“…Even though [oil] revenues may be substantial for many years, they cannot provide a durable basis for growth and employment… Higher oil revenues should primarily be set aside so that coming generations also can benefit from the increase in the resource base.”


“…Even though [oil] revenues may be substantial for many years, they cannot provide a durable basis for growth and employment… Higher oil revenues should primarily be set aside so that coming generations also can benefit from the increase in the resource base.”


“…Even though [oil] revenues may be substantial for many years, they cannot provide a durable basis for growth and employment… Higher oil revenues should primarily be set aside so that coming generations also can benefit from the increase in the resource base.”

The National Budget 1998, p. 30.

A. Introduction

1. This note examines the role of the State Petroleum Fund (SPF) in Norwegian economic policy, as a means to promote a sustainable long-run fiscal position and to help maintain the competitiveness of the non-oil (“mainland”) economy in the face of high oil export revenues. In Norway’s fiscal strategy, the SPF is to be used as a means to insulate the budget from the effects of large short- or longer-term changes in the level of petroleum revenues. During the ongoing period of high and rising oil production, this means that surplus petroleum revenues are transferred to the SPF, where they are used to acquire financial assets (and earn income) for use in later decades, when oil production will be lower and the aging of the population will have added to fiscal expenditures. To help minimize any tendency toward appreciation of the real exchange rate during the period of fiscal and external current account surpluses, the funds accumulated in the SPF are invested entirely in foreign currency-denominated assets abroad.

2. The rate of accumulation of assets depends on the amount of fiscal surpluses transferred into the SPF, the timing of transfers, and the rate of return on investment. Using the approach and major assumptions presented in the National Budget for 1998, the first part of this note examines the sensitivity of the long-term fiscal position to the timing and amount of transfers into the SPF. The second section discusses the investment strategy of the SPF and the rationale for the authorities’ recent decision to invest part of its resources in equities.

B. Rationale for the State Petroleum Fund

3. Oil production began on the Norwegian continental shelf in the North Sea in 1971 and has expanded steadily since then; at present Norway is the world’s second-largest oil exporter, after Saudi Arabia. However, the SPF was established only in 1990, and did not receive large transfers of oil revenues until 1996. The authorities effectively began setting aside part of the income generated in the petroleum sector almost from the outset, through increases in net foreign assets; but there was no perceived need for a formal mechanism for managing these assets, other than the general procedures for official foreign exchange reserves. What, then, precipitated a change in strategy?

4. One factor was a sharp increase in oil production that began in the late 1980’s. Prior to that time rates of oil production rose only gradually, reflecting the assessment that oil prices would rise more rapidly in the future than most other asset prices and that oil left in the ground was a good investment. However, the sharp decline in world oil prices in 1986 led to a reassessment of the relative attractiveness of other assets and this, in conjunction with pressures to capitalize on costly and short-lived investment, induced the authorities to raise the rate of extraction rapidly from the late 1980’s onward.

5. Another factor in the decision to establish the SPF was a realization of the dangers posed by the loss of competitiveness of the mainland economy. This “Dutch disease” was a side effect of the petroleum boom of the 1970’s and early 1980’s, and was reflected in a rise in Norwegian costs of 16–40 percent relative to its major trading partners.2 The result was a sharp decline of production and employment in export-oriented and import-competing industries and a stagnation of the mainland economy (Figure 1). This was offset during the petroleum boom by a 70 percent increase in public sector employment in 1970–91 and a rise in budgetary expenditures for social transfers to 17 percent of GDP in early 1990s, which absorbed most of the government’s oil revenues. The risks of excessive dependence on oil revenues were brought home following the 1986 oil price shock, which helped to precipitate a recession that lasted until 1993.



Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A001

Source: Statistics Norway.

