Experiences and future challenges for a small oil-producing country
Presentation at the workshop "Exchange rate strategies for developed open economies in the new millenium", Reserve Bank of New Zealand, 19 February 2002
Ingvild Svendsen
Monetary Policy Department
Norges Bank
Petroleum production on the Norwegian continental shelf. In millions of Sm3 o.e.
Crude oil
Gas
Source: Ministry of Finance (Long Term Programme 2002-2005)
Total export from Norway, 2000
Traditional export
Source: Statistics Norway
Exchange rate regimes in Norway
December, 1978
Interest rate regulation,
trade weighted baskets
May, 1985
Interest rate set by Norges Bank,
fixed exchange rate from 1986
October, 1990
Linked to ECU
December, 1992
Floating krone
May, 1994
Stability against European currencies
Increasing weight on low and stable inflation
March, 2001
Inflation target (2.5 per cent)
Nominal effective exchange rate. Norway
1990 = 100. Månedstall. 1970-2001
Apreciation -->
Fixed exchange rate
Stability against European currencies
Sources: Norges Bank and Datastream
A twin surplus
per cent of GDP
Current account balance
Fiscal surplus
The Norwegian Government Petroleum Fund (1990-)
· Objective: To manage assets and distribute wealth between generations
· To serve as a buffer against terms of trade shocks
· Transfers the amount necessary to produce a balanced government budget
· Invests the surplus entirely in foreign markets
· Managed by Norges Bank
Petroleum activities in 2001
Demand for
Norwegian goods and services
(USD 3,9 billion)
MAINLAND ECONOMY
Use of petroleum revenues
(USD 0,6 billion)
PETROLEUM ACTIVITIES
Government net
cash flow
(USD 24,7 billion)
PETROLEUM FUND
Interest and dividends
(USD 1,8 billion)
Export revenues oil and gas
(USD 34,1 billion)
FOREIGN SECTOR
Financial investments abroad
(USD 25,9 billion)
Source: Ministry of Finance (RNB2001)
· Valutakurs brukt: 9 NOK/USD
Volatility in terms of trade and exchange rates. St. deviation (per cent) of monthly changes in exchange rates, 1997-2000, and st. deviation (per cent) of annual changes in terms of trade, 1980-2000.
Australia
New Zealand
UK
Sweden
Canada
Mainland Norway
Norway
Sources: Eco Win and OECD
Nominal effective exchange rate
- stability in the medium term
Sources: Norges Bank and Datastream
Government Petroleum Fund
Capital in per cent of GDP
Source: Ministry of Finance
The Government's Long-Term Programme 2002-2005
New guidelines for economic policy
· Fiscal policy:
- new rule for the use of petroleum revenues:
- continued focus on smoothing fluctuations in the economy
· Monetary policy:
- inflation target
Strategy for the use of petroleum revenues
(endorsed by the Parliament June 2001)
· The use of petroleum revenues over the Government budget is to be increased moderately and gradually, approximately in line with an estimated 4 per cent real return on the capital of the Petroleum Fund
· Emphasis will still be given to stabilise economic fluctuations (?)
Structural non-oil budget deficit.
In per cent of GDP Mainland Norway
Use of petrolum revenues
Source: Ministry of Finance
Interest rates
Key rates and rise in labour costs
Per cent
Norway
New Zealand
Australia
Euro area
Sweden
UK
Canada
US
Denmark
Japan
Rise in labour costs, 1998-2000
Signs of Dutch disease: Employment by sector
Per cent of total employment
Public sector
Manufacturing
Source: Statistics Norway
Structural effects on the Norwegian economy
· Use of petroleum revenues will entail some changes in the industry structure
· Increased spending on private and public services: Sheltered sector lay claim to a higher share of available employment
· Resources have to be transferred from the exposed sector
Adjustments through real appreciation
· Adjustments through deteriorating competitiveness and profitability in internationally exposed industries
· Pressures on economic resources may lead to higher wage and price inflation
· Must be countered by tighter monetary policy
· Higher interest rate may result in nominal appreciation => deteriorating competitiveness
· Not everyone will be equally enthusiastic ...
· ... but monetary policy shall no in this situation counter the strong exchange rate.
Slide 19
· APPENDIX:
