.is/mm/vidskipti/frettir/2008/12/02/tvofaldur_gjaldeyrismarkadur/
asks the key question
“Hins vegar mun framboð á krónum erlendis nú líklega þorna upp að mestu leyti, og líklegt að gengi krónu á erlendum mörkuðum færist nær því gengi sem gilda mun hér á landi”
roughly translated
‘On the other hand supplies of the Kronur abroad will now probably/mostly dry up and likely lead to the foreign exchange rate Kronur/Euro being drawn closer to the exchange rate in Iceland.’
Is it with more hope rather than expectation that the value abroad will be trawled to the Iceland
rate of exchange rather than vice versa? :)
Regardless, the rate of exchange in Iceland will continue to fall until a realistic level has been reached.
` bc123a said: “Slow down” etc
What are you still doing around here?
I was replying to Gerard and I think I answered a question he may have had.
I already mentioned that the delicate part was legally enforcing the repatriation of all currencies coming from the sale of produce like fish, (licenced to be fished by the Icelandic State).
“This is incredibly stupid – it really diminishes the motivation to produce export-worthy goods.”
There will be no lack of motivation to fish nor no lack of profitability in doing so.
@Knowless
Fish etc are sold at foreign currency prices. The value of the kronur is not relevant to that.
And the Kronur is devaluing by degrees every day.
Slow down. If I read those “measures” correctly, fish exporters (or any other exporters from iceland, for that matter) are forbidden to hold their money abroad – they are obliged to bring it to iceland bank. And probably, converting it to ISK is allowed only at artificially inflated rate.
This is incredibly stupid – it really diminishes the motivation to produce export-worthy goods.
And about 1/3 of icelanders having foreign currency loans. They will not be bankrupt. They ARE BANKRUPT now. Having deeply negative equity in real estate in country approaching big depression … they are bankrupt.
If they (the government) will try to artificially pump up the ISK, there will be lot more than 1/3 of bankrupt people in iceland.
TWR “… Politicians here may be incompetent, but they are not THAT stupid.”
Are you sure ?
you cannot rule anything out, especially the most stupid and destructive possibilityes,
my guess is that things will get a lot worse before they start getting better,
i can see angry people with pitchforks taking over the Parliament and Central Bank buildings very soon
it would not surprize me at all, of course David probably has a pitchfork too, but hes no match for the crowd.
Gerard,
Fish etc are sold at foreign currency prices. The value of the kronur is not relevant to that.
And the Kronur is devaluing by degrees every day.
What is a delicate matter is that the exporters deposit the foreign currency into Iceland banks as they are required to. Making that currency available for purchase by others.
Because naturally you can imagine that, in uncertain times that exporters will find ways around that requirement.There are all sorts of little tricks that were used in the 80’s.
The restrictions firmly keep the doors closed for individuals transferring Kr to for. currency but those with money can take advantage of a few loopholes.
They say, for a restricted float to work there needs to be trust in the economy and the Government, with the important factor that the Governments spending budget is balanced.
TWR, not devaluing the krona will diminish the comparitive advantage of Iceland, because other countries will not buy Icelandic goods if they can do so only at the overpriced official rate. If foreigners aren’t willing to buy Icelandic goods, how will you Icelanders be able to buy ours?
A question to those who have been in Iceland in recent days (or otherwise know about this):
1) If I travel to Iceland as a tourist, do the banks there convert my excess ISK into EUR, if I don’t manage to consume all?
2) When doing the above, do I need to show a receipt of having purchased the currency from them?
3) What is the maximum amount of ISK the banks purchase back? Is it 500 000 ISK like for Icelanders?
I am planning to go to Iceland for several weeks. On one hand, I wouldn’t like to visit a bank every day (to convert EUR to ISK), on the other hand, I wouldn’t like to be stuck with a thick bunch of ISK, unable to convert all back to EUR.
‘Politicians here may be incompetent, but they are not THAT stupid.’ Yes, the politicians are smart because brain dead Icelanders allowed these thieves to stay in their jobs.
To gerard:
If ‘they’ will devaluate krona more then it’s devaluated now, it will make close to 1/3 Icelandic population go bankrupt, since lots of households have part (lucky ones, since many were victims of banks advertisement and took 100% foreign currency loans) of their loans in foreign currency.
Imagine how huge would be the wave of social unrest in this case… Politicians here may be incompetent, but they are not THAT stupid.
So what IMF and other loans are for if they impose exchange control ? or is it IMF’s condition ? we will see how “temporary” is this measure.
Provisionally, these measures seem very suitable: Flights of money are avoided; on the other hand, Central Bank drinks fresh water: this one, is thirsty of currencies, essential serum for Iceland these days.
Why don’t they play ball and devalue the krona, it’s what everybody is expecting. Are some politically connected people holding things back?
My dear bc123a, your comment about Yugoslavia may be true, for 70’s and 80’s. But nowdays, things are sooo different! Some countries of former YU don’t have standard as high as Iceland (which was, by the way, obviously artificial, sustained by loans and illegal banking), but at least none of those governments have monopolly on alchohol drinks, they have all built and serviced their own roads and airports, they are at least trying (well, after Milosevic’s and Tudjman’s downfall) to keep track of what their governments are doing and protest if they don’t like it. Now what we have here, in Iceland, really does seam as comunism! For some time now…
What are we suposed – allowed – to do with the ISK received for the coupons of ISK bonds that we currently hold?
Either the krona floats or it doesn’t. There is no such thing as an administered float. That is called currency control. This is simply a way of delaying the inevitable in the hope that, in the words of Mr. McCawber, “something will turn up”. Calling a pig a bathing beauty doesn’t make it swim.
A: All foreign currency that domestic parties acquire, either from the sale of goods and services or in another manner, must be submitted to a domestic financial institution within two weeks of the time the foreign currency was acquired or could have been acquired by the owner or his agent or representative.
Hey guys, sounds like Yugoslavia in 1970’s and 1980’s (yes, it was a communist country).
I am amazed, didn’t know that Branko Mikulic (former head of communist government, who had exactly the same ideas) is available as advisor.
How much are you paying for his services?