6. These events helped to galvanize support for measures to insulate both the fiscal revenue base and employment in the mainland economy from developments in the oil sector. As one step in this process, in 1990 the authorities decided to establish a State Petroleum Fund (SPF) as a way to increase the transparency of utilization of petroleum revenues and facilitate decisions on setting aside a portion of current revenues. Resources were to be accumulated in the SPF during times of stable or rising oil prices and normal economic activity, and could be drawn upon either in the short run, as a buffer against oil price declines or recession, or in the longer run as oil production declined. In either event the SPF would not make expenditures, loans, or transfers directly to economic agents in Norway, but would transfer funds to the budget where the financing would be incorporated in normal budget procedures. Resources in the SPF were to be derived from surpluses in the central government budget, which would be transferred to the Fund, and its investment income. However, initially the ongoing recession made it difficult to attain the fiscal surpluses needed to activate the SPF.

7. Even though the SPF could not be utilized at first, it remained an important component of Norway’s long-run economic strategy. In late 1993 Norway adopted the “Solidarity Alternative,” an economic strategy designed explicitly to promote competitiveness and employment in the mainland economy over the longer term. Under the Solidarity Alternative, labor unions agreed to accept relatively modest nominal wage increases, in exchange for the authorities’ commitment to use monetary policy to stabilize the exchange rate. Fiscal policy was to be used for demand management and to insulate the mainland economy from windfall oil revenues through transfers from the central government budget to the SPF.

8. The continuing increase in oil export revenues during the 1990’s, in conjunction with a recovery in mainland economic activity, facilitated preparations for active use of the SPF by 1996. Under the regulations adopted for this purpose, the SPF is managed by the Norges Bank. During 1996–97 the resources in the SPF were invested under guidelines based on the Norges Bank’s procedures for management of official foreign exchange reserves, and thus were held in high-quality interest-bearing assets abroad. The investment abroad of SPF resources is intended to help ensure that the fiscal and current account surpluses that give rise to transfers to the SPF are matched by capital outflows, to promote the stability of the exchange rate and the competitiveness of the mainland economy. In commenting on its strategy for activating the SPF, the government stressed the important role that SPF resources could play in providing financing to the budget in the longer run, as oil production declines, thereby promoting inter-generational equity (see below).

9. In order to generate a sizeable fiscal surplus, the increase in central government expenditure was held below that of mainland output (Table 1–see page 8). As a result, the budget swung into modest surplus in 1995. In 1996 the surplus ballooned to 4.6 percent of GDP and the authorities initiated corresponding transfers to the SPF (Table 2). The transfer increased to 5.7 percent of GDP in 1997 and a similar amount is envisaged for 1998. By the end of 1998, accumulated assets in the SPF (budgetary transfers plus investment income) are expected to reach 16.6 percent of GDP.

Table 1.

Norway: State Budget Balance in 1993–98

(In percent of GDP)

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Sources: The Ministry of Finance; and staff estimates.
Table 2.

Asset Accumulation in the State Petroleum Fund

As a percent of GDP

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Sources: National Budget 1998; and staff estimates.

C. Inter-generational Equity and Sustainability in the Use of Oil Revenues

10. The exploitation of exhaustible resources, such as petroleum, differs from many other economic activities in that it represents a depletion of national wealth. If a society wishes to avoid excessive consumption from this source at the expense of future generations, it would be appropriate to limit current consumption to levels that can be financed indefinitely on the basis of a reasonable rate of return on the investment of the corresponding assets. Thus, one measure of sustainability in the use of oil revenues is whether the non-oil current account deficit is expected to exceed levels that could be financed on a permanent basis from the imputed income on Norway’s oil wealth. During 1992–96, the non-oil current account deficit averaged about 7½ percent of GDP. Based on a discount rate of 4 percent in real terms, the net present value of Norway’s present and future oil earnings is estimated at about 185 percent of GDP at 1998 prices. Assuming that the rate of return on oil wealth is equal to the discount rate, Norway would be able to finance the present level of the non-oil current account deficit indefinitely. In recent years the non-oil deficit has been considerably more than offset by a current account surplus on oil-related activities.

11. In 1995 the Norwegian authorities started to produce generational accounts, which measure effects of alternative policies on different generations. Generational accounting indicates that policy measures that have only marginal, if any, effect on the current fiscal balance may have significant effects on inter-generational equity, given that government liabilities not paid by current generations must ultimately be paid by future generations. Based on the most recent calculations by the authorities, the generational accounts are roughly in balance. However, there is considerable uncertainty associated with these calculations, relating in particular to future petroleum prices and production, demographic trends, benefit levels and other features of the pension and health systems, output and productivity gains, and the level of interest rates.

