1. Introduction

The objective of Norges Bank’s liquidity management is to implement monetary policy by ensuring that short-term money market rates remain close to the policy rate. This is done by setting the terms for banks’ loans from, and deposits with, the central bank and by managing the quantity of central bank reserves, ie banks’ overnight deposits in the central bank. Norges Bank uses market operations to manage the quantity of central bank reserves and seeks to maintain the total quantity of reserves in the banking system at NOK 35 billion with a symmetric target range of plus/minus NOK 5 billion. The size of banks’ holdings of central bank reserves, excluding Norges Bank’s market operations, is referred to as structural liquidity.

Incoming and outgoing payments over the government’s account, Norges Bank’s foreign exchange transactions on behalf of the government and changes in the amount of government securities outstanding are the main factors that influence structural liquidity.[1] As an example, when private agents pay taxes to the government, reserves are transferred from their banks’ accounts with the central bank to the government’s account with Norges Bank. Such transactions reduce the level of central bank reserves in the banking system and reduce structural liquidity. Likewise, but in the opposite direction, outgoing payments over the government’s account will result in a rise in structural liquidity. Another factor influencing structural liquidity is Norges Bank’s foreign exchange transactions. When Norges Bank buys NOK, this results in a reduction in structural liquidity, whereas when Norges Bank sells NOK, this results in an increase in structural liquidity. Government borrowing also influences structural liquidity. Reserves are withdrawn from the banking system when the government issues bills and bonds and are replenished when these government securities mature. Structural liquidity is also influenced when the general public exchanges notes and coins for deposits in private banks, but these amounts are small compared with the other factors. Chart 1 illustrates the total annual liquidity effect of the various factors between 2008 and 2022. As shown in the chart, both the magnitude and the direction of the liquidity effect resulting from the different factors will vary. Every year, the liquidity effect of Norges Bank’s foreign exchange transactions and transactions over the government’s account have opposite signs. This reflects the requirement for the petroleum fund mechanism to be liquidity-neutral (see Section 4 below).

Chart 1: Total annual effect of the government’s account, government securities, foreign exchange transactions on behalf of the government and notes and coins on structural liquidity. 2008 – 2022. In billions of NOK

^{Source: Norges Bank}

In order to manage the total quantity of reserves in the banking system, Norges Bank prepares a forecast of the daily liquidity effects of the above-mentioned factors. The structural liquidity forecast comprises the sum total of these daily liquidity effects. The forecast is made for one calendar year at a time and is continually updated throughout the year. Norges Bank uses the forecast to determine whether market operations are necessary to supply or reduce liquidity. The forecast also provides the basis for setting the maturity and allotment volume of market operations. In addition, the forecast is used by participants in the Norwegian money market to gauge the liquidity situation in the banking system. There is considerable uncertainty surrounding the forecasts, and substantial revisions are possible through the year. An updated forecast is published on Norges Bank’s website every Monday and Thursday at 12 noon with information up to and including the publication date. In the event of more pronounced changes, an updated forecast can also be published outside of these dates and will then be announced on Norges Bank’s website.

2. The forecast before the start of the forecast year

The process of making an annual structural liquidity forecast begins once the Government has presented its central government budget bill, which is at the beginning of October. The forecast is normally published in mid-December. The following describes how the forecast of the liquidity effects of incoming and outgoing payments over the government’s account, foreign exchange transactions on behalf of the government, government borrowing and notes and coins is prepared prior the first publication of the structural liquidity forecast.

2.1. Incoming and outgoing payments over the government’s account

2.1.1 Daily forecast based on the previous year’s payment pattern

The government has a large number of settlement accounts with Norges Bank, where the sum of total deposits comprises the government’s sight deposit account. The settlement accounts are used for sending and receiving payments to and from government sector agencies and other activities. Owing to the large number of settlement accounts, no forecasts are prepared of daily movements over each account. Instead, accounts are grouped by commonalities, such as type of activity or purposes. Examples of account groupings for which forecasts are prepared are value-added tax (VAT), income tax, the Norwegian Labour and Welfare Administration (NAV), health and social, defence and petroleum tax.

