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Europe > Iceland

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Cover IMF Working Papers
Capital Controls in Times of Crisis – Do They Work?
Apoorv Bhargava
,
Romain Bouis
,
Annamaria Kokenyne
,
Manuel Perez-Archila
,
Umang Rawat
, and
Ms. Ratna Sahay
This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
Keywords:
Capital controls; capital outflows; financial crises; inflow control; outflow controls Introduced; outflow control; controls on outflow; tightening control; Capital account; Capital flows; Caribbean; Global
Cover Policy Papers
IMF COVID-19 Response—A New Short-Term Liquidity Line to Enhance The Adequacy Of The Global Financial Safety Net
International Monetary Fund
The COVID-19 pandemic has created severe disruption in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages. In the context of intensified demand for liquidity and heightened global uncertainty, staff has revisited the 2017 proposal for a new facility to provide liquidity support to the Fund’s membership. This paper proposes the establishment of a new Short-term Liquidity Line (SLL) as a special facility in the General Resources Account (GRA), based on the key features of the 2017 blueprint.
Keywords:
PP; SLL arrangement; SLL usage; liquidity pressure; liquidity position; liquidity shortage; Liquidity; Balance of payments need; Communications in revenue administration; Credit; Financial Sector Assessment Program; Global
Cover IMF Staff Country Reports
Iceland: 2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
Iceland is experiencing an economic slowdown that has reduced overheating concerns. Tourism growth has decelerated and the króna has stopped appreciating. Demand management has become easier, allowing the authorities to focus on medium-term priorities, including infrastructure, healthcare, education, and the environment. Risks, however, have become more evident. High fuel prices and other factors are challenging the airline business; world trade tensions are escalating; and the United Kingdom—a vital trading partner—is not yet assured of a smooth EU exit. Icelandic policies thus need to focus on further increasing resilience to shocks.
Keywords:
ISCR; CR; competition authority; staff appraisal; baseline rojections; increase government investment; IMF staff projection; liability positions vis-à-vis nonresident; tourism growth; foreign currency; Current account surpluses; Income; Government finance statistics; Fiscal stance; Global; Europe
Cover IMF Working Papers
Portfolio Inflows Eclipsing Banking Inflows: Alternative Facts?
Mr. Eugenio M Cerutti
and
Mr. Gee Hee Hong
Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors.
Keywords:
WP; capital flows; portfolio inflows; bank inflows; global financial cycle; portfolio debt; loan inflow; AE corporate; borrower type; investment loan; factor loading; debt inflow; debt optimization operation; Loans; Capital inflows; Securities; Stocks; Global
Cover Policy Papers
Increasing Resilience to Large and Volatile Capital Flows: The Role of Macroprudential Policies - Case Studies
International Monetary Fund
NULL
Keywords:
PP; bank; central bank; financing; net capital; Banco de la República de Colombia; FX lending; parent bank; return on equity; foreign currency; financial crisis; credit growth; financial system; banking sector; monetary policy; Credit; Capital inflows; Capital flows; Loans; Global
Cover IMF Staff Country Reports
Iceland: 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights Iceland’s continued real GDP growth, driven by tourism. Growth reached 7.2 percent in 2016 and is projected at almost 6 percent in 2017 before tapering to about 2.5 percent over the medium term. Bank credit to the nonfinancial private sector remains muted, growing only 4.3 percent in 2016, but it is expected to pick up. Thus far, growth has been driven not by leverage but by exports, private consumption, and investment. Iceland’s current account surplus is projected to shrink modestly over time, with some export sectors suffering while others thrive.