12. The effect of projected demographic trends and the design of the pension system on pension expenditures merits further elaboration, as this category of expenditures is similar in magnitude to petroleum revenues and is expected to begin rising sharply around the time that petroleum revenues begin to drop. As outlined in Norway’s Long-Term Program for 1998–2001, real GDP growth is expected to slow in the coming decades as a result of the projected slowing of labor force after 2010 and the diminishing scale of petroleum activities. There is also expected to be a sharp jump in the number of pensioners after 2010, and overall the number of old-age and disability pensioners may grow by 560,000, or by about 65 percent, between 1995 and 2050. Based on these projections, there would be a sharp deterioration in the dependency ratio, from 2.5 employed persons per pensioner in 1997–2010 to only 1.7 by 2050. The average old-age pension is also expected to rise as an increasing number of recipients become eligible for supplementary pensions. This suggests that expenditures on old-age and disability pensions, which currently absorb just over 7 percent of GDP, may exceed 16 percent by 2050. These demographic changes would also lead to a greater need for health care services.

Old-Age Pensions in Norway

The National Insurance Scheme operates on a pay-as-you-go basis and provides a minimum pension, guaranteeing basic security for all citizens who reach the retirement age, and a supplementary earnings-related pension. The government intends to maintain the National Insurance Scheme’s major role in the pension system.

In anticipation of the expected deterioration of the dependency ratio after 2010, the government’s ultimate objective is to raise the average retirement age—the effective average retirement age of 60 years old is far below the statutory retirement age of 67 years. This objective is also supported by an increased life expectancy, which has already reached 80 years and is expected to increase further, as well as by the fact that the effective working time was on average reduced by a longer period of education.

An early retirement provision—an agreement-based pension (AFP), allowing employees to retire at 64 years of age with the benefits approximately equal to disability benefits—was introduced in 1989 for large groups of employees. In the wage settlement for 1997 social partners agreed upon further reductions of the retirement age under the AFP to 63 years effective from October 1, 1997, and 62 years from March 1, 1998. A special committee, appointed by the government to examine the early retirement issue, and focusing particularly on incentives to work after the regular retirement age, is expected to report in late 1998.

D. Long-term Prospects for the SPF

13. As noted above, accumulated assets in the SPF are expected to reach 16.6 percent of GDP by the end of this year. In this section, two alternative scenarios are examined for the evolution of the SPF in subsequent years, based on differing growth rates in fiscal expenditure during 1998–2000. These scenarios do not envisage any shocks to the economy, and share a number of common assumptions (Table 3). First, the government’s oil revenues are expected to rise from 8 percent of GDP in 1997 to a peak of 11 percent of GDP in 2002, subsequently declining to less than 2 percent of GDP by 2050. These projections are based, inter alia, on the assumption used in Norway’s 1998 budget that oil prices would fall from an average of NKr 135 per barrel in 1997 to NKr 125 this year, and further to NKr 100 per barrel (measured in 1998 kroner) by 2010, in part reflecting the recent international agreement to reduce carbon dioxide emissions.3 Second, pension expenditures are assumed to reach 16 percent of GDP by 2040, for the reasons described above.4 Third, real GDP growth is assumed to average about 2 percent per annum. Fourth, the ratio of nonpetroleum revenue to GDP is held constant in 1999–2050 at the level set in the 1998 budget. Finally, the real rate of return on SPF investments is set at 4 percent.

Table 3.

Future SPF Assets: Underlying Assumptions and Results

(In percent)

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Sources: Ministry of Finance; and staff estimates.

14. In the first scenario, fiscal expenditures in 1998 were assumed to be in line with the 1998 budget proposal of Norway’s outgoing Labor government in October 1997, and the growth rate of “underlying” expenditures was assumed to be held to 1 percent a year in 1999–2001 and grow in line with output thereafter.5 Budgetary expenditures, excluding pensions, would decline from 28.5 percent of GDP in 1997 to 26.4 percent in 2001 and remain constant at the level through the remainder of the scenario. On this basis, the fiscal surplus is expected to peak in 2002, and to turn into a deficit in 2015. However, assets in the SPF would continue to increase until 2025, when they would reach a peak of 185 percent of GDP. Thereafter the transfers from the SPF to the budget would exceed its investment income, and SPF assets would decline gradually to just over 100 percent of GDP by 2050.

15. The second scenario reflects the non-pension expenditures actually incorporated in the final 1998 budget, which implied a real growth rate of 2.3 percent. This growth rate is assumed to prevail again in 1999–2001, after which fiscal expenditure would rise in line with GDP. In this variant SPF assets would peak in 2018 at about 140 percent of GDP and would be exhausted by 2046. Thereafter the government would begin to incur debt to finance its fiscal deficits, which would cumulate to 40 percent of GDP by 2050. These results underscore the importance of continued expenditure restraint, in the period 1999–2001.

E. Return on the SPF Investment Portfolio

16. In the long run, the rate of return on the SPF investment portfolio will have important implications for Norway’s fiscal position. The first long-term scenario described above would be sustainable in the long run, assuming the 4 percent real rate of return on the SPF portfolio, but a 1 percentage point permanent reduction in the rate of return would reduce the SPF from over 100 percent of GDP to less than 20 percent by 2050 (Figure 2).



(Percent of GDP)

Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A001

Sources: Ministry of finance; and staff estimates.

17. Notwithstanding the estimated real rate of return of approximately 4.7 percent for the first nine months of 1997 (measured in Norwegian kroner), the rate of return reported by the budget category “Dividends and interest on the SPF” appears to be substantially lower. This was the result of the SPF’s receipt of transfers in 1996–1997 on an annual basis—at the end of the period—which created a substantial lag between the time petroleum revenues were received by the government and the time they were transferred to the SPF.6 Beginning from the second quarter of 1998, the transfers to the SPF will be made on a quarterly basis, which will reduce the lag between the accumulation of petroleum revenues by the government and their transfer to the SPF.

F. Investment Strategy of the SPF

18. To date, all the assets of the SPF have been invested in low-risk, interest-bearing financial instruments, such as bonds and bills, issued by foreign governments or highly rated international institutions. The currency composition of the SPF investment portfolio was defined by Norway’s import weights—about 75 percent of the Fund was invested in Europe, with one-third placed in Swedish and Danish assets.

19. In 1997 the authorities reviewed the guidelines for management, investment strategy and currency distribution of the SPF’s investment portfolio. To increase the geographical dispersion and thereby reduce the exposure to a number of relatively small markets, the SPF was instructed to reduce its exposure in Europe from 75 percent to 50 percent. The government also decided to require that some 30–50 percent of the SPF assets be invested in equities. This decision was supported by evidence that the rate of return on a portfolio containing both equities and fixed-income instruments is on average higher than the return on a fixed-income portfolio. The long-term investment horizon—the authorities do not expect to draw on the SPF until well after 2010—reduces risks associated with equity markets being more volatile than bond markets. Given that equities, unlike bonds, have a negative covariance with oil prices, investments in equities would also provide some cushion in case of petroleum price shocks.

20. Norges Bank has supplemented import weights, which were previously used as a criterion for market distribution, with GDP weights for the bond portion of the portfolio and market capitalization weights for the equity portion. The currency distribution of investments will not differ from market distribution, since exchange rate risk is not considered important in the long run for the markets under consideration. These guidelines would allow Norges Bank to direct SPF investments into the largest and most liquid markets with low transaction costs.

21. The equity part of the portfolio will be expanding gradually, since Norges Bank intends to avoid risks associated with the timing of an abrupt entry into equity markets. The SPF investment in equities will be limited to portfolio investment, with investments in individual companies not exceeding 1 percent of their share capital. Initially the SPF would be invested only in developed equity markets, including Europe (40–60 percent of the total); the United States and Canada (20–40 percent); and Asia and Oceania (10–30 percent).

