WHAT IS 'Macroeconomic Stabilization Fund (FEM)'

The Macroeconomic Stabilization Fund (FEM) was established by Venezuela to stabilize cash flow from oil production.

BREAKING DOWN 'Macroeconomic Stabilization Fund (FEM)'

The Macroeconomic Stabilization Fund (FEM) was created in 1998 at the request of the International Monetary Fund, or IMF, as a fund to receive income generated from oil production above a certain price per barrel and pay out the difference if the price falls below that level. Regulation of the fund by the central bank board began in 1999. By December 2001, the fund had US$7.1 billion in assets. In 2003, the government tapped the fund to cover its fiscal budget deficit, withdrawing more than US$6 billion.

Stabilization funds

A stabilization fund is a mechanism set up by a government or central bank to insulate the domestic economy from large influxes of revenue, such as from commodities such as oil. A primary motivation is maintaining steady government revenue in the face of major commodity price fluctuations as well as the avoidance of inflation. This usually is accomplished through the purchase of foreign denominated debt, especially if the goal is to prevent overheating in the domestic economy. The first such fund was in Kuwait in 1953. Stabilization funds since have been set up for Russia, Norway, Chile, Oman, Kuwait, Papua New Guinea the UAE and Iran. They also may be set up for exchange rate stabilization as in the European financial Stability Facility, the UK Exchange Equalization Account and the US Exchange Stabilization Fund.

Dependence on revenue from natural resources tends to cause fiscal volatility and macroeconomic instability. Reducing this dependence is made difficult by the so-called Dutch Disease, which occurs when the production of natural resources attracts large foreign capital inflows. This in turn causes appreciation of the real exchange rates and weakens the competitiveness of domestic tradable sectors. The current account deteriorates, making the economies vulnerable to price swings. In addition, governments of resource-rich economies, especially those lacking strong institutional and legal framework, tend to make more-than-proportional increases in discretionary spending following commodity-driven fund inflows.

Studies have shown that stabilization funds contribute to smoothing government expenditure. Expenditure volatility in countries with stabilization funds can be 10-15 percent percent lower than that in economies without them. Stabilization funds can smooth expenditure volatility. A strong institutional framework is key in managing stabilization funds and their resources. Export product diversification tends to reduce expenditure volatility. Countries with better-managed real expenditure have less volatile public spending. And then, domestic and international financial markets can function as buffers to smooth expenditures. Better institutions have been shown to reduce fiscal volatility.

RELATED TERMS
  1. Oil Stabilization Fund (Iran)

    The Oil Stabilization Fund was a fund of surplus revenues from ...
  2. World Fund

    A world fund is a mutual fund that invests in securities from ...
  3. Financial Stability Oversight Council ...

    The Financial Stability Oversight Council (FSOC) is a council ...
  4. Foreign Fund

    A foreign fund is a fund that invests in companies outside the ...
  5. Closed to New Investors

    Closed to new investors means a fund has decided to stop allowing ...
  6. Income Fund

    Income funds pursue current income over capital appreciation ...
Related Articles
  1. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  2. Personal Finance

    What Is the Bank for International Settlements?

    Headquartered in Basel, Switzerland, Founded in the 1930's the Bank for International Settlements (BIS), is a bank for central banks.
  3. Investing

    An Introduction to Sector Mutual Funds

    Investing among several different sectors in the economy is a way to diversify your portfolio.
  4. Financial Advisor

    Stable Value Funds: Risk Less And Earn More

    Stable value funds can provide higher yields and lower risk.
  5. Insights

    Macroeconomics

    Find out everything you need to know about macroeconomics.
  6. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
  7. Financial Advisor

    Top 5 American Funds for Retirement Diversification in 2016

    Discover five mutual funds from industry leader American Funds with high yields that are perfect for retirement savings diversification.
  8. Investing

    Money Market Funds: Enough Regulation Already?

    Since September, the Securities and Exchange Commission (SEC) has been sitting on proposed rules for money market mutual funds that would affect 61 million individual investors plus untold businesses ...
  9. Retirement

    Top 5 JPMorgan Funds for Retirement

    Discover five J.P. Morgan mutual funds that provide high returns and excellent diversification of retirement savings. Learn how to allocate assets properly.
  10. Investing

    Stop Paying High Mutual Fund Fees

    Discover how mutual fund fees effect your mutual fund's returns.
RELATED FAQS
  1. How should a company budget for capital expenditures?

    Learn the difference between capital expenditures and operational expenses, and discover the importance of budgeting for ... Read Answer >>
  2. What macroeconomic problems do policy makers most commonly face?

    Learn about the macroeconomic factors policymakers have to be concerned with when deciding on economic policies, such as ... Read Answer >>
Trading Center