IMF says Iceland stability hinges on rates, controls
STOCKHOLM (Reuters) - Iceland and officials at the International Monetary Fund agree that capital controls and a "firm interest rate policy" are needed to maintain exchange rate stability, the IMF wrote in a report on Tuesday.
The IMF provided details of its review of the hard-hit economy following last week's long-delayed approval of a fresh tranche of funds as part of a promised $2.2 billion loan programme.
"The existence of large non-resident krona holdings, and the propensity of residents to invest abroad, suggest that without capital controls, outflows could be very large," IMF staff wrote in a report following discussions with Icelandic officials on economic developments and policies.
This rules out "rapid capital account liberalisation," the fund said. The report, completed on Oct 20, estimates foreign holdings in Icelandic crowns at some $5 billion, or roughly 40 percent of the country's gross domestic product.
Even with capital controls in place, the level of the country's interest rates has remained a crucial factor in exchange rate stability, it said.
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