FAQs about Norges Bank’s foreign exchange transactions on behalf of the government
Norges Bank is banker to the government, and in this role, performs financial services for the government. One such service is converting foreign exchange. These conversions performed by Norges Bank are a task entirely separate from monetary policy and work to promote financial stability.
The central government budget includes what is called the structural non-oil deficit, ie a deficit that excludes revenues and expenses relating to petroleum activities.
Petroleum revenues in NOK are spent to cover this deficit and expenses related to the State’s Direct Financial Interest (SDFI). If petroleum revenues in NOK are insufficient for this purpose, the government will need to sell foreign exchange and purchase NOK. The foreign exchange comes from the government’s petroleum revenues in foreign currency. If foreign currency revenues are also insufficient to meet this need, foreign exchange is transferred from the Government Pension Fund Global (GPFG). Conversely, when NOK revenues exceed the volume spent, the government has a need to sell NOK and purchase foreign exchange for saving in the GPFG.
The conversion amount is calculated by Norges Bank. At 10 am on the last business day of the month, Norges Bank announces the amount to be converted on each day of the following month.
The conversion needs for the year as a whole depend on the difference between revenues from petroleum activities in NOK and the government’s petroleum revenue spending. Norges Bank assesses these amounts on an ongoing basis in order to adjust conversions. See details on calculating foreign exchange transactions (pdf)
The daily foreign exchange transactions announced each month are based on Norges Bank’s updated forecast of conversion needs for the year as a whole. The conversion needs are then distributed over the year’s remaining business days.
The forecast of conversion needs is uncertain, because it is unknown how large the government’s total revenues from petroleum activities will prove to be. For example, there will be considerable uncertainty about total petroleum revenues in years when petroleum prices are volatile. The non-oil deficit may also change. Through the year, new information is obtained about these amounts. The conversion needs Norges Bank announces each month may therefore vary.
Norges Bank’s daily transactions are in the amounts announced, and the Bank purchases or sells NOK for EUR, since this is the most liquid currency cross for the Norwegian krone. To minimise the impact of these transactions on the market, transactions are spread throughout the day. These transactions are carried out with Norwegian and international banks.
When Norges Bank purchases NOK, liquidity is drained from the banking system. When the Bank sells NOK, liquidity is supplied.
The effect of Norges Bank’s foreign exchange transactions and receipt of petroleum revenues in NOK by the government on banking system liquidity is offset by the government’s petroleum revenue spending.
Banking system liquidity may be affected temporarily by Norges Bank’s foreign exchange transactions, but Norges Bank does not take this into account in deciding on the amount of foreign exchange to convert.
Norges Bank does not ordinarily carry out foreign exchange transactions on behalf of the government at the end of December, because the liquidity of the NOK market in this period is regarded to be poorer than at other times of the year.