The petroleum fund mechanism and associated foreign exchange transactions by Norges Bank
- Ellen Aamodt
- Economic Commentaries
The Norwegian government receives substantial revenues from petroleum activities, both as revenues in NOK from oil taxes and revenues in foreign currency from the government's own petroleum activities via the State's Direct Financial Interest (SDFI). The government spends a portion of total petroleum revenues every year via the central government budget. The remainder is transferred to the Government Pension Fund Global (GPFG) and is invested in foreign securities.
To date, government petroleum revenues in NOK have been higher than annual spending of petroleum revenues. Norges Bank, on behalf of the government, has converted the surplus in NOK into foreign currency and transferred the foreign currency to the GPFG. In the years ahead, government spending of petroleum revenues is expected to exceed revenues in NOK. The government will then have to draw on the foreign exchange in the SDFI to finance petroleum revenue spending. Norges Bank will be tasked with converting SDFI foreign exchange to NOK on behalf of the government, in the same way as the Bank has previously converted the government's NOK surplus from oil taxes into foreign currency.
The fact that Norges Bank will switch from buying to selling foreign exchange as part of the petroleum fund mechanism will not in itself have any impact on the krone exchange rate. Over time, it is the size of the non-oil budget deficit that is important for the krone exchange rate. The breakdown of the government's net cash flow from the petroleum sector into NOK and foreign currency has no bearing.
This series consists of short, signed articles on current economic issues and are only published on Norges Bank’s website.