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Ingvild Svendsen Monetary Policy Department Norges Bank

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.

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Ingvild Svendsen Monetary Policy Department Norges Bank

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  1. Experiences and future challenges for a small oil-producing countryPresentation 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

  2. Petroleum production on the Norwegian continental shelf. In millions ofSm3 o.e. Crude oil Gas Source:Ministry of Finance (Long Term Programme 2002-2005)

  3. Total export from Norway, 2000 Traditional export Source: Statistics Norway

  4. 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)

  5. Nominal effective exchange rate. Norway1990 = 100. Månedstall. 1970-2001 Fixed exchange rate Stability against European currencies Apreciation --> Sources: Norges Bank and Datastream

  6. A twin surplus per cent of GDP Current account balance Fiscal surplus

  7. 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

  8. Petroleum activities in 2001 MAINLAND ECONOMY Demand for Norwegian goods and services (USD 3,9 billion) Use of petroleum revenues (USD 0,6 billion) Government net cash flow (USD 24,7 billion) PETROLEUM ACTIVITIES PETROLEUM FUND Interest and dividends (USD 1,8 billion) Export revenuesoil and gas (USD 34,1 billion) Financial investments abroad (USD 25,9 billion) FOREIGN SECTOR Source:Ministry of Finance (RNB2001)

  9. 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 Mainland Norway Norway Canada Sources: Eco Win and OECD

  10. Nominal effective exchange rate - stability in the medium term Sources: Norges Bank and Datastream

  11. Government Petroleum Fund Capital in per cent of GDP Source: Ministry of Finance

  12. The Government's Long-Term Programme 2002-2005New 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

  13. 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 (?)

  14. Structural non-oil budget deficit.In per cent of GDP Mainland Norway Use of petrolum revenues Source: Ministry of Finance

  15. Key rates and rise in labour costsPer cent Interest rates Norway New Zealand Australia Sweden UK Euro area Denmark Canada US Japan Rise in labour costs, 1998-2000

  16. Signs of Dutch disease: Employment by sectorPer cent of total employment Public sector Manufacturing Source: Statistics Norway

  17. 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

  18. 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.

  19. APPENDIX:

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