As most of the major incoming and outgoing payments over the government’s account are made on approximately the same date each year, the forecast is based on the account groupings’ previous year’s payment pattern.[2] The previous year’s payment amounts are adjusted according to budgeted revenues and expenditures in the central government budget. Payments related to income tax, VAT and excise duties, as well as National Insurance payments, are adjusted by the percentage difference between the budget for the forecast year and the estimated financial statements for the previous year. The amounts are included in Appendix 2 of Prop. 1 S, the “Yellow Book”. For example, VAT is adjusted for percentage changes in the item “Value added tax”, while other taxes are adjusted for percentage changes in the items “Wealth and income tax” and “Employers’ and private individuals’ National Insurance contributions”.[3] The remaining incoming and outgoing payments are adjusted by a general factor, reflecting the percentage change in the item “Expenditure excluding borrowing and petroleum activity” between the forecast year and the previous year.

Finally, payments in the forecast year that fall on a weekend or public holiday are moved. Outgoing payments from the government are moved to the preceding business day, while incoming payments to the government are deferred to the following business day. Payments with regular due dates are checked. In principle, a number of payments have regular dates, but for various reasons they can be moved. The amounts may also differ substantially from the previous year’s even after the adjustments referred to in the previous paragraph. Norges Bank therefore obtains information on payments above NOK 500 million from government ministries and agencies prior to the forecast year.

Chart 2 illustrates some of the government’s regular incoming and outgoing payments. Outgoing payments to health trusts largely take place on the first business day of each month. Block subsidies to Norwegian local governments are also paid at the beginning of each month, except for August and December. Pensions and disability benefit payments from the Norwegian Labour and Welfare Administration (NAV) usually enter the banking system on the 19th of each month. The deadlines for payment of the petroleum tax are 1 February, 1 April, 1 June, 1 August, 1 October and 1 December, while the deadlines for submitting withholding tax and employer contributions are 15 January, 15 March, 15 May, 15 July, 15 September and 15 November. The deadlines for submitting VAT returns are 10 February, 10 April, 10 June, 31 August, 10 October and 10 December.

Chart 2: Examples of incoming and outgoing payments over the government’s account in January, February and March. 
The direction of the arrows represents the effect of the payments on liquidity in the banking system. Payments with upward arrows have a positive liquidity effect, while payments with downward arrows have a negative liquidity effect. The relative proportions between the payments are based on an average between 2019 and 2023.

^{Source: Norges Bank}

2.1.2 Sum of incoming and outgoing payments over the government’s account

Once the forecast of daily transactions over the government’s account has been made, the sum of incoming and outgoing payments over the government’s account is calculated based on the amounts in the forecast. Since higher outgoing than incoming payments result in an addition of liquidity to the banking system, we refer to this as “liquidity provision over the government’s account”. The provision of liquidity over the government’s account is also calculated based on the key figures in the central government budget. Normally these two variables differ, partly because Norges Bank does not make a detailed forecast of payments over every one of the government’s sub-accounts. Total liquidity provision  over the government’s account is therefore assumed to correspond to the key figures in the central government budget. In the forecast, the difference between the two variables is smoothed across business days.

The assumption that the non-oil deficit (and thus the same liquidity provision over the budget) in the forecast of incoming and outgoing payments over the government’s account is the same as in the forecast of foreign exchange transactions (see Section 2.2) is also a requirement for the assumption of a liquidity-neutral petroleum fund mechanism^[4] in the forecast. The petroleum fund mechanism is liquidity-neutral when the negative liquidity effect of petroleum revenue inflows in NOK to the government is offset by the positive liquidity effect of the non-oil deficit and Norges Bank’s sales of NOK on behalf of the government. When Norges Bank purchases NOK, the negative liquidity effect of the NOK purchases and inflows of petroleum revenues in NOK is to be offset by the non-oil deficit.

