“At the moment the liberalization of capital controls would be a very risky move in the present global environment,” Flanagan said. “With interest rates, there is scope to move forward in the near future.”

Iceland’s economy will shrink as much as 10.5 percent this year, Flanagan said, signaling a deeper recession than the 9.6 percent contraction the fund forecast last year. The country needs to keep capital controls in place to prevent a sell-off of the krona, which lost more than two thirds of its value last year after the collapse of the three biggest banks.

The IMF is not concerned that an election due to be held on April 25 would reduce the government’s commitment to following the fund’s program designed to rebuild the economy, Flanagan said.

Iceland got an IMF-led loan of $5.1 billion in November to help it rebuild the crippled economy, the fifth-richest per capita as recently as 2007.

Source: Bloomberg