Malaysia's over-dependence on oil money has proven to be a boon and bane over the years.
While it has had the cushioning effect of insulating itself against economic downswings, it has also led to its over-reliance and inertia in wanting to aggressively look for new sources of revenue for the country.
Petroleum income, one of Malaysia's major sources of income, is predicted to bring in RM64 billion in 2024, a significant drop from RM69.8 billion in 2023. The need for Malaysia to look at alternative sources of wealth and reduce its reliance on oil earnings has long been stated by economists.
It became more important because oil is a finite source of wealth, and the development of renewable energy sources would not provide Malaysia an advantage.
Brent Crude prices are set on a global scale based on supply and demand considerations, which are subject to change due to geopolitical events that are out of the control of a tiny nation like Malaysia.
Malaysia needs to make sure that the money from oil doesn't end when the oil wells dry up because of its excessive reliance on a finite source of income; instead, it needs to ensure that the wealth from oil multiplies through wealth-growing initiatives.
This can be accomplished through the Oil Sovereign Fund, which would provide planners with assurance in implementing well-planned economic strategies, widening the country's revenue base, and confronting an impending crisis as running costs consume development expenditure.
Malaysia's trillion-dollar debt and narrowing of sources of revenue should signify that the clock is ticking and the need to reduce dependence on oil becomes more urgent. Many countries in the Middle East have already taken concrete measures to reduce their dependence on oil through the establishment of an oil sovereign fund.
The fund will insulate Malaysia against the vagaries of fluctuating income. and ensure that wealth from the oil is increased manifold even after the depletion of Malaysia's oil resources.
A good role model Malaysia should emulate is Norway's sovereign, where a portion of oil and gas revenues can be transferred to the fund that can be invested in equities, fixed income, and real estate locally and abroad.
Today, Norway's Oil Sovereign Fund has over US$1.3 trillion in assets, including 1.4% of global stocks and shares, making it the world's largest sovereign wealth fund.
Malaysia can follow this trodden path ensuring that there will be safety nets and that the well-being and welfare of future generations are well taken care of.
The fund should receive annual appropriation and it must be allowed to grow sustainably with no withdrawal except when there is a critical event and when the fund performs better than the targeted. It must be managed strictly, and no government present or future should be allowed to squander the reserves and ensure growth in its invested assets.
If the government wishes it can spend an agreed percentage of it as part of the annual budget. Budget surpluses must be transferred to the fund, while deficits are covered with the money from the fund. In other words, the authorities can spend more in hard times and less in good times.
These funds must be professionally managed, and free from any political interference. It must be constituted with wide representations, including nominees of the opposition political parties and non-governmental organisations (NGOs) aside from the many professionals managing the funds.
It can be constituted somewhat the same way as the Sarawak Sovereign Wealth Fund. The board of guardians, chaired by former Federal Court judge Sulong Matjeraie, are all distinguished experts in their respective fields.
The proposed sovereign Fund should have a balanced mix of stakeholders from both the public and private sectors with extensive experience in Malaysia and abroad.
The sovereign wealth fund (SWF) will subscribe to international best practices, particularly the Generally Accepted Principles and Practices for SWFs, better known as the Santiago Principles.
SWFs if implemented properly are among the best policy instruments to manage an economy's peaks and troughs.
Through SWF, Malaysia can invest in large surpluses generated by its oil and gas sector and achieve three goals, smoothening the disruptive effects of fluctuating commodity prices, opening new markets and income streams outside of Malaysia, and transferring wealth to future generations.
Malaysian policy-makers must take a much broader perspective on ensuring that the wealth of future generations is intact by taking a proactive stance today as the famous Abraham Lincoln could not have said more succinctly when he said" You cannot escape the responsibility of tomorrow by evading it today"
*The writer was formerly attached to a think tank.