May 22, 2017 / 9:16 PM / 3 months ago

Iceland's strong currency is a problem -finance minister

COPENHAGEN, May 22 (Reuters) - The strength of Iceland's crown has become a problem for its economy, finance minister Benedikt Johannesson warned on Monday, adding that the government would increase VAT on tourism to try to tame the currency.

The North Atlantic island nation recently lifted capital controls put in place after its banks collapsed during the global financial crisis more than eight years ago.

But a boom in tourism and increased investor appetite for Icelandic assets has pushed the currency to levels not seen for almost a decade against the euro and the U.S. dollar.

"It is certainly a problem for all the export sectors, for the fisheries, for the tourist industry, for the food industry etc," Johannesson told Reuters in a phone interview.

"Everybody competing with foreign competitors is in grave difficulties."

The government is therefore proposing to increase value-added tax (VAT) on the tourist industry from 11 percent to 24 percent, the general level for the rest of the economy, Johannesson said.

"We're trying with all the means we know to counter the high demand for Icelandic krona (crown), and even so it has become stronger almost every day. We're running out of ammunition now," he said.

Iceland is expected to welcome around 2.4 million tourists this year, up from less than half a million in 2009. While the boom in tourism has helped the economy grow, it has exacerbated the problem of a too-strong currency.

Before joining the government after last year's election Johannesson had proposed to peg the Icelandic crown to the euro to avoid damaging currency fluctuations, emulating a currency model that has worked in Denmark for decades.

His Reform Party holds only seven seats in parliament, however, and main coalition partner the Independence Party, which holds 21 seats, has yet to back the proposal.

The government, which holds 32 of the 63 seats in parliament, has created a task force to review monetary policy, including the possibility of a currency peg. It is due to report at the end of 2017.

"We haven't decided on that (a crown peg) yet, but I would say that in the business community and especially in the export sector, I think there is widespread support," Johannesson said.

Last week, Iceland's central bank lowered its key deposit rate to 4.75 percent from 5 percent citing easing inflationary pressures because of the stronger crown. (Additional reporting by Ragnhildur Sigurdardottir in Reykjavik; Editing by Catherine Evans)

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