2.2 Foreign exchange transactions on behalf of the government

Every year, the government uses revenues from petroleum activities to finance a planned central government budget deficit, referred to as the structural non-oil budget deficit. If the net cash flow from petroleum activities[5] is insufficient to finance the non-oil budget deficit, the remainder is transferred from the GPFG.[6] Since the GPFG is in foreign currency, these transfers must be converted into NOK. In addition, the parts of the net cash flow that are in foreign currency, ie SDFI’s foreign currency revenues, must be converted into NOK. If the net cash flow exceeds the non-oil deficit, the surplus is instead transferred to the GPFG. The size and direction of the foreign exchange transactions depend on the size of the NOK revenue in the net cash flow relative to the size of the non-oil deficit.

The calculation of the exchange need for a new forecast year is based on the central government’s non-oil budget deficit, net cash flow from petroleum activities and the forecast of foreign currency revenues from the SDFI received from Petoro. If oil and gas prices have changed substantially from the time the central government budget forecasts were made, Norges Bank will instead base its own estimates on petroleum tax and SDFI revenues. The estimated exchange need is divided by the number of trading days in the year and is included as this amount in the structural liquidity forecast.

2.3 Government borrowing

Every December, a strategy and borrowing programme for government debt is published for the coming year. It contains limits for total issuance of Treasury bills and government bonds and an auction calendar for issuances. When preparing a new forecast, information is used from the Strategy and borrowing programme on planned issuance of Treasury bills, both dates and planned issuance volume. The forecast also takes into account information on Treasury bill maturities. For government bonds, the planned total issuance volume is smoothed over announced auction dates for the calendar year. On the maturity dates for government bonds, an amount is included that corresponds to the market’s holdings of the individual government bond. For repurchases, the volume is not known in advance and no repurchase volume is forecast. Finally, coupon payments are included.

2.4 Notes and coins

The liquidity effect of notes and coins observed in the previous year is adjusted for weekends and holidays. Day-to-day variations are relatively small. The seasonal pattern also varies little from year to year but may be somewhat affected by moving holidays such as Christmas and Easter. Cash use in Norway has fallen over time and is fairly low. Notes and coins therefore have little impact on structural liquidity (Chart 1).

3. Updating the forecast through the year

The forecast must be updated continually through the year to reflect actual developments in structural liquidity and new information. In particular, changes in movements over the government’s account and foreign exchange transactions may result in changes in the forecast, but the liquidity effects of government borrowing may also change over the course of the year.

3.1 Incoming and outgoing payments over the government’s account

Despite the fact that most large incoming and outgoing payments over the government’s account take place at about the same time each year, there may at times be considerable uncertainty associated with the exact path for payments over the government’s account with Norges Bank. At the same time, the size of the payments could fluctuate with the business cycle and thus differ from the central government budget. Therefore, the Bank engages in ongoing dialogue with responsible ministries and agencies throughout the year and adjusts the forecast according to newly received information.

In connection with changes in the forecast of daily movements over the government’s account, the difference between liquidity provision over the government’s account estimated on the basis of the daily forecast and liquidity provision over the government’s account estimated on the basis of the key figures may be changed. For example, if we are informed of a payment from the government’s account that was not included in the forecast earlier, the difference will be reduced. Estimated liquidity provision over the government’s account that was estimated prior to the forecast year on the basis of the key figures on the government budget will also be updated through the year. This takes place when new forecasts are prepared of the amounts described in Box 1. For example, if the budgeted non-oil deficit and transfers from the GPFG are increased and we are unable to specify how the daily payments in the forecast will be affected, the difference will increase. The increased difference is distributed over the remaining business days in the forecast, so that the petroleum fund mechanism in the forecast remains liquidity-neutral.

