Brunei Darussalam
Recent Economic Developments

This paper describes economic developments in Brunei Darussalam during 1997–98. In 1997, the economy grew by 4 percent led by strong construction and services activities, while average inflation declined to less than 2 percent. Current expenditures were contained, and a recovery in capital expenditures was financed by larger transfers from the Brunei Investment Agency. In 1998, the Brunei economy was adversely affected by the large decline in world price of crude oil, the collapse of a large domestic private company, and the impact of the Asian crisis.


This paper describes economic developments in Brunei Darussalam during 1997–98. In 1997, the economy grew by 4 percent led by strong construction and services activities, while average inflation declined to less than 2 percent. Current expenditures were contained, and a recovery in capital expenditures was financed by larger transfers from the Brunei Investment Agency. In 1998, the Brunei economy was adversely affected by the large decline in world price of crude oil, the collapse of a large domestic private company, and the impact of the Asian crisis.

I. Recent Economic Developments, 1997-98

A. Overview/Summary

1. The Brunei economy is heavily dependent on oil and natural gas, which account for over 50 percent of GDP, about 80 percent of government tax revenues, and 90 percent of exports. Substantial fiscal revenues from oil and gas production have fueled the growth of a large public sector which provides generous remuneration, an extensive welfare system, a high level of investment in infrastructure, and employment for a rapidly growing labor force. High earnings from the export of oil and gas and a steady increase in the country’s net foreign assets over the years have provided a comfortable external payments position and helped to cushion the financial impact of exogenous shocks. The exchange and trade system has remained liberal, and the peg to the Singapore dollar has helped maintain a stable macroeconomic environment.

2. Despite substantial proven oil and gas reserves and ongoing exploration, an important objective of development policy has been to diversify the economic base. However, while the share of non-oil/gas sector in GDP has increased during the 1990s, this reflected mostly growth in construction and services, which have been driven by government development expenditures. Diversification and expansion of private sector activity continues to be impeded by high public sector remuneration, restrictions on the type of activities which are open to foreign participation, and cumbersome foreign investment approval procedures.

3. In 1997, the economy grew by 4 percent led by strong construction and services activities, while average inflation declined to under 2 percent. Current expenditures were contained, and a recovery in capital expenditures was financed by larger transfers from the Brunei Investment Agency (BIA). A surge in private sector credit extended by commercial banks to a large domestic private company facing major economic problems was accompanied by an almost commensurate decline in their net foreign assets position.

4. In 1998, the Brunei economy was adversely affected by the large decline in world price of crude oil, the collapse of a large domestic private company, and the impact of the Asian crisis. As a result, real GDP growth is estimated to have fallen to around 1 percent, owing to the combined effects of the decline in oil/gas exports, the slowdown in non-oil/gas activity exacerbated by the collapse of a large domestic company and lower government capital expenditures, and the related fall in consumption. The immediate financial impact of these shocks on the balance of payments and government revenues was absorbed through the BIA’s investment position, while the impact on the real economy was felt through a decline in overall economic activity and the repatriation of large numbers of foreign workers.

B. Real Sector Developments, 1997-98


5. Real GDP growth increased from 3½ percent in 1996 to 4 percent in 1997, buoyed by strong growth in the non-oil/gas sector, especially in the agriculture and services sectors. In 1998, real growth declined sharply, to 1 percent, owing to the combined effects of an ongoing decline in oil and gas exports because of sharply lower international prices; a fall in domestic demand, exacerbated by the collapse of a large local enterprise; and lower government capital expenditure.

Oil and gas

6. In 1997, production of crude oil and condensate fell slightly to 163,000 barrels per day (bpd) from 165,000 bpd in 1996 (Table).1 Apart from a small quantity earmarked for domestic consumption, the crude oil and condensate are exported to ASEAN countries (37 percent), Japan (28 percent), Korea (27 percent), Taiwan (6 percent), and New Zealand (2 percent) under one-year renewable contracts at prices that vary with the average monthly U.S. dollar price for light crude oil “Tapis” grade, quoted in Malaysia. A small, but increasing, amount is sold on the spot market directly. Though the average international oil price declined by just over 2 percent in U.S. dollar terms during the year, to US$21.5 per barrel, the value of crude oil output in local currency terms rose slightly, as the Brunei dollar depreciated by over 5 percent against the U.S. dollar. Output of liquified natural gas (LNG) remained stable in 1997 at just over 1 billion standard cubic feet per day (bscf/d), maintaining Brunei as the world’s fourth largest producer. About 20 percent of production is consumed domestically, and the remainder is exported exclusively to Japan (Tokyo Electric Power, Tokyo Gas, and Osaka Gas Companies) and Korea (Korea Gas Corporation) under long-term (20-year) contracts. Under the terms of the contracts, the importing countries are free to vary the volume of LNG imports in any one year by plus or minus 3 percent. The contract price for LNG, also determined in U.S. dollars, is adjusted every quarter in line with prices on the world spot market for oil. In 1997, it increased by 4½ percent in U.S. dollar terms to US$3.84 per million BTU.

7. In 1998, reflecting the combination of a 37 percent decline in the average U.S. dollar price of oil to under US$14 a barrel; the onset of recession in many oil importing Asian countries; and actual developments through end-September, annual production of crude oil and condensate is estimated to have fallen below last year’s level, to 160,000 bpd. Similarly, output of LNG is estimated to have declined by about 2 percent to 1.057 bscf/d, while the average price for LNG is estimated to decline by about 25 percent over 1997.

Non-oil/gas sectors

8. In 1997, non-oil/gas activities grew by over 7 percent, spurred by 10 percent growth of the private sector; the government sector grew by under 5 percent, in line with previous years. Consistent with the government’s policy of increasing domestic food production and fostering agro-industrial activities, agricultural output grew by over 6 percent, boosted by sharp increases in local production of ‘halal’ meats (poultry, goats, and cattle) and fruits, and a pick-up in agro-industry. Despite a 4½ percent decline in fish catch, as a result of BSP seismic survey activity and haze in the first half of the year, both of which prevented access to productive fishing areas, total output in the fisheries sector increased on account of higher aquaculture production (seabass and marine shrimp) and increased processing activities. The construction sector grew by just under 9 percent, reflecting an acceleration in public infrastructure development projects, including upgrade of facilities at Muara Port and Brunei International Airport, and development of Brunei Bay, while manufacturing output (food and beverage processing, garments, wood processing and furniture, and building materials) increased by just under 5 percent. In the tertiary sector, restaurants, hotels, real estate, and business services exhibited strong growth, as did community, social, and personal services (including government activities).

