This is the first annual report that Norges Bank has published about the operational management of the Government Petroleum Fund. One of the primary objectives of the report is to provide comprehensive background information, to permit an understanding and evaluation of the manner in which Norges Bank is fulfilling its management responsibilities.
The Government and the Storting (Norwegian parliament) have delegated an important responsibility to Norges Bank by assigning the operational management of the Petroleum Fund to the Bank. The division of responsibility between Norges Bank and the political authorities has been clearly defined. The Ministry of Finance is responsible for drawing up the strategy, and in the context of this strategy Norges Bank has been given a clearly defined responsibility for the results achieved through management operations. In addition, the Bank submits recommen-dations to the Ministry on the choice of strategy.
The management objectives are laid down in the Regulation relating to the Management of the Government Petroleum Fund: Norges Bank shall seek to achieve the highest possible return subject to the limits set out in the Regulation, and ensure that satisfactory risk management systems and control routines are in place.
Norges Bank has placed considerable emphasis on building up a sound system for risk management and control. As long as the systems and organisation were being developed, little use was made of the scope for permitted deviations from the benchmark portfolio, as set out in the guidelines for the management of the Fund.
The Petroleum Fund recorded a return of 9.3 per cent in 1998. As a result of the depreciation of the krone, the return measured in NOK was 19.8 per cent. Movements in the krone exchange rate do not affect the international purchasing power of the Petroleum Fund, so that it is more appropriate to consider the return measured in inter-national currencies. Norges Bank outperformed the benchmark portfolio by 0.2 percentage point.
Developments through 1998 served to remind us on many occasions that the return on the Petroleum Fund may show substantial short-term fluctuations. There may also be considerable variations in the return from one year to the next. We must therefore be prepared for some years with weak or even negative returns. In such years, as well as in years with a high return, it is important to bear in mind that the strategy for the Petroleum Fund is based on a long time horizon.
During the past two years, Norges Bank has faced considerable challenges in connection with the preparation and implementation of the new management strategy for the Petroleum Fund, and this task has received high priority. The Fund is a very important economic policy instrument, and shall promote the long-term considerations pertaining to the use of petroleum revenues. Broad confidence in the manner in which this important part of our common financial wealth is managed is therefore important.
Clearly defined roles and responsibilities, and openness about management results, are preconditions for confidence in the management of the Fund. It is the intention that this annual report will contribute to this end.
Oslo 24 February 1999
Svein Gjedrem
Governor