3.2 Foreign exchange transactions on behalf of the government

The size of the currency exchange need in the forecast year is updated in the event of changes in the non-oil deficit in the government budget and the estimated cash flow from petroleum activities, including foreign currency revenues from the SDFI. When the central government financial statements for the previous year are presented, foreign exchange transactions will also take into account that, in the previous year, either too much or too little was transferred between the government and the GPFG.[7] With regard to net cash flow from petroleum activities, revenues from the SDFI will be assessed on an ongoing basis in the form of actual incoming and outgoing payments and updated projections from Petoro, which Norges Bank receives quarterly. Completed payments from Equinor related to dividend and share buybacks, if any, as well as information on such expected future payments, are monitored continuously throughout the year. Estimated petroleum tax could also be changed during the year independently of the Revised and Final National Budget. How petroleum taxes in the forecast year are estimated is described below.

3.3 Government borrowing

In the forecast, the effect of government securities on structural liquidity for the calendar year as a whole is normally associated with little uncertainty. For Treasury bills, there are normally few changes compared with the current auction calendar. For government bonds, the structural liquidity forecast is updated with information in line with ongoing published information two days ahead of announced auction dates in the auction calendar, ie bond and volume at the upcoming auction. Following a completed syndication, the forecast is updated with information about the bond and the issuance volume, and the issuance volume for the remaining auction dates are adjusted according to syndicated volume. The forecast is also updated with information about any buybacks and possible consequences for amounts due in the forecast year. The government also enables primary dealers of government securities to borrow government securities against central bank reserves, under what are known as repurchase agreements. Repurchase agreements temporarily reduce the quantity of central bank reserves in the banking system and are entered into the forecast on an ongoing basis.

4. Further details on the petroleum fund mechanism and foreign exchange transactions in the forecast

4.1 Is the petroleum fund mechanism always liquidity-neutral in the forecast?

Payment of petroleum tax and dividend from Equinor entail, in isolation, a withdrawal of reserves from the banking system. These reserves are resupplied to the banking system through Norges Bank’s foreign exchange purchases and the government’s petroleum revenue spending over the central government budget.[8] Over time, the petroleum fund mechanism is thus liquidity-neutral.

In the course of a calendar year, however, the petroleum fund mechanism can to some extent influence liquidity in the banking system. Among other things, this reflects the potential difference between the budgeted net cash flow from petroleum activities that forms the basis for transfers from the GPFG, which are approved in connection with the final budget in December, and the actual net cash flow from petroleum activities in the central government accounts. This difference is adjusted for in the transfers from the GPFG and Norges Bank’s foreign exchange transactions the following year.

Over several years, the non-oil budget deficit in the central government financial statements has been smaller than the budgeted non-oil deficit, which is the basis for transfers from the GPFG set in connection with the final budget in December. As a result, the amount transferred from the GPFG has been too large and the amount of Norges Bank’s NOK purchases has been too high, which in turn has resulted in a build-up of the government’s account with Norges Bank and lower banking system liquidity. This is not necessarily adjusted for in transfers from the GPFG and foreign exchange transactions the following year but was the reason for the reversal of NOK 70 billion from the government’s account to the GPFG in 2022.

In the forecast of foreign exchange transactions and movements over the government’s account, the non-oil deficit is assumed to reflect the budget for the forecast year (see 2.1.2 above). On the other hand, if it becomes clear towards the end of the year that the central government account deficit will be higher or lower than budgeted, the Bank will make discretionary adjustments to the forecast of incoming and outgoing payments over the government’s account. Given that transfers to and from the GPFG are not changed correspondingly, the liquidity effect of the difference between the actual and budgeted deficit will not be offset by a change in Norges Bank’s foreign exchange transactions. In such cases, the petroleum fund mechanism will not  be liquidity-neutral in the forecast year.

4.2 Announced foreign exchange transactions and transactions in the forecast

As described earlier, Norges Bank continuously monitors factors that may change the foreign exchange need in the forecast year. The updated estimate of the exchange need forms the basis for the foreign exchange transactions ahead in the forecast. In the event of new information in the course of the month that implies a different exchange need, the forecast of daily foreign exchange transactions from the following month will differ from the foreign exchange transactions conducted in the current month.