9. In 1998, growth of non-oil/gas activities slowed to 4 percent, in response to effects of the Asian crisis; the collapse of a large local company; and a lower government capital expenditure. Private sector expenditures were curtailed by the combined effects of an appreciating Brunei dollar, especially against the Malaysian ringitt (about 20 percent), which encouraged cross-border shopping (e.g., in nearby Sabah and Sarawak), and the repatriation of some 40,000 foreign workers following the collapse of the Amedeo company and a sharp reduction in related construction activities. The initial decline in public sector expenditure, following a sharp reduction in capital expenditures in the first half of the year, was partially compensated in mid-year, by a supplementary capital expenditure allocation of B$352 million and a B$100 million increase in allowances for lower- and mid-level government employees.

Employment, Wages, and Prices


10. Brunei’s population is growing at an annual rate of 3 percent, and reached an estimated 314,400 at end-1997. Out of an estimated working age population (those between the ages of 15 and 65) of 200,900 in 1997, about 123,000 were economically active, giving an overall labor force participation rate of 61 percent.2 While the labor force participation rate (including temporary residents) of women has increased, from 46 percent in 1991 to 54 percent in 1995, male labor force participation remained much higher at 79 percent. Relatively high salaries and generous benefits offered by the government (see below) continue to act as a disincentive to private sector employment, and according to the latest Labor Department Census (1995), just under half (46 percent) of the working population is employed in the public sector, including over 39,000 in the government. Other large-scale employers are BSP (4,000) and Royal Brunei Airlines (1,900). In the private sector, chronic labor shortages, in professional as well as unskilled fields, have been alleviated by the recruitment of foreign workers, who now make up about 40 percent of the total working population. Private sector employment is concentrated in the construction sector (over 40 percent), followed by wholesale and retail trading (13 percent), and non-oil and gas mining, quarrying and manufacturing (10 percent).

11. In 1998, there was an exodus of foreign workers (including about 16,000 Thais working in the construction sector), reflecting cost cutting measures in local companies facing increased competition from Asia crisis countries; completion of major government projects and the slow down of public sector construction; and the collapse of a large local enterprise.

12. Despite the need for foreign workers and the underlying excess demand for labor, registered unemployment in the local population is estimated to exceed 6,000, equivalent to an unemployment rate of about 5 percent, owing to the reluctance of Bruneians to accept manual-type employment (e.g., in the construction sector) and a mismatch between vacancies and suitably qualified candidates. In reality, actual unemployment is higher as many unemployed people fail to register, particularly among teenage Malays who have not completed secondary school. Under the Seventh NDP, the labor force requirement is expected to increase by 5,200 per year and reach 156,000 in 2000, with the proportion of foreign workers anticipated to remain over 40 percent.

13. The government remains the most attractive employer in Brunei. In particular, an average annual salary of B$ 15,800, supplemented by various allowances and benefits, (amounting to about 70 percent of salary) including rent subsidy, low interest housing and car loans, and an allowance for the haj pilgrimage make it very difficult for the private sector to compete for labor,3 especially small to medium-size private sector companies, even though wage determination in the private sector is entirely free. Average wage rates per month for private sector employees vary from B$450-500 for unskilled labor to B$1,000 for secretaries, construction supervisors, and professional staff, equivalent to an average annual wage of B$5,400-6,000 and B$12,000, respectively.


14. While inflation in Brunei, as measured by changes in the CPI,4 generally moves in line with trend price developments in Singapore because of the currency peg to the Singapore dollar, deviations in overall annual inflation performance can arise through supply disruptions, changes in administered prices, price developments in the nontraded goods sector, and the composition and pattern of imports.

15. In 1997, average annual CPI inflation in Brunei fell to 1.7 percent, down from 2 percent in 1996, whereas average annual CPI inflation in Singapore rose to 2 percent in 1997, from 1.4 percent in 1996. There were no changes to administered prices or prices of nontraded goods, nor any major supply disruptions in 1997. For the most part, price developments reflected the combination of declines in the U.S. dollar import prices of food, manufactured products, and machinery and transport equipment, and fluctuations in bilateral exchange rates of import source countries. In particular, the appreciation of the Brunei dollar against the currencies of neighboring Asian crisis countries (Malaysian ringgit, Indonesian rupiah, Philippine peso, and Thai baht), especially in the second half of the year, which helped moderate imported inflationary pressures (ASEAN countries account for 45 percent of total imports), was offset by the depreciation of the currency against the U.S. dollar, sterling, the yen, and the major European currencies (U.S., Japan, and Europe account for 39 percent of total imports). Prices of food, clothing, and footwear (accounting for a combined 45 percent weight in the reference consumer basket) increased by 3.7 percent and 4 percent, respectively, while prices of housing, transport, and communications (with a combined weight of 39 percent) declined slightly. In the year to July 1998, average CPI inflation was negative 0.6 percent, as a decline in prices of transport and communications more than offset small increases in prices of food, clothing, and footwear.


16. The quality of the environment has been an important policy consideration since the Fifth National Development Plan, 1985-90 (NDP5). Since 1993, the National Committee on Environment (NCE), assisted by the Environment Unit in the Ministry of Development which acts as Secretariat, maintains responsibility for overall policy coordination, review, and implementation of the government’s National Environment Strategy (NES) within the NDP. Under NDP7, 1996-2000, the policy objectives of the NES include sustainable use of natural resources, minimizing negative environmental impacts from population growth, and achieving an appropriate balance between socio-economic development and maintaining the quality of the environment. Principal areas of environmental policy include conserving biodiversity, protecting forests, the ocean, freshwater resources and the atmosphere, and managing solid waste.

