Norges Bank’s foreign exchange transactions with the Government Pension Fund Global
The Norwegian government receives substantial revenues from petroleum activities (referred to as the government's net cash flow). These revenues are in both NOK and foreign currency. Revenues in NOK primarily comprise oil taxes and dividend from Statoil, while revenues in foreign currency comprise revenues from the government's own petroleum activities via the State's Direct Financial Interest (SDFI). At the same time, the government receives substantial income in foreign currency in the form of returns on the Government Pension Fund Global (GPFG). Some of this income is used each year to finance the non-oil budget deficit in line with the fiscal rule. Norges Bank has been tasked by the Ministry of Finance to carry out the foreign exchange transactions associated with petroleum fund mechanism.
In recent years, the government's net revenues from the petroleum sector have declined. At the same time, more petroleum revenues have been spent each year over the central government budget in line with the fiscal rule. As illustrated in Chart 1, the transfers to the GPFG have declined since 2012. As gas and oil resources are depleted, it must be expected that the government's revenues from petroleum activities will decline further. The fiscal rule has been designed to allow the real return on the GPFG to finance the non-oil fiscal deficit when petroleum revenues are no longer sufficient to finance the fiscal deficit. Beginning in 2016, the government's revenues from the petroleum sector have not been sufficient to finance the non-oil deficit, and some of the return on the GPFG has been transferred to be spent over the central government budget (Chart 1).
Chart 1. Key figures from the central government accounts 2011-2015 and the central government budget for 2016. In billions of NOK.
Source: Ministry of Finance.
Norges Bank has been tasked by the Ministry of Finance with the responsibility for undertaking the necessary conversions of foreign exchange associated with the petroleum fund mechanism. The petroleum fund mechanism is illustrated in Chart 2. The SDFI's foreign currency revenues are transferred on an ongoing basis via a foreign exchange portfolio in Norges Bank called the "petroleum buffer". Transfers to and from the GPFG take place on the last business day of the month. Oil and gas companies pay oil tax in NOK and exchange their revenue for NOK before payment takes place., Dividend from Statoil is also paid in NOK.
Until 2014, revenues in NOK from petroleum activities were larger than the non-oil deficit. Norges Bank therefore sold NOK and purchased foreign exchange equal to the difference and transferred that amount of foreign exchange to the GPFG (Chart 2.1). Taxes in NOK from the oil and gas companies were then used to finance the non-oil budget deficit and to purchase foreign exchange for the GPFG. Through most of 2014, the government's revenues in NOK were approximately as large as the non-oil budget deficit, and Norges Bank did not carry out any foreign exchange transactions on behalf of the government. From October 2014, the taxes in NOK were no longer sufficient to finance the spending of petroleum revenues, and the government had to draw on some of the SDFI's revenues in foreign currency in addition (Chart 2.2). Since 2016, the non-oil budget deficit has exceeded the government's net cash flow from petroleum activities in both NOK and foreign currency. This difference has been covered by a transfer of foreign exchange from the GPFG. To finance the non-oil budget deficit, Norges Bank has therefore sold all the revenue in foreign currency from the SDFI, in addition to the foreign exchange transfers from the GPFG (Chart 2.3).
The charts below show the petroleum fund mechanism.*
Chart 2.1 The government's revenues in NOK from petroleum activities are higher than the non-oil budget deficit = Norges Bank sells NOK and purchases foreign exchange for the GPFG
Chart 2.2 The government's revenues in NOK from petroleum activities are lower than the non-oil budget deficit = Norges Bank purchases NOK and sells foreign exchange from the SDFI
Chart 2.3 The government's revenues in NOK and foreign currency from petroleum activities are lower than the non-oil budget deficit = Norges Bank purchases NOK and foreign exchange from the GPFG and SDFI
*The red columns illustrate cash flows in foreign currency and the blue columns cash flows in NOK.
Further information about the petroleum fund mechanism and Norges Bank’s sale of foreign exchange from the SDFI:
- The petroleum fund mechanism and movements in the petroleum buffer portfolio (PBP) (Economic Commentaries 2/2017)
- The petroleum fund mechanism and Norges Bank's foreign exchange transactions (Economic Commentaries 1/2016)
Norges Bank's foreign exchange transactions associated with the GPFG are planned and smoothed over the year and pre-announced each month so that market operators know the amounts to be converted.