22. As a part of its role as the operational manager of the SPF, the Norges Bank is responsible for defining long- and short-term investment strategies. The former will be specified in a benchmark portfolio. The benchmark is a hypothetical portfolio, which would be used for assessment of actual investment decisions. At the initial stage the composition of the benchmark portfolio would be in line with the composition of recognized financial market indices, which would allow Norges Bank to minimize costs and contain investment risks. The benchmark portfolio would define a target rate of return, which should be comparable to returns on the petroleum part of wealth. Although in the short run, the return on investment could deviate from the benchmark portfolio, in the long run the two should be similar. The short-term investment strategy essentially allows some short-term variation from the benchmark portfolio, and thus is the degree of discretion the fund manager has in making investment decisions.

23. The administration of the equity portfolio would evolve in three stages, depending on whether the investment strategy is passive or active, and whether the equity investment is managed externally or internally. During the first stage the equity portfolio will be managed externally, using a passive (indexing) strategy, since Norges Bank lacks the necessary in-house expertise to invest in equities. During the second stage Norges Bank would move toward an active investment strategy and external management. In the third stage, after Norges Bank has gained certain experience in equity investment, this part of the SPF portfolio would be managed internally using active investment strategies.

24. Norges Bank has already chosen four external managers and appointed a global custodian, which would be in charge of carrying out transactions related to the SPF investments and estimating the return on these investments. It is likely that Norges Bank would decide to move to a second stage in June 1998. The SPF exposure to risk of investing in individual companies would not be significant, given that its share in each company is limited by the guidelines to 1 percent, and it would not effectively exceed 0.3 percent by the end of 1998.

G. Conclusion

25. The State Petroleum Fund has begun to play an important role in insulating Norway’s mainland economy from cost pressures and the erosion of competitiveness related to high oil export revenues, and in preserving petroleum wealth to smooth inter-generational consumption. The ability of the SPF to fulfill these objectives depends primarily on the course of fiscal policy. In 1996–97 restraint in fiscal expenditure resulted in a sharp improvement in the central government surplus, which allowed the authorities to begin accumulating assets in the SPF. The long-term scenarios for possible accumulation of SPF assets underscore the importance of continued restraint in public expenditure, given the many risks and uncertainties associated with the level of oil and natural gas production, price fluctuations, and the level of pension and health expenditure over the long run.


  • Arnason, Birgir and David Ordoobadi, 1996, “Norway’s Long-Term Fiscal Challenge,” in IMF Norway—Background Paper, SM/96/17, January, (Washington: International Monetary Fund).

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  • “Future Management of the Government Petroleum Fund,” 1997, Economic Bulletin, February pp. 175185.

  • Leibfritz Willi, 1996, “Generational Accounting: An International Comparison,” Intereconomics, March/April, pp. 5561.

  • Ordoobadi, David, 1996, “Norway’s State Petroleum Fund,” in IMF Norway—Background Paper, SM/96/17, January, (Washington: International Monetary Fund).

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  • Royal Norwegian Ministry of Finance, 1996–97, “The Long-Term Program 1998–2001,” Report No.4 to the Storting.

  • Royal Norwegian Ministry of Finance, “The Revised National Budget 1997.”

  • Royal Norwegian Ministry of Finance, “The National Budget, 1998.”

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Prepared by Natalia Koliadina.


The lower figure is for relative wage rates in manufacturing industry, while the higher figure is for relative unit labor costs. Developments in Norway’s international competitiveness are summarized in a companion background paper on the wage determination system.


The agreement is intended to avert climate changes caused by increasing carbon dioxide emissions. It is likely that the need to reduce emissions would require a reduction in the world consumption of fossil fuels, which, in turn, would affect producer prices of crude oil. The oil price projections used in Norway’s 1998 budget reflected the assumption that stabilizing carbon dioxide emissions at the 1990 level would reduce oil prices by 15–20 percent in real terms by 2010.


The scenarios implicitly assume that the increase in health care spending after 2010, caused by demographic trends, will be offset by an increase in taxes paid by pensioners.


Underlying expenditure is equal to total fiscal expenditure minus spending on petroleum activities, unemployment benefits, interest payments, support to shipyards, and refugees. The excluded categories presently account for about 12 percent of fiscal expenditure.


Before the funds are transferred to the SPF, they are kept in the deposit account of the government with Norges Bank with an annual interest rate of 3¾ percent, which is reported as interest earnings in the budget.

Norway: Selected Issues
Author: International Monetary Fund