C. Fiscal Sector Developments, 1997-98


17. The public sector in Brunei is highly dependent on revenue from the oil and gas sector, and provides generous remuneration for public workers as well as a high level of investment in infrastructure. In response to a trend decline in oil and gas prices, the government has gradually attempted to contain current expenditure, while capital expenditure accelerated in 1993-95 to complete the Sixth NDP. In the absence of significant revenue measures, transfers from the Brunei Investment Agency (BIA) have financed budgetary shortfalls since 1992, reaching as high as 31 percent of GDP in 1994.5

18. Due to a turnaround in oil and gas prices which pushed up revenue in 1996, together with a decline in capital expenditure, due to temporary slowdown in new development projects, transfers were reduced to about 12 percent of GDP. However, as world oil price declined again, the government increased transfers to finance budgetary shortfalls in 1997 and 1998.

19. In 1997, total revenue, excluding transfers form BIA, declined by 2 percentage points of GDP, while total expenditure increased by the same amount from the previous year. Transfers from BIA increased by 2 percentage points of GDP. In 1998, total revenue is estimated to have declined by 9½ percentage points of GDP, while total expenditure is estimated to have remained at 50 percent GDP. Consequently, transfers from BIA are expected to have increased by about 10 percentage points of GDP. Meanwhile, defense expenditures (in both current and capital expenditure part) rose to some 14 percent of total expenditure in 1997, equivalent to 7 percent of GDP.


20. Government revenues are dominated by receipts from the hydrocarbon sector in the form of corporate income tax, royalties, and dividends. Consequently, revenues fluctuate with oil and gas production and prices, and the profitability of the oil and gas industry (see Section II. A.

21. In 1997, tax revenue increased from 18⅓ percent of GDP to 19½ percent of GDP. Income tax, which accounted for 85 percent of tax revenue, increased because of higher income tax receipts from oil and gas companies.6 Import duties, which accounted for 14 percent of tax revenue, also increased despite a decline in total imports, as a result of the surge in imports of motor vehicles which were subject to higher import duties (40-200 percent).

22. Non-tax revenue, however, decreased from 19 percent of GDP to 16 percent of GDP. Government property income (mostly oil/gas-related dividends and royalties), which accounted for about 75 percent of non-tax revenue fell due to lower royalties, as the bulk of oil production shifted to farther offshore fields and exploitation of new oil and gas fields became more costly.7

23. In 1998, due to the fall in oil/gas prices, tax revenue is estimated to have declined to about 16 percent of GDP and non-tax revenue to 10 percent of GDP.

Current expenditure

24. In response to a decline in oil/gas revenues, the government has attempted to contain current expenditure. Salary increases have been controlled below the rate of inflation; as a result, current expenditure decreased to 32 percent of GDP in 1997, in line with the 1986-94 average (34 percent).

25. In 1998, current expenditure is estimated to have increased by 2 percentage points of GDP to 34 percent, partly due to the increase in allowances (B$80-140 per month, depending on basic salary) for government employees effective July 1998. The impact on current expenditure is estimated to be around B$100 million,8 of which B$50 million is expected to be paid in 1998. Expenditure on personnel emoluments increased in 1997 owing to the creation of new posts, previously frozen, and the appointment of new permanent secretaries and new deputy secretaries, and this is also expected to increase the expenditure on personnel emoluments in 1998.

Capital expenditure9

26. Until 1995, the government accelerated the implementation of the projects in the Sixth NDP in order to complete projects within the Plan period. However, in 1996, capital expenditure slowed due to delays in the launching of the new Seventh NDP.

27. In 1997, capital expenditure increased by 4 percentage points of GDP, reflecting a 42 percent increase in development expenditure incurred by the inclusion of Istana Project Section (IPS) projects which were previously not recorded in the development budget. The payments for IPS projects (B$380 million) were more than one-fourth of total capital expenditure, which was already committed by the government in 1996.

28. In 1998, as a part of public expenditure reduction measures, the government initially budgeted only B$605 million for development expenditure, compared to B$1.3 billion in the 1997 budget and B$892 million of actual spending in 1997. However, as a result of the economic downturn, the authorities announced additional development expenditure of B$352 million in late June, increasing the total budget to B$957 million. The additional injection of funds was designed to ensure that all contractors be paid and projects carried out, and to fuel the sluggish economy. Actual expenditure is estimated to have been B$730 million of which B$230 million for IPS-related projects. Nevertheless, total capital expenditure is estimated to have declined by 2 percentage points of GDP.

29. Apart from capital expenditure, large investments in some public enterprises took place in 1994 and 1995, financed by transfers from the General Reserve Fund (around 1 percent of GDP).

D. Monetary Sector Developments, 1997-First Half of 199810


30. In 1997, broad money growth declined as a sharp decline in net foreign assets of the banking system more than offset a sharp rise in credit to the private sector. In particular, a large decline in foreign assets of commercial banks (BCB net foreign assets rose) was closely matched by a corresponding increase in credit extended to a large domestic private sector company, mostly involved in construction activities. In addition, commercial banks’ foreign liabilities rose as depositors switched from local currency deposits to higher yielding foreign currency deposits. Total deposits fell as an increase in quasi-money was more than offset by a decline in demand deposits. Currency outside banks grew by slightly more than non-oil/gas nominal GDP. In the first half of 1998, most monetary aggregates declined relative to end-1997, reflecting the sharp decline in oil prices and sluggish growth in the non-oil and gas sector. In particular, currency declined by 3 percent, while claims on the private sector fell by just under 12 percent. As a reflection of the economic downturn experienced in 1998, particularly in the construction sector, commercial banks’ exposure rose during the year (to the real estate market and to personal loans), and the incidence of rolling over loans rose sharply. Notwithstanding the roll over of some loans, the share of nonperforming loans in total loans rose from 3 percent to just under 5 percent in the year to mid-1998.11

Developments in 1997

31. Broad money fell by just under 5 percent in 1997 to B$7,466 million in 1997, as a sharp decline in net foreign assets of the banking system more than offset the rise in net domestic assets. On the assets side, the decline in net foreign assets was entirely due to the fall in net foreign assets of commercial banks, as net foreign assets of the Brunei Currency Board (BCB) rose to B$849 million. As a result, the BCB’s net external assets ratio increased to 0.94 from 0.89, while its liquid external assets ratio rose to 0.40 from 0.36.