The petroleum buffer portfolio (PBP) allows Norges Bank's foreign exchange transactions to be smoothed over the year despite variations in oil taxes, SDFI foreign exchange revenues and changes in monthly transfers to the GPFG. The estimates for government revenues from the petroleum sector and the non-oil budget deficit can change considerably through the year. The changes will influence the transfers to the GPFG and Norges Bank's foreign exchange transactions for the GPFG. This will also affect the size of the PBP. The PBP was larger than necessary at the end of 2014 because the transfers to the GPFG were for a period smaller than expected. Norges Bank therefore reduced the size of the PBP through 2015 by selling foreign exchange in the market.
Quarterly inflows into and outflows from the petroleum buffer portfolio.*In millions NOK.
|Foreign exchange purchases from the SDFI||Foreign exchange purchases in the market||Transferred to/from the GPFG||Market value at end of quarter**|
|2017 Q3||29 372||-51 034||10 400||12 892|
|2017 Q2||35 790||-48 482||16 300||25 185|
|2017 Q1||39 098||-61 568||23 431||21 765|
|2016 Q4||28 927||-49 511||27 000||20 670|
|2016 Q3||26 158||-59 395||29 500||14 067|
|2016 Q2||29 712||-55 787||24 000||18 205|
|2016 Q1||33 572||-46 007||24 733||20 581|
|2015 Q4||38 940||-35 502||-13 000||8 665|
|2015 Q3||33 957||-46 211||-12 000||18 091|
|2015 Q2||37 540||-40 622||-12 000||39 839|
|2015 Q1||45 624||-39 881||-5 498||55 367|
|2014 Q4||49 399||-13 757||-25 100||54 252|
|2014 Q3||36 829||0||-36 500||37 344|
|2014 Q2||45 590||0||-44 300||36 591|
|2014 Q1||57 688||0||-41 211||34 172|
|2013 Q4||48 233||2 299||-61 900||18 015|
|2013 Q3||47 625||11 107||-58 500||29 021|
|2013 Q2||49 213||16 008||-58 400||28 226|
*A positive number indicates a net inflow into and a negative number a net outflow from the petroleum buffer portfolio.
**Market value at the end of the quarter deviates somewhat from net cash flow because market values change over the course of the month.
Holdings and inflows into the buffer portfolio are published in the quarterly report on the management of the Bank's foreign exchange reserves.
- The fiscal rule states that over time, the structural non-oil deficit on the central government budget shall not exceed the real return on the capital in the GPFG, which is estimated at 4 percent.
- The petroleum fund mechanism is the system that channels government revenues from petroleum activities on the Norwegian continental shelf to spending via the central government budget and saving in the GPFG, with the capital in the GPFG being exclusively invested in instruments in foreign currency.
- Transfers are made in practice as follows: Norges Bank purchases SDFI's gross foreign exchange revenues and pays with NOK, which is transferred to government's account in Norges Bank. The SDFI's operating and investment expenses are appropriated via the central government budget, and are financed primarily by drawing on the government's account with Norges Bank.
- Most of oil and gas companies' net income is transferred to the government in the form of taxes. Oil and gas companies' profits after tax represent only a small portion of income. Oil and gas companies have substantial gross revenues in foreign currency and gross expenses in NOK, which entail an exchange need in addition to tax payments, but this is not a part of the exchange of foreign currency associated with the petroleum fund mechanism.
- Amounts of oil tax payable by oil and gas companies are transferred from these companies' accounts in Norwegian banks to the government's account with Norges Bank. Oil tax is payable six times a year: 1 February, 1 April, 1 June, 1 August, 1 October and 1 December. Dividend payment from Statoil is a direct transfer in NOK from Statoil's account in one of the Norwegian banks to the government account with Norges Bank.
Daily purchases of foreign exchange in millions of NOK:
|January||- 500||- 500||-1000||- 900|
|February||- 700||- 900||-1000||- 900|
|March||- 700||- 900||- 850|
|April||- 700||- 900||- 850|
|May||- 700||- 900||- 850|
|June||- 700||- 900||- 850|
|July||- 700||- 900||- 850|
|August||- 700||- 900||- 850|
|September||- 700||- 900||- 650|
|October||- 700||- 900||- 650|
|November||- 700||- 900||- 650|
|December||- 600*||- 900**||- 900|
* Up to and including 11 December 2015
** Up to and including 16 December 2016
* From 23 October 2008: NOK 620 million
* From 21 May 2003: NOK 0 million