Capital controls and Iceland's crisis exit strategy

In November 2008, weeks after its banking system collapsed, Iceland imposed comprehensive capital controls as part of the IMF-supported stabilisation programme, with the explicit goal of propping up a currency that had already lost more than half its value that year. Then-governor Mar Gudmundsson later explained that the controls served several purposes at once: they let the Central Bank keep interest rates lower than would otherwise have been needed to defend the krona, gave the government room to finance a large fiscal deficit domestically after being cut off from foreign markets, and bought time to restructure bank balance sheets before the exchange rate was tested again. The exit proved far harder than the entry. Because the resolution of the failed banks' estates was not finalised until 2010, and because a large stock of liquid, foreign-owned kronur remained parked onshore, the authorities released capital controls in three successive strategies published in 2009, 2011 and 2015, using targeted auctions that bought back offshore kronur at discounted exchange rates. Controls on domestic residents were not substantially lifted until the second half of 2016, nearly eight years after they began.