Given that the estimated exchange need is not changed during the month, the foreign exchange transactions announced for the current month and the foreign exchange transactions in the forecast for the remained of the year usually agree. In certain cases, foreign exchange transactions announced for the following month could, however, differ from the Bank’s estimated annual exchange need. The difference between announced foreign exchange transactions and the Bank’s estimated exchange need may partly reflect uncertainty related to the decision basis or the size of the petroleum buffer portfolio^[9]. In such situations, the forecast assumes that the foreign exchange transactions will again correspond to the exchange need for the year from the following month.

5. Liquidity statistics

Every Monday and Thursday, Norges Bank publishes statistics with retrospective information on the reserves in the banking system with a lag of two trading days. The statistics describe the actual liquidity effects of the various factors described above, as well as the liquidity effects of other foreign exchange transactions and Norges Bank’s market operations.

Footnotes

[1] See Aamodt, E. and K. Tafjord (2013). “Structural liquidity”. Economic Commentaries 9/2013, Norges Bank, for a detailed description of structural liquidity and which factors influence structural liquidity.

[2] Since the forecast is published in mid-December, the year before the beginning of the forecast year, the previous year’s movements imply actual developments up until publication of the forecast and the previous year’s forecast for the remainder of December.

[3] In the forecast for 2023, VAT payments in 2022 for example were adjusted by a factor of 1.06. Table 2.8 in Appendix 2 of the central government budget specifies that in 2023, income related to VAT is budgeted at NOK 392 950 million, while estimated accounts for 2022 show NOK 370 000 million.

[4] The petroleum fund mechanism channels the government’s revenues from petroleum activities on the Norwegian shelf for spending over the government budget or saving in the Government Pension Fund Global (GPFG).

[5] Government revenues from petroleum activities, also called the government’s net cash flow from petroleum activities, comprise petroleum tax, revenues from the SDFI and dividends from Equinor ASA. The amount to be transferred to or from the GPFG also includes any net financial transactions related to petroleum activities. These correspond to the sum of gross revenues from central government sales of Equinor shares less government purchases of Equinor shares, as well as financial transactions relating to petroleum companies in which the central government has ownership interests (cf Section 4, fifth paragraph, of the Government Pension Fund Act). In the discussion ahead, the term net cash flow from petroleum activities is used as a collective term for both revenues and financial transactions related to petroleum activities.

[6] The central government budget is initially set up with a deficit with oil revenues excluded, and where all of the government’s revenues from petroleum activities are transferred to the GPFG. Subsequently, the deficit is financed through an account reversal from the GPFG. Petroleum revenue spending, or the size of the non-oil budget deficit, is guided by the fiscal rule. Under the fiscal rule, the use of the GPFG’s capital shall over time follow the expected real return on the GPFG, projected at 3%. In this paper, the term “transfers to/from the GPFG” implies net transfers to/from the GPFG.

[7] Differences arise because the actual transfer between the government and the GPFG is approved in connection with the final budget in December, while the actual net cash flow from petroleum activities will not be known until the financial reports are completed the following year.

[8] In this context, it is assumed that petroleum tax receipts and dividend from Equinor are larger than the non-oil deficit and that Norges Bank will thus purchase foreign exchange. If instead, petroleum tax receipts and dividend from Equinor are smaller than the non-oil deficit, Norges Bank would instead purchase NOK, which would reduce banking system liquidity. The overall effect on the amount of reserves in the banking system will nevertheless be neutral as the negative effect on liquidity of petroleum tax receipts and dividend from Equinor, as well as Norges Bank’s NOK purchases, will be offset by the positive effect of the non-oil deficit on liquidity. For a more detailed description of the petroleum fund mechanism see Aamodt, E. (2012) “The Petroleum fund mechanism and Norges Bank’s foreign exchange purchases for the GPFG”, Economic Commentaries No.14, Norges Bank.

[9] Se eg Economic Commentaries 2/2017 for more about the composition of and movements in the petroleum buffer portfolio.