32. Net foreign assets of commercial banks declined by B$2,400 million during the year to B$2,984 million, owing to an increase in liabilities and a sharp reduction in assets. Foreign liabilities of commercial banks increased B$237 million during the year to B$368 million, reflecting exchange rate valuation effects and an increase in foreign currency deposits, as some customers switched from local currency denominated deposits to higher-yielding foreign currency deposits, including U.S. dollar deposits. Foreign assets of commercial banks declined by B$2,165 million to B$3,351 million. The decline in commercial banks’ foreign assets was almost equally matched by a 65 percent increase in private sector credit, the bulk of which was used to help finance (through one commercial bank) construction-related expenditures of a large domestic company (amounting to B$1.6 billion). As a result, the bank in question sharply increased its open foreign exchange position.12 Excluding this amount, credit to the private sector grew by about 15 percent. Loans to the construction sector (excluding the large construction-related loans mentioned above), which accounted for 16 percent of total loans, rose by 45 percent during the year, while personal loans, which account for over a third of total loans, increased by only 2½ percent.13 Government deposits declined by B$740 million during the year to B$933 million.14

33. On the liabilities side, currency outside banks increased by 7½ percent in 1997, slightly higher than the growth rate of nominal nonoil/gas GDP. Total deposits declined by 5½ percent, as a large increase in time deposits—in response to higher deposit rates following a rise in deposit rates in Singapore in the last quarter of the year (see below)—was more than offset by a steep reduction in demand deposits.

Developments in the first half of 1998

34. Monetary aggregates through end-June 1998 reflected the sharp decline in economic activity, especially in the non-oil and gas private sector. Net external assets of the BCB declined to B$826 million over end-1997, owing mostly to valuation effects of a depreciating exchange rate. As a result, though the BCB’s net external assets ratio fell to 0.92, while its liquid external assets ratio declined to 0.38.

35. Credit to the private sector declined by 11½ percent over end-1997, as just under half of the B$1.6 million lent out in 1997 (see above) was repaid in the first half of 1998. Excluding the amount lent out in 1997, loans increased by only 3 percent or so, reflecting the uncertain regional environment and a sharp and widespread downturn in domestic non-oil and gas business activity. Loans outstanding to the construction sector declined in nominal terms, while personal loans rose by just under 3½ percent.15

36. At end-June, currency in circulation was around B$625 million, down 3 percent from end-1997, while deposits by commercial banks at the BCB remained flat at B$367 million, slightly below the statutory minimum cash balance requirement of 6 percent.

Interest rates

37. Consistent with the exchange rate peg to the Singapore dollar, interest rate policy in Brunei follows that of Singapore. The Brunei Bankers’ Association (BBA) sets the prime lending rate every month, based on the Singapore prime rate for the previous month and market expectations. The Brunei prime rate moves with the prime rate in Singapore plus a margin, usually between 0.25-0.5 percent, and acts as a benchmark lending rate only; in practice, a lower rate is applied to preferred customers and on consumer loans. The BBA also sets monthly maximum interest rates for savings and time deposits up to B$50,000 and B$ 100,000, respectively, though not in a fixed relation to the prime rate. Interest on deposits above B$ 100,000 are freely determined. Demand deposits are not remunerated, except those of the government which earn 2.5 percent annually.

38. In 1997, though the lending rate in Singapore was increased on two occasions in the last quarter, from 6¼ percent to just under 7 percent, the prime lending rate in Brunei was maintained at 6½ percent throughout the year. On the deposit side, the average three-month deposit rate in Singapore was raised in the last quarter of 1997 from under 3½ percent to over 4 percent, while the average savings rate was increased from 2¾ percent to over 3 percent. In response, the maximum rate on three-month deposits of under B$ 100,000 in Brunei was raised several times during the year from 1½ percent to 2¼ percent by end-year, while the yield on savings deposits under B$50,000 was raised from 1¾ percent to 2 percent toward the end of the year.

39. In January 1998, in response to a further increase in the prime lending rate in Singapore, to 7¾ percent, the prime lending rate in Brunei was raised to 7 percent. On November 9, 1998, in line with the reduction in the Singapore prime rate to 6½ percent, the prime lending rate was reduced to 6¾ percent in an effort to help spur economic activity in the non-oil private sector. With regard to deposit rates, in response to increases in yields in Singapore on savings deposits in January (to 3½ percent) and on three-month deposits in February (to just under 5¼ percent), deposit rates in Brunei were also raised. In January, savings rates on deposits under B$50,000 were increased to between 2¼ and 2¾ percent, while yields on time deposits under B$ 100,000 were increased to between 3 and 3½ percent. In November, both rates were reduced 25 basis points in line with the decline in the prime lending rate.

E. External Sector Developments, 1997-98


40. Sizable hydrocarbon exports and the steady accumulation of long-term foreign assets over many years have provided Brunei with a comfortable external payments position, facilitating the maintenance of a liberal exchange and trade system. In recent years, however, both trade and current account balances deteriorated steadily (in terms of GDP) as imports rose sharply while exports remained stagnant. Japan is the major export market, while the increase in imports, which has been fueled by increased government expenditure, has largely come from ASEAN countries.

41. Brunei does not publish comprehensive balance of payments statistics, although the Ministry of Finance is compiling the statistics based on the limited information available. A major impediment to the compilation of the balance of payments is the lack of data on the government’s investment income. Only data on merchandise exports and imports based on customs returns are published on an annual basis in the Statistical Yearbook. Unpublished data are available for some of the other components of the balance of payments, based mainly on the exchange record of the commercial banks, the balance sheet of the BCB, foreign banking transactions of the Brunei Shell group of companies, Royal Brunei Airlines, and remittance companies. Hydrocarbon exports, merchandise imports, and investment income dominate the external current account.

42. Although the current account remained in substantial surplus throughout the period,16 the surplus showed a declining trend, falling from 90 percent of GDP in 1985 to about 40-50 percent recently following reduced earnings from petroleum. In 1997, an increase in exports and a decline in imports, together with increasing investment income, improved the current account balance. However, in 1998, the trade surplus is estimated to have declined by 8½ percent points of GDP to 3½ percent, mainly due to the world oil price decline and lower investment income. As a result, the current account surplus is estimated to have fallen to 43 percent of GDP.


43. Exports consist mostly of hydrocarbons, with revenues from LNG since 1986 equaling those from the export of oil. Although its share in total exports is still small at 9 percent, the export of nonhydrocarbons increased by 167 percent during 1993-97, led by reexports as well as garment exports, which have benefitted from Brunei’s quota in developed country markets under the Multifibre Agreement.