Keywords:
ISCR; CR; fiscal policy; IMF staff projection; economy; inflation expectation; exchange rate volatility; prudent fiscal policy; CBI transactions; inflation prospect; Tourism; Current account; Inflation; Global
Cover Policy Papers
Increasing Resilience to Large and Volatile Capital Flows—The Role of Macroprudential Policies
International Monetary Fund
Capital flows can deliver substantial benefits for countries, but also have the potential to contribute to a buildup of systemic financial risk. Benefits, such as enhanced investment and consumption smoothing, tend to be greater for countries whose financial and institutional development enables them to intermediate capital flows safely. Post-crisis reforms, including the development of macroprudential policies (MPPs), are helping to strengthen the resilience of financial systems including to shocks from capital flows. The Basel III process has improved the quality and level of capital, reduced leverage, and increased liquid asset holdings in financial systems. Drawing on and complementing such international reforms at the national level, robust macroprudential policy frameworks focused on mitigating systemic risk can improve the capacity of a financial system to safely intermediate cross-border flows. Macroprudential frameworks can play an important role over the capital flow cycle, and help members harness the benefits of capital flows. Introducing macroprudential measures (MPMs) preemptively can increase the resilience of the financial system to aggregate shocks, including those arising from capital inflows, and can contain the build-up of systemic vulnerabilities over time, even when such measures are not designed to limit capital flows. While the risks from capital outflows should be handled primarily by macroeconomic policies, a relaxation of MPMs may assist, as long as buffers are in place, in countering financial stresses from outflows. Capital flow liberalization should be supported by broad efforts to strengthen prudential regulation and supervision, including macroprudential policy frameworks. The Fund has two frameworks to help ensure that its advice on MPPs and policies related to capital flows is consistent and tailored to country circumstances. The frameworks (the Macroprudential framework and the Institutional View on capital flows) are consistent in terms of key principles, including avoiding using MPMs and capital flow management measures (CFMs) as a substitute for necessary macroeconomic adjustment. The appropriate classification of measures is important to ensure targeted advice consistent with the two frameworks. The conceptual framework for the assessment of measures laid out in this paper will assist staff in properly identifying MPMs and measures that are designed to limit capital flows and to reduce systemic financial risk stemming from such flows (CFM/MPMs), and thereby ensure the appropriate application of the Fund’s frameworks, so that staff policy advice is consistent and well targeted. The Fund will continue to develop and share expertise in using MPMs, and integrate these findings into its surveillance and technical assistance, which should contribute to building international understanding and experience on these issues.
Keywords:
PP; capital flow; liberalization; capital; macroprudential measure; paper; systemic risk; flow liberalization; liquidity tool; financial crisis; Capital flows; Systemic risk; Macroprudential policy; Macroprudential policy instruments; Capital inflows; Global
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund. European Dept.
This paper examines Iceland’s expenditure policy, especially five expenditure pressure points, as well as capital flows and monetary policy effectiveness in small open economies. The postcrisis fiscal adjustment demanded painful choices, with spending on healthcare, education, and investment suffering cuts in real terms. While expenditures in these areas have rebounded more recently, there is a room for further decompression. Using quarterly panel data for 18 advanced and emerging small open economies during 2002–15, it finds that monetary policy is focused on inflation developments, but also that domestic interest rates affect capital flows, raising concerns about a reinforcing loop between monetary policy and capital flows.
Keywords:
ISCR; CR; monetary policy; cost; GDP; monetary policy effectiveness; health expenditure; expenditure pressure points; monetary policy independence; monetary policy stance; interest cost; Capital flows; Capital inflows; Macroprudential policy instruments; Macroprudential policy; Global; Europe
Cover IMF Staff Country Reports
Iceland: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Iceland
International Monetary Fund. European Dept.
This paper provides an assessment of the economic conditions, outlook, and crises in Iceland. There is a mounting sense that capital controls hurt growth prospects, repressing local financial markets, scaring foreign investors, and impeding savings diversification, and that it is time for them to go. Recent settlements with the bank estates are a huge step forward, improving already favorable macroeconomic conditions. At 4 percent in 2015 and gaining pace, real GDP expansion is among the fastest growing in Europe, opening up a positive output gap. However, the biggest risk for Iceland is overheating. Large wage awards on top of already hot economic readings speak to Iceland’s boom-bust history.
Keywords:
ISCR; CR; Iceland; right; CBI governor; IMF staff projection; CBI transactions; inflation expectation; baseline projection; asset price pressure; Bank supervision; Capital account liberalization; Capital controls; Wages; Global; Europe
Cover Policy Papers
Review of Access Limits and Surcharge Policies
International Monetary Fund
Scope and strategy: This paper reviews access limits and surcharge policies in the Fund’s General Resources Account (GRA). It builds on the preliminary Executive Board discussion that took place in May 2014, against the backdrop of the 14th Review quotas expected to become effective early in 2016, which will on average double individual members’ quotas. At the meeting in 2014, most Directors considered that a moderate increase in normal access limits in SDR terms would broadly restore the normal Fund access to levels considered acceptable in 2009, and saw merit in adjusting the surcharge threshold to allow for a moderate increase in the SDR value of credit not subject to the charge.
Keywords:
PP; IMF executive board review; financing role; threshold; SDR; refund; surcharge policy; b. paragraph 4; decisions III; Credit; Personal income; Currencies; Balance of payments need; Credit risk; Global