Transcript of a Conference Call on Iceland 2012 Article IV Consultation
April 12, 2012with IMF Mission Chief Julie Kozack
Thursday, April 12, 2012
MS. KOZACK: Hello everybody and thank you for joining us. I will say a few brief words related to the staff report. First of all, in Iceland the recovery is underway. Iceland is gradually emerging from its post-crisis recession, but at the same time we do see that inflation is rising. And of course there are some risks to this outlook emanating from both domestic and external sources, and there are also a number of policy challenges that Iceland is facing. As you all know, Iceland has made significant progress on the policy front since the crisis. These achievements are laudable and very significant, but they still do face a number of challenges going forward. These include lifting the capital controls, completing the fiscal consolidation, completing private sector debt restricting and of course bringing to conclusion the restructuring of the banking sector. I think I'll leave my remarks here, I'm very happy to take your questions.
QUESTIONER: I want to talk about the capital controls. You say it's a key challenge facing Iceland still. There have been some potential delays. The auctions are not going quite according to plan, and also they had to change some legislation around capital controls recently. I was wondering whether you could comment on that.
MS. KOZACK: As we state in the Article IV report, the lifting of controls in Iceland is very, very difficult challenge for the authorities. The reason it's so difficult is twofold. One, it is because of the size of the locked in foreign holdings, and also because the international environment is not very benign at the moment. Essentially the pace of lifting the controls will depend on the strength of the balance of payments in Iceland and this essentially is very much related to the amount of capital inflows that Iceland receives. In order to let some of the locked in foreign currency out or foreign funds out, Iceland is going to need inflows of some form. And as we've seen with some of the auctions, at times those inflows are less forthcoming than we had hoped and this goes to underscore the difficulty of the challenge.
The other thing I would say is that the authorities' strategy is meant to be conditioned-based, so the idea is that the pace of the lifting of controls will have to depend on the conditions that are at hand, and of course to the extent that those conditions are less favorable, the pace of liberalization would likely have to be slower.
QUESTIONER: A follow-up question: the central bank has itself touched on the possibility of altering the format of the auctions it is holding and I was wondering whether you thought that was a wise approach to adopt.
MS. KOZACK: The strategy that the central bank has laid out is a very flexible strategy and the idea is that the strategy will be adjusted over time depending on conditions, and this is in recognition of the fact that the liberalization is difficult and will require a flexible approach. The strategy includes of course the auctions, but there are a number of other measures that are outlined in the strategy that the central bank can ultimately rely on. These include an exit tax, possible swapping of offshore krona holdings for European bonds, so that there are a number of other methods that the central bank could use as it liberalizes, and the point of the strategy is to be flexible and to allow the central bank to use the flexibility.
QUESTIONER: This is a little bit of a follow-up to the Bloomberg question. I wonder if you could expand a little bit about what kind of pace you would like to see them move and if you think that anything else needs to be done in order to create a more stable environment for these removals.
MS. KOZACK: What we would like to see is that the pace of controls takes place in a way that it doesn't destabilize the gains that have been made so far. This will require that the balance of payments is sufficiently strong, that reserves main adequate, so looking at standard reserve adequacy measures to reserve to short-term debt, we wouldn't want to see those measures move very low. And at the same time, we also have to pay attention to the financial sector because a lot of these nonresident holdings are deposits or held in the form of deposits in the banking sector, so we would want to make sure of course that the financial sector is able to withstand the deposit withdrawals. The idea would be that the pace should be such that the situation remains stable. And that includes also the currency. There is some scope for some depreciation, but not a large depreciation because of the currency mismatches that still exist in Iceland so that we would want to see that conditions remain generally stable throughout the liberalization process.
QUESTIONER: What are your views on the recent krona movements?
MS. KOZACK: As I said, some depreciation is possible. We also know that the krona is seasonally weak in the winter because tourists come less frequently in the winter to Iceland than in the summer, so that some of it is seasonal. Some of it reflects deleveraging by companies that are refinancing in krona but are repaying debt that it is foreign currencies and obviously that deleveraging is something that needs to take place over time both because some of these entities have debt that is too high and also because they need to unwind some of the currency mismatches that were put on their balance sheets before the crisis. So some of this is essentially a natural process that will take place over time and it may lead at times to some pressure on the krona.
MS. KOZACK: I would like to thank everybody for participating and also to alert you that this will be my final act as Mission Chief for Iceland. This Article IV mission was my last and I'm now moving on to become the Mission Chief for Poland and Lithuania, and the next mission and report that you should expect from Iceland will be in about 6 months under a new mission chief. Thank you all for your interest in Iceland, I've enjoyed working with you and I move on to new challenges.
MS. SIMONETTA NARDIN (IMF External Relations Department): Thank you very much, Julie, and thank you all for participating.