44. As a result of Brunei’s conservation policy and long-term contracts with Japan and Korea the volume of oil exports has stabilized. The changes in the value of hydrocarbon exports have reflected mainly the price fluctuations in the world oil market.

45. Total exports increased by 3 percent in 1997. Petroleum exports (crude and condensate) decreased by 8 percent, reflecting lower oil price and volume (oil price decreased by 2½ percent and petroleum export volume declined by 5½ percent), while exports of LNG increased by 11½ percent. Gas exports to Korea increased by 29 percent. Total oil and gas exports increased marginally by 1 percent, but still accounted for 91 percent of total exports. A notable increase was seen in exports of garments17 (18½ percent over the previous year) and machinery and transport equipment18 (28⅓ percent).

46. In 1998, total exports are estimated to have declined by 29 percent, mainly due to the decline in oil and gas prices. Petroleum exports are estimated to have declined by 37½ percent, reflecting the decline in oil price, while gas exports are estimated to have declined by 26½ percent.

47. Japan remains the dominant export market (53 percent of total exports in 1997) while Korea (18 percent) has increased its share as it started to import LNG in 1994. Exports to ASEAN countries (21 percent), including newly joined Laos, Vietnam and Myanmar, remained almost flat in recent years.


48. Brunei imports almost everything, including most foodstuffs and beverages. In value terms, machinery and transportation equipment account for the highest share, ranging between 35 percent and 50 percent of all imports, reflecting high number of vehicles and construction activity in Brunei. Manufactured goods, such as consumer electronics and electrical appliances, come next with a 20-30 percent share, followed by food (including live animals) and other manufactures, such as textiles.

49. After nearly a 20 percent increase in 1996, total imports in U.S. dollar terms declined by 15 percent in 1997. Excluding lumpy aircraft-related imports which surged in 1996, imports declined by 8 percent. The decrease in imports (excluding aircraft-related) was due to a decline in world commodity prices, the completion of major projects by 1996 and an “effective” decline in development expenditure (development expenditure excluding payments for IPS project: B$629 million in 1996 to 512 million in 1997).19

50. Looking at the origin of imports, in 1997, 45½ percent of total imports were from ASEAN countries. Imports from European Union, accounted for 18 percent in share. Imports from Japan, accounted for 11 percent in share, increasing significantly in 1997, partly due to the increase in the importation of cars, while imports from USA decreased in share to 10 percent in 1997 after a surge in 1996, reflecting lumpy aircraft-related imports.

51. In 1998, imports are estimated to have declined by more than 14½ percent in U.S. dollar terms, due to continued decline in world commodity prices and “effective” development expenditure (B$512 million in 1997 to B$500 million in 1998).20

Other current account transactions

52. Investment income is estimated to have risen in line with the persistent current account surpluses. Thus, the steady growth of imports was easily financed, even though investment income may have fluctuated substantially from year to year depending on financial market performance. However, net investment income is estimated to have been around 50 percent of GDP in recent years. Net outflows on account of services and current transfers occurred each year, in the form of payments for foreign travel, and, occasionally, high consulting, management, and other professional fees in the oil and gas sector. Current transfer outflows mainly consist of remittances by immigrant workers from neighboring Asian countries. Nevertheless, the current account surplus increased to 53 percent of GDP in 1997.

53. In 1998, due to a loss incurred by regional economic crisis and a collapse of large private company, investment income (net) is estimated to have declined by 1½ percent point of GDP to 49 percent. Decline in interest rates in U.S. and U.K. also had a negative effect, but this was partially offset by the depreciation of the Brunei dollar. Together with a decline in the trade balance, the current account surplus is estimated to have declined by more than 10 percentage points of GDP to 43 percent.

Capital account transactions

54. Portfolio and direct investment inflows have risen in recent years. Recorded inflows, however, are dwarfed by long-term capital outflows, which are derived as a residual in the balance of payments compilation, combining direct placements and reinvested earnings. Short-term capital (the sum of recorded transactions through the domestic banking system and by the Brunei Shell group of companies, plus estimated export trade credits and transactions through BCB) provided net financing in most years. In placing their structural excess liquidity abroad, commercial banks in Brunei contributed importantly to both outward portfolio investment and short-term lending in most years.

International reserves

55. The international reserve position of Brunei is very comfortable, although it fell in 1997, mainly due to a sharp drop in commercial banks’ net foreign assets. At the end of 1997, international reserves amounted to US$3.7 billion, or 17 months of imports of goods and services, with most reserves held by the commercial banks. Commercial banks have invested their international reserves mostly with affiliated banks in Singapore; at end-1997, those net investments amounted to US$1.8 billion. Official international reserves include the BCB’s external assets and the Consolidated Fund, which could be mobilized if necessary for balance of payments financing. The BCB’s external assets have been increasing steadily with currency in circulation. At the end-1997, total net official international reserves were US$1.9 billion, equivalent to nine months of imports of goods and services.

Exchange and trade system21

56. Exchange arrangement: The Brunei dollar is issued by the Brunei Currency Board (BCB) only against payments in Singapore dollars and at par. The BCB’s only intervention currency is the Singapore dollar and the BCB does not quote rates for other currencies. Under the terms of a 1967 Currency Interchangeability Agreement (CIA), the Singapore dollar is customary tender in Brunei and the Brunei dollar in Singapore. Banks are free to deal in all currencies, with no restrictions on amount, maturity, or type of transaction, and in practice, the Brunei exchange market functions as an extension of the Singapore market.

57. There is no forward market for foreign exchange in Brunei. However, as a result of the CIA, foreign exchange risk can be hedged in terms of Singapore dollars by resorting to facilities available in that country, including foreign currency futures and options traded on the Singapore International Monetary Exchange (SIMEX), over-the-counter forward transactions arranged by banks in Singapore, and the short-term foreign exchange swap market operated among banks in the Singapore money market. There is no official cover for forward positions.

58. The Brunei dollar is fully convertible and there are no exchange controls. There are no requirements to collect, repatriate or surrender foreign exchange proceeds from exports, and financing terms may be freely agreed between residents and nonresidents. While the provision of foreign exchange for invisible transactions and current international transfers is subject to a bone fide test, in practice, approval is granted quickly and without limit. There are no capital account restrictions, nor any regulations limiting banks’ foreign exchange exposure. Activities relating to national food security and those based on local resources require some degree of local participation, and at least one half of the directors of a company must be either Brunei citizens or residents of Brunei.

