Macroeconomic Stabilization Fund FEM Overview
Skylar Clarine, a fact-checker and personal finance expert with experience in veterinary technology and film studies, provides an overview of the Macroeconomic Stabilization Fund (FEM) in Venezuela.
Established to stabilize cash flow from oil production, the FEM was later ignored and dismantled by President Hugo Chávez’s administration. The fund’s proceeds were used to subsidize oil prices and support failed economic schemes in the country.
Key takeaways include the FEM’s purpose of insulating oil-producing countries’ local economies from the volatility of international oil markets and the mismanagement of the fund by Chávez’s administration.
The FEM, also known as Fondo de Estabilización Macroeconómico (FEM) in Spanish, was created in 1998 at the request of the International Monetary Fund (IMF). The fund received income generated from oil production above a certain price per barrel and distributed the difference if the price fell below that level.
Regulation of the fund began in 1999, and by December 2001, it held $7.1 billion in assets. However, in 2003, the government withdrew more than $6 billion from the fund to cover its fiscal budget deficit. As of November 2018, the fund had diminished to $3 million.
Calculations suggest that Venezuela could have avoided its economic crisis in 2012 by putting money from its oil revenues into the fund. Estimates range from potential savings of $26 billion by 2012 to $146 billion between 1999 and 2014. Reinvesting these funds into government debt and income-generating schemes would have generated substantial earnings for the government, similar to the returns earned by Norway’s similar fund.
The IMF suggested a reference price of $9 per barrel of oil when the fund was created. Subsequent fund inflows were calculated based on the difference between the average price of oil over the past five years and the daily price. This difference was then invested in government debt or other income-generating instruments.
Stabilization funds, like the FEM, are mechanisms established by governments or central banks to protect domestic economies from revenue fluctuations, especially from commodities like oil. These funds aim to maintain consistent government revenue and prevent inflation by purchasing foreign denominated debt.
Various countries, including Kuwait, Russia, Norway, Chile, Oman, Papua New Guinea, and Iran, have established stabilization funds. Exchange rate stabilization funds exist 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 leads to fiscal volatility and macroeconomic instability. This dependence is exacerbated by the Dutch disease, which attracts significant foreign capital inflows and causes appreciations of real exchange rates, weakening the competitiveness of domestic sectors. Resource-rich economies tend to increase discretionary spending following commodity-driven fund inflows.
Studies have shown that stabilization funds contribute to smoothing government expenditure, reducing volatility by 13% compared to economies without such funds. Effective management and strong institutional frameworks are crucial in handling stabilization funds. Diversification of export products also helps reduce expenditure volatility. Countries with well-managed real expenditure have less volatile public spending. Domestic and international financial markets can serve as buffers to smooth expenditures. Improved institutions have been proven to reduce fiscal volatility.
