COPENHAGEN May 22 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
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
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,
"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,"
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)