A fund to face any KWAN-dary

Williams says that while the idea of a contingency fund is appealing as a defence against unexpected events, there is also a need to evaluate the cost-benefit considerations of its size, use and management.

THE government has to build a contingency fund to be used when faced with climate risks or other unexpected major events, especially after what happened during the Covid-19 pandemic, the Malaysian Rating Corp Bhd’s (MARC) has suggested.

It is a suggestion worth listening to. A fund like that will be vital when there is an urgent need for dispersal of financial aid or to support the economy.

MARC did not mention which fund it was referring to, but it may presumably be the National Trust Fund, or better known by its acronym KWAN.

There has never been a better time to systematically build up this “rainy-day” fund then when the economy is on the up-and-up.

With Bank Negara cautiously estimating that the gross domestic product may hit the upper bound of its 4% to 5% growth expectations and the government’s commitment to fiscal prudence – with continued subsidy rationalisation – the savings and extra revenue can be used for targeted aid or stashed away for exactly such emergencies.

There is not much about KWAN on the Internet, and it does not have its own website. It was set up under the National Trust Fund Act 1988, with funding coming from the consolidated fund (where all government revenue goes) and Petroliam Nasional Bhd (Petronas).

Managed by Bank Negara, its latest annual report available on the Internet is from 2021.

According to the 2021 annual report, KWAN’s accumulated funds as of Dec 31, 2021 stood at RM15.9bil, down from RM19.5bil in 2020, which was also the most that the fund has ever accumulated.

The government used some RM6bil from the fund to procure vaccines for Covid-19 and related expenses. According to an Aug 8 statement on the official portal of the Finance Ministry, the fund size is now back to RM20bil.

Building up the contingency fund is one thing, but there is also a need for accountability and transparency with this “rainy-day” fund. There have to be well-defined terms and conditions under which the government can use it, given the profligacy of past decades and the opacity in spending.

For example, at what level of risk or what magnitude of disaster should the fund be deployed?

A contingency fund would also help build a strong fiscal foundation and avoid the need to divert funding meant for operating and development expenditures or delay the implementation of initiatives.

Besides setting up this fund, it is also necessary to address how longer-term funding should step in and make financing for rebuilding more sustainable.

Economist Prof Geoffrey Williams says that while the idea of a contingency fund is appealing as a defence against unexpected events, there is also a need to evaluate the cost-benefit considerations of its size, use and management.

He believes that there are challenges to how the contingency fund can be funded to be of a meaningful size.

He takes as a comparison KWAN’s fund size, which at its peak was less than RM20bil compared with the RM150bil withdrawn from the EPF under Covid-19 related withdrawal plans.

“The RM2bil in the normal budget contingency fund is too small for anything other than cash-flow management,” he says.

Under the annual federal government budget, RM2bil is set aside as a contingency reserve.

Williams suggests several ways to raise the fund size through the consolidation of the smaller government-linked investment companies (GLICs) into a “Malaysian Superfund” that could quickly raise RM1.1 trillion.

This could be topped-up further with Petronas contributions.

Calling it a new sovereign wealth fund similar to the Norwegian fund, the “Malaysian Superfund” can be invested in domestic development projects as well as strategic investments overseas to maximise returns.

These suggestions answer questions on how to grow the fund to a meaningful size and how to manage it responsibly.

“Privatisation proceeds and savings from cutting wastage, leakages and corruption can add further to the fund.

“So, it is feasible to get a large fund relatively quickly which could rise to RM2 trillion or more in a few years,” he says, adding that it can be used to fund social protection while having a reserve for emergency withdrawals.

At this point, all that is known of KWAN’s future is from an Aug 8 statement issued by the Finance Ministry, which spoke of how the GLICs and GLCs can help catalyse growth in the economy through the deployment of funds under the first phase of the GEAR-uP programme.

Under this, “KWAN will be strengthened as an inter- generational wealth fund of Malaysia with new sources of contributions, revised utilisation guidelines, and streng-thened investment mandates to ensure sustainability and a retention of wealth for future generations of Malaysians”.