59. Trade arrangements: The trade system remains very liberal and import tariffs continued to decline over the period. There are no restrictions on the destination, origin or provenance of merchandise trade. On the export side, there are neither bans nor taxes, although licenses are required for cigarettes, petroleum products, rice, salt, and sugar; in the case of the latter four because they are subsidized. On the import side, a few imports are banned or restricted for environmental, health, safety, security, or religious concerns, but not for protection or balance of payments reasons. Between 1996 and 1998, the percentage of imports subject to a zero-rate tariff, including basic foodstuffs and construction and educational materials, rose to over 82 percent from 79 percent, while the number of goods subject to tariff rates in excess of 10 percent fell from 748 to 78. As a result, while automobiles remain subject to duties ranging from 60 percent to 300 percent depending on engine size, the average weighted import tariff has fallen to under 1 percent. In accordance with the Common Effective Preference Tariff (CEPT) scheme for the ASEAN Free Trade Association (AFTA), Brunei is scheduled to reduce all its tariffs on imports from other ASEAN members to 0-5 percent range by 2003, with the exception of 203 tariff lines that are permanently excluded from the plan for environmental, health, safety, security, or religious reasons.

II. Selected Issues

A. Fiscal Structure and Reform

Structure of the budget

60. The fiscal structure of Brunei Darussalam is characterized by a very large public sector. In addition, the government budget is built on a structure of public expenditures which is relatively inflexible (given the very high levels of government employment and salaries and perquisites) while the structure of public revenue is narrow and relatively volatile (due to the dominance of the oil and gas revenues and the lack of broad-based income or consumption taxes). As a result, the official budget tends to be in deficit in years when the world oil prices are not favorable, but this is more than offset by large investment income of government assets held abroad which is not included in the budget figures.

Budget process

61. The Ministry of Finance is in charge of the budget process, under the supervision of the State Budget Committee appointed by the Sultan. Only the central government collects revenues, and lower levels of government are dependent on transfers from central government. The fiscal year coincides with the calendar year. In addition to the yearly budget cycle there is a five-yearly NDP cycle. Although the design and implementation of NDPs is coordinated and monitored by the Economic Planning and Development Department (EPDD), the National Development Committee, chaired by the Minister for Development and including various deputy ministers and the permanent secretaries of all other ministries, makes the final allocation.

Structure of revenue

62. As mentioned in Section I, government revenues are dominated by receipts from the hydrocarbon sector in the form of corporate income tax, royalties, and dividends. The present tax system of Brunei consists of two major taxes (corporate income tax, including withholding tax on overseas interest payments, and customs duties) and three minor taxes (estate and stamp duties, and municipal buildings tax).22 Non-tax revenue consists of royalties, dividends, and some commercial receipts (fees and charges).

63. Brunei does not have personal income tax and corporate income tax accounts for the major share of tax revenue. The tax has three rates: 55 percent of oil companies; 50 percent for gas companies; and 30 percent for all other companies. Of about 4,000 registered companies, 1,500-2,000 file income tax declarations, but only 500 pay taxes. The oil and gas companies pay taxes on a quarterly basis and all other companies annually. The share of import duties in tax revenue was 14 percent in 1997, which is likely to decline in the coming years as Brunei lowers import-duty rates further, consistent with commitments under various multinational agreements.

64. New revenue measures were introduced in recent years, but their revenue impact was limited. The measures included a 30 percent increase in the price of gasoline in 1992, the introduction of a few co-payments in the medical insurance scheme, and increases in fees and charges for government services. Also, effective December 1994, import-duty rates on cigarettes and alcoholic beverages were raised substantially. In February 1995, a steep increase in the import tariffs on automobiles took place which raised a uniform rate of 20 percent to a range of 40-200 percent, depending on the size of engines. In April of that year, the government reduced import duty rates on 688 items, mainly consumer goods.

65. Nontax revenue consists of royalty, dividends, and some commercial receipts. Royalty payments differ for onshore, and offshore fields. For onshore fields, the royalty currently paid by BSP is a flat 12½ percent (in cash or kind) of production; for offshore fields, it is 10 percent of production between 3 and 10 miles, and 8 percent of production farther offshore. Similar terms apply to natural gas production. The level of dividends are decided by the executive boards of the companies, taking various factors into account such as investment plan.

Structure of expenditure

66. The Brunei expenditure statistics distinguish between ordinary, charged and development expenditures. Ordinary expenditures consist mostly of wages and salaries and pensions and gratuities for public sector workers, but also certain capital expenditure.23 Charged expenditures cover other current operational costs. Finally, the category “development expenditures” contains all capital spending decided in the context of the five-year NDPs. A consistent functional breakdown of expenditures is not available, although “ordinary expenditures” are published by ministries and for a subset of major departments.

67. Brunei Darussalam’s budget policy is centered around the principle that all its people should share in the revenues from the exploitation of oil and gas. Based on this policy, current expenditure has provided public sector employees with generous remuneration and an elaborate welfare system. The welfare system offers essentially free medical care, with treatment abroad if required; a noncontributory old age pension of B$200 per month for citizens and permanent residents who are 60 years old or older; special allowances in case of disability and poverty; free education up to the university level, abroad where necessary; subsidized housing and staple foods; and financial support in making pilgrimages to Mecca. These benefits are generally not available to temporary residents, and for permanent residents they are partly financed privately from the 10 percent of income Muslims are expected to give to charity (zakat). Apart from welfare-related expenditures, the budget puts emphasis on defense,24 which accounted for 14 percent of total expenditure in 1997, equivalent to about 7 percent of GDP.

68. On capital expenditure, while their principal objective has been to diversify the economic base through the expansion of agriculture and industry, the NDPs have shifted their emphasis on different spending categories. Under the Seventh NDP (1996-2000), the structural reforms to promote economic diversification included (1) encouraging oil/gas downstream activities such as petrochemical and gas-based industries, refining, and bunkering; (2) promoting Brunei as a service hub for trade, tourism, and business services; and (3) developing agriculture and fisheries, mainly to provide for some part of Brunei’s domestic requirements.


