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Economic and Monetary Policy

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09.01.2012 // As a non-member of the EU Norway is not part of the Economic and Monetary Union. However, Norwegian authorities have regular contacts with representatives from EU member states and the European Commission on economic and monetary matters, both at political and at administrative level.

Norway has a very open economy, with per capita foreign trade among the highest in the world. Around 70 percent of Norway's foreign trade is with the EU and Norway is also closely connected to European economies. A stability oriented policy aiming at high growth and employment is therefore in Norway's interest.

The main guidelines for the Norwegian economic and monetary policy are given in the Report No. 29 (2000-2001) to the Parliament (Stortinget). According to these guidelines, economic policy shall be based on the following main considerations:

Economic policy shall contribute to economic stability, avoiding pronounced cyclical fluctuations.

Economic policy shall be sustainable over time to avoid the need for extensive policy shifts after a period as this may weaken the basis for welfare. Petroleum revenues are expected to decline at some stage, while expenditure on pensions and health care will increase sharply. In order to address these challenges without substantial fiscal tightening in the future, a large share of the high petroleum revenues must be transferred to The Government Petroleum Fund.  The petroleum fund was established in 1990 under this name, but is today known as The Norwegian Government Pension Fund - Global (PFG).

Economic policy shall contribute to the efficient use of resources both in the public and private sector.

Fiscal Policy is based on the following guidelines:
All petroleum revenues are directed into the Norwegian Government Pension Fund – Global PFG. The capital in the fund is invested abroad to avoid strong effects on the mainland economy and on the exchange rate.

The use of petroleum revenues, that is the transfer from Pension Fund to the State Budget, is set at an estimated 4 pct. real return on the capital of PFG. This is to ensure a gradual and sustainable phasing in of petroleum revenues in the economy.

The actual implementation of fiscal policy shall take into account business cycle fluctuations around the suggested medium-term path.

According to the guidelines for monetary policy, Norges Bank’s implementation of monetary policy shall be aimed at maintaining low and stable inflation. In this way, monetary policy will also contribute to stable expectations concerning exchange rate developments, and to stable developments in output and employment. The operational target is defined as an annual increase in consumer prices close to 2.5 pct. Monetary policy shall be forward looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, temporary disturbances, shall in general not be taken into consideration. It is expected that consumer price inflation, as a general rule, will be within a 1 percentage point deviation of either side of the target.

The Government presented the National Budget for 2011 on October 6. 2011, which includes updated projections for the Norwegian economy. Find more information on the Norwegian national budget here.

The Norwegian Government Pension Fund - Global has the twofold purpose of smoothing out spending of oil revenues and at the same time acting as a long-term savings vehicle to let the Norwegian Government accumulate financial assets to help cope with expenditures associated with the ageing of the population. PFG serves as a fiscal management tool to ensure transparency in the use of petroleum revenues.

Norges Bank is responsible for the management of PFG on behalf of the Ministry of Finance. The fund is invested in financial instruments abroad, where 60 pct. of the portfolio is allocated to fixed income instruments and 40 pct. to equities. The fund is well diversified. The equity portfolio has a geographical split of 50 pct. in Europe and 50 pct. in America and Asia/Oceania. For the fixed income portfolio, 55 pct. is invested in Europe, 35 pct. in America and 10 pct. in Asia/Oceania. Within the regions, the portfolio is distributed between countries according to market capitalisation weights.

In order to evaluate the performance of the PFG, the Ministry of Finance has defined a benchmark portfolio, which is a theoretical portfolio consisting of indices for the countries in which investments are allowed. The Ministry of Finance has also set a limit as to how much the PFG’s investments may deviate from the benchmark.

In the Revised National Budget 2004, the Government proposed to establish new ethical guidelines for the management of the Petroleum Fund.

For continuously updated information on economic developments, budget issues and government debt figures, please visit the Ministry of Finance's website in English.

Developments in interest rates, economic statistics, analysis and forecasts may also be found on the websites of the Central Bank (Norges Bank)  and Statistics Norway.

Contact person at the Mission of Norway is Counsellor for Finance, Lars-Erik Østby, ph.: + 32 (0) 2 238 74 75, e-mail: leos@mfa.no


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