Norway plans to spend a record 420 billion kroner ($41 billion) of its oil wealth this year to weather the brutal COVID-19 downturn.
The richest Nordic economy and western Europe’s biggest oil and gas producer has been hit on two fronts as the coronavirus pandemic shut down mainland activity and led to a collapse in the global crude market. The Norwegian government now expects mainland gross domestic product to drop 4 percent this year.
The recession could still go deeper, as “uncertainty is unusually high,” the government said in a statement with key figures from the revised budget it will present later on Tuesday.
Norway has amassed a $1 trillion sovereign wealth fund from decades of petroleum production that gives it tremendous fiscal fire power. The so-called structural oil-corrected deficit will represent 4.2 percent of the fund’s value this year, exceeding the country’s 3 percent fiscal rule.
“The bill is high,” Finance Minister said on NRK radio. “We need to be aware that as we’re spending more money now, that means less money in the years ahead.”
When oil-money spending exceeds the state’s income from petroleum activities, the government makes withdrawals from the fund. While that happened during the previous oil downturn, 2020 will be the first year where outflows surpass the fund’s own cash flow from dividends and interest payments, forcing it to offload assets. The withdrawal amount will be included in the spending plan due at 10:45 a.m. in Oslo.
The government said in April it expected emergency measures - from compensating businesses for lost revenue to guaranteeing loans and boosting unemployment benefits - will weaken this year’s budget by 201 billion kroner compared to the original plan presented in October, but that estimate has grown since then.
The changes since last year are striking. The Conservative-led government was aiming for a slight reduction in oil spending to 244 billion kroner, representing a negative fiscal impulse of 0.2 percentage point. That figure, measured as the increase in the structural oil-corrected deficit divided by trend GDP, is now set to jump to a positive 5.1 percentage points.
Norway is now gradually opening up society, restarting schools and lifting restrictions on many businesses as the contagion comes under control. But the export and oil-dependent nation is also bracing for the longer-term consequences of a global downturn.
Parallel to the government’s response, Norway’s central bank has slashed the key policy rate by 1.5 percentage points to an unprecedented 0 percent over three cuts starting in March. It’s also intervened to support the weak krone and provided cheap liquidity to banks.
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