69. Since 1986, government foreign investment income accruing to the General Reserve Fund is no longer recorded ex-ante in the budget, although it is used ex-post for financing budgetary shortfalls, as transfers from the General Reserve Fund have occurred regularly since 1992. Since 1994, the transfers also have included investments by the BIA in some public enterprises. However, these ex-post transfers to the budget have been well below the estimated annual investment income of the government.

70. There are two separate reserve funds: the Government Consolidated Fund, a reserve fund comprising the government’s tax and non-tax revenues including transfers from the General Reserve Fund, and from which the government’s ordinary and charged expenditures are paid; and the Development Fund, a reserve fund allocated in accordance with the NDP from which development expenditures are paid. Every year, a certain amount is transferred from the Consolidated Fund to the Development Fund as a “contribution to Development Fund.”

71. The General Reserve Fund, under the control of the BIA, is the largest extra-budgetary fund which contains revenues from oil and gas set aside for future generations. Information on this fund is not available as the BIA presents its accounts only to the Sultan. In the mid-1980s, the government ceased recording BIA’s investment income as revenues and began recording its foreign transactions separately from the exchange records. Another extra-budgetary fund is the Government Trust Fund, which finances loans on favorable terms to government employees.25

Public enterprises

72. Since 1985 the government has held a 50 percent share in Brunei Shell Petroleum Company Limited (BSP) and Brunei Shell Marketing26. In 1973, the government first bought a 25 percent share in BSP, which was established in 1957 as a fully owned subsidiary of the Royal Dutch/Shell group. Brunei Shell Marketing was established in 1974 to sell oil and gas products domestically. The government eventually also raised to 50 percent its initial 10 percent share in three other companies—Brunei LNG, Brunei Coldgas, and Brunei Shell Tankers—formed in 1969 to handle the liquefied natural gas trade with Japan. Brunei Coldgas was merged with Brunei LNG in 1996, and the government retains a two-thirds majority, while the remaining one-third is shared equally between Shell and Mitsubishi Corporation of Japan. Brunei Tankers is fully government owned but its activities are subcontracted to Shell. The government’s interests in the oil and gas companies are looked after by the Petroleum Unit, a division within the Prime Minister’s Office, which is also the principal regulator of the oil and gas industry. In addition, the Bruneian members of the BSP board and their alternates formed in 1993, a ministerial committee, called the Brunei Oil and Gas Authority, with policy responsibility for major decisions; the Director of the Petroleum Unit serves as secretary to this committee.

Fiscal reform

73. While the authorities have undertaken some measures in recent years to raise more fiscal revenues and rationalize expenditures (selected tariff increases, freezing current expenditures, and privatizing a few small public services), there is a need to broaden the tax base away from oil revenues. Also, there is considerable scope for rationalizing large public expenditures and developing an institutional framework that can capture private sector as it becomes a more significant part of the economy.

74. The present tax system of Brunei is relatively simple and its rates are moderate by international standards, but extremely narrow in scope. It has the following five weaknesses;

  • It is very narrow in coverage; it lacks a general sales tax as well as a broad-based income tax (income tax is levied only on the profits of limited companies and exempts all establishments that are unincorporated as well as all personal incomes).
  • Its revenues are essentially dependent on oil and gas, which is likely to be a declining source of revenue over the medium term.
  • The revenue yield of the tax system is low and lacks buoyancy.
  • The system contains tax laws which are out of date and which have not kept pace with the changes in the structure of the economy as well as the economic policies.
  • The present system is not efficiently administered.

75. Broadening the tax base is an important fiscal objective, given that oil/gas sector will be a declining source of revenue over the medium term. It would be necessary to expand the present corporate income tax to cover the large and growing unincorporated establishments; this sector benefits greatly from government investment in economic and social infrastructure and pays little to no taxation. Over time, it would be desirable that income tax be extended to include the incomes of individuals as well.

76. On charges, many public services, even when they involve huge investment and operations and maintenance costs and are of commercial type (e.g., electricity, water, telephone, roads) are inadequately priced. Thus, charges should be raised to recover at least the operational costs of electricity generation and distribution, water supply, and local telephone service, and over time these services should operate on a commercial basis, with prices based, as far as possible, on average costs.

77. On the expenditure side, personnel emoluments in the public sector are large (one-fourth of total expenditure) and civil service cash “perquisites” are excessive making private sector employment uncompetitive in comparison with government employment, which is the largest employer and, in fact, it is an employer of choice with the Bruneians. Although subsidies are not explicit in the budget, there are many sizable “hidden” subsidies (e.g., energy, housing, water, telephones) as well as transfers (e.g., civil service pensions). Defense expenditure also should be reduced, considering its large and increasing share in the total expenditure, in favor of human resource and infrastructure development.

78. Thus, limiting new government job creation to, or below, the annual attrition rate (thereby keeping the “net” employment level constant or even reducing it) and eliminating, or reducing, fringe benefits such as conveyance and telephone allowances, which have little rationale, would be an effective way of rationalizing large public expenditures. Also, the civil service pay scales and other pay scales (i.e., teachers, military) should be revised to incorporate all perquisites and “hidden” benefits and make government salary structures completely transparent. Over time, the subsidy given to government employees (in the form of interest-free loans) for the purchase of cars and houses, which are essentially items of private consumption, should be eliminated or reduced.

B. Strengthening and Development of the Financial Sector

79. As part of its strategy to diversify the economy, some diversification of financial services has occurred over the last few years, and the government has targeted further development in this area, including in the provision of clearing and settlements services and the development of a domestic securities market. Further development of the financial system will help spur a healthy and sustainable expansion in private sector activities in Brunei only if it is preceded by appropriate prudential regulation and supervision.


80. As detailed in the accompanying table, the financial system of Brunei comprises:

(i) The Central Bank Subsector: The operation of the BCB are limited to the issue and redemption of Brunei currency notes and coins and the investment of its external reserves. By statute, the BCB is required not to let its external assets fall below 70 percent, or its liquid assets below 30 percent, of its demand liabilities.27 The BCB does not act as a lender of last resort to banks, lend to the government, hold government securities, or maintain any government deposits.28 The BCB maintains accounts in three domestic banks, which are used for the settlement of currency transactions. At end-June 1998, total assets of the BCB stood at B$ 1.45 billion.

