Macroeconomic Stabilization Fund (FEM)

What Is the Macroeconomic Stabilization Fund (FEM)?

The Macroeconomic Stabilization Fund (FEM) was laid out by Venezuela to balance out cash flow from oil production. Nonetheless, the administration of President Hugo Ch\u00e1vez, who came to power before long, overlooked the fund and endeavored to destroy it later. His administration is reported to have utilized the fund's proceeds to finance oil prices and in different failed economic schemes all through the country.

Understanding the Macroeconomic Stabilization Fund (FEM)

The Macroeconomic Stabilization Fund or Fondo de Estabilizaci\u00f3n Macroecon\u00f3mico (FEM) (as it is called in Spanish) was made in 1998 at the request of the International Monetary Fund, or IMF, as a fund to receive income generated from oil production over a certain price for each barrel and pay out the difference assuming the price fell below that level.

Regulation of the fund by the central bank board started in 1999. By December 2001, the fund had US$7.1 billion in assets, and in 2003, the government tapped the fund to cover its fiscal budget deficit, pulling out more than US$6 billion. As of November 2018, the fund held a simple $3 million.

Different calculations have demonstrated the way that Venezuela might have avoided the crisis in its economy that began in 2012, assuming it had hid away money from its oil revenues into the fund. As per one calculation, the country might have saved $146 billion somewhere in the range of 1999 and 2014, a period during which oil prices rose decisively. The Economist has a more conservative estimate for savings of $26 billion by 2012. Reinvesting that amount into government debt and income-producing schemes would have collected further earnings for the government. Norway, which has a comparable fund, earned higher returns from its investments. The Venezuelan government might have earned returns along comparative lines.

The IMF suggested a peg of $9 per barrel at the cost of oil as reference when the fund was framed. Given the oil market's volatility, subsequent fund inflows were to be calculated by involving the difference between the average of the price for a barrel of oil for the past five years and the daily price. FEM would receive the difference, which would be invested in government debt or other such instruments to generate income.

Stabilization Funds

A stabilization fund is a mechanism set up by a government or central bank to protect the domestic economy from large floods of revenue, for example, from commodities like oil. A primary motivation is keeping up with consistent government revenue in the face of major commodity price vacillations as well as the avoidance of inflation. This typically is achieved through the purchase of foreign denominated debt, particularly on the off chance that the goal is to forestall overheating in the domestic economy.

The primary such fund was in Kuwait in 1953. Stabilization funds since have been set up for Russia, Norway, Chile, Oman, Kuwait, Papua New Guinea, and Iran. They additionally might be set up for exchange rate stabilization in the European Financial Stability Facility, the U.K. Exchange Equalization Account, and the U.S. Exchange Stabilization Fund.

Dependence on revenue from natural resources will in general reason fiscal volatility and macroeconomic instability. Diminishing this dependence is made troublesome by the supposed Dutch disease, which happens when the production of natural resources draws in large foreign capital inflows. This thus causes appreciation of the real exchange rates and debilitates the seriousness of domestic tradable sectors. The current account deteriorates, making the economy helpless against price swings. Also, governments of asset rich economies, particularly those lacking strong institutional and legal structure, will generally make more-than-corresponding expansions in discretionary spending following commodity-driven fund inflows.

Studies have shown that stabilization funds add to smoothing government expenditure. Expenditure volatility in countries with stabilization funds can be 10% to 15% lower than that in economies without them. Stabilization funds can smooth expenditure volatility. A strong institutional structure is key in overseeing stabilization funds and their resources. Export product diversification will in general reduce expenditure volatility. Countries with better-oversaw real expenditure have less unpredictable public spending. And afterward, domestic and international financial markets can function as supports to smooth expenditures. Better institutions have been displayed to reduce fiscal volatility.

Features

• Stabilization funds are helpful to protect nearby economies of oil-creating countries from the volatility of international oil markets.
• President Hugo Ch\u00e1vez's administration is reported to have disregarded and, subsequently, endeavored to destroy the fund.
• The fund received proceeds equivalent to the difference between a reference price for a barrel of oil and the daily price. Those proceeds were to be invested in income-producing instruments.
• The Macroeconomic Stabilization Fund (FEM) was a fund laid out by the Venezuelan government to cushion itself from the oil market's volatility.