The Petroleum Fund Mechanism and Norges Bank’s Foreign Exchange Transactions

Abstract

The petroleum fund mechanism channels government revenues from petroleum activities on the Norwegian continental shelf to spending via the central government budget and to saving in the Government Pension Fund Global (GPFG). On behalf of the government, Norges Bank executes the necessary foreign exchange transactions associated with government spending of petroleum revenues. The government’s net purchases of NOK are mainly determined by the size of the non-oil budget deficit. Government spending of petroleum revenues and the need to exchange currency have passed through various phases: (i) oil taxes in NOK exceeded the non-oil budget deficit, so that Norges Bank sold NOK and purchased foreign exchange for the GPFG (ii) the deficit was approximately equal to oil taxes in NOK, (iii) the deficit was larger than taxes in NOK and Norges Bank had to sell foreign exchange from the State’s Direct Financial Interest (SDFI) to finance the deficit and (iv) the deficit is larger than taxes in NOK and the SDFI’s revenues, so that in addition to selling foreign exchange from the SDFI’s revenues, Norges Bank must sell foreign exchange from a portion of the return on the GPFG. The size of government revenues from petroleum activities and the currency breakdown of these revenues have no effect on the government’s net purchases of NOK.