Brunei Darussalam: Structure of Financial Sector, 1998

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Source: Data provided by the Brunei authorities.

Became an Islamic bank in 1993.

Co-owned by Royal Family (66.95 percent), Dai Ichi Kangyo Bank Ltd. (14.4 percent), and over the counter stock (18.65 percent).

Co-owned by Baiduri Holdings (60 percent), Royal Brunei Airlines (10 percent), Royal Brunei Technical Services (15 percent), and Paribas (15 percent).

The BIA was established in 1983 for holding and managing the Government Reserve Fund and all the government’s external assets, including those built-up over the years from oil and gas earnings. Data on the outstanding stock of external assets of the BIA and the performance of those assets over the years remain confidential.

(ii) Deposit money corporations: At end-June, 1998, total assets of deposit money corporations stood at B$8,877 million (110 percent of GDP), of which over half comprised loans and advances. About 70 percent of the banking system’s total assets are held by the three oldest banks: Citibank, Standard Chartered Bank (SCB), and Hongkong and Shanghai Banking Corporation (HSBC), although more recently the three local banks have been growing at a faster rate.

(iii) Other banking institutions: Finance companies are involved mainly in hire-purchase financing of cars and other consumer durables, and in mortgage lending. They are subject to the same minimum cash balance as banks (6 percent), and compete with banks in attracting nontransferable time and savings deposits (they are restricted from taking demand deposits). At end-June 1998, total assets of finance companies were B$732 million. Finally, the Tabung Amanah Islam Brunei (TAIB) is a type of depository corporation operating under Islamic banking principles, enabling persons to save and invest to undertake the Haj pilgrimage to Mecca.

(iv) Nondepository financial corporations: Nondepository financial corporations include 23 insurance companies, half of which are local, the Employees Trust Fund (ETF), 2 securities companies, 29 money changers, and an equal number of remittance companies. The EPT was set up in 1993 as a compulsory pension scheme for all new public sector employees and, since 1994, for all private sector employees, with an exemption for those working for an employer with an approved provident fund (i.e., banks and Brunei Shell Petroleum). Two securities companies operate as fully owned subsidiaries of their respective local banks. To date, the banking system’s excess liquidity has been invested in the nearby equity and bond markets of Singapore, Malaysia and Hong Kong, and investments by Bruneians in the domestic market are mainly concentrated in the property sector. There are no bonds or bills, either public or private, and the two securities companies are limited to brokerage services for the purchase of foreign securities on behalf of their clients.


81. Licensing, regulation and supervision of the financial sector is the responsibility of the Financial Institutions Divisions (FID) of the Ministry of Finance. FID was established in 1993 and is headed by the Director who reports directly to the Permanent Secretary. Though the financial system is dominated by the operations of commercial banks, six of which have strong ties to their parent institutions (providing them with strong technical skills and management), FID has only four professional supervisory staff, with limited expertise, assigned the responsibility for supervising all financial sector activities. Notwithstanding some progress in strengthening regulation and supervision following several financial failures in the second half of the 1980s,29 the financial system of Brunei remains vulnerable to domestic and foreign disturbances, owing to inadequate prudential regulation and weak supervision.

82. Apart from the minimum paid-up capital requirements stated in the legislation, the only prudential regulations covering banks and finance companies are the annual renewal of their licenses and the imposition (in line with Singapore) of a 6 percent minimum cash balance (MCB). There are no legal or otherwise documented licensing procedures, and licenses are renewed on a case-by-case basis. The MCB was introduced in December 1995 on all banks and finance companies, and maintained at 6 percent notwithstanding the reduction to 3 percent in the MCB imposed by the Monetary Authority of Singapore in July 1998.30 In practice, because there is no lender-of-last-resort facility, in times of tight liquidity, some banks fall short of the latter requirement. Except for the MCB, FID has not issued any capital adequacy, loan classification and provisioning requirements, or any other prudential criteria. FID does not conduct on-site inspections of banks or of other deposit-taking institutions, to assess the adequacy of banks’ internal procedures and controls, nor is there any effective off-site supervision. Though minutes of the meetings of the Bankers’ Association are submitted to FID, meetings between FID and bank managers are not held on a regular basis. There are no legal requirements for FID to approve large share holdings, changes in ownership, or major investments by banks, nor are there any limits on exposure to foreign currencies other than the Singapore dollar. There are no cease and desist provisions for regulatory and prudential violations, nor is there regular consultation with parent supervisory authorities. In addition, no anti-money laundering laws are in force, nor have any guidelines in this regard been issued by FID. Finally, although banks voluntarily report their nonperforming loans and their risk-weighted capital adequacy ratios (CAR) on a quarterly basis (the latter requirement is to be extended soon to the finance companies), audited statements of banks are not required to be prepared in accordance with internationally accepted accounting standards, nor are they systematically forwarded to, and analyzed by, FID, on an on-going basis. Though supervisory staff have some knowledge of the Basle Committee’s Capital Adequacy Criteria, they are not sufficiently familiar with the Committee’s Core Principles for Effective Banking Supervision. In particular, while data reported by banks indicate that they all meet the minimum risk-weighted CAR of 8 percent, it is unclear whether banks are correctly valuing their assets and applying appropriate risk-weights. In addition, finance companies most likely fall short of the requirement, as their paid-up capital base has remained unchanged at B$l million despite sharp increases in their loan portfolios in recent years. While nonperforming loans (NPL) of banks are small, both in absolute terms and as a share of total loans, between end-1996 and end-June 1998, their share doubled to just under 5 percent. The share of NPL of finance companies is not known but is also likely to have risen in the last year in line with the sharp drop in economic activity and the weakening of the real estate market.

Prudential policy reforms

83. Against this background, it is clear that prudential regulation and supervision need to be significantly improved to ensure the soundness of the financial system. The government recognizes the need for an improved supervisory structure and has stated in its Seventh National Development Plan (1996-2000), that a proper regulatory mechanism to oversee the financial system will be given priority attention.

84. Banking regulation needs to be brought up to international best practices by requiring banks, especially local ones, to adopt appropriate standards for accounting, valuation, loan classification and provisioning; instituting transparent licensing procedures; mandating ceilings on loans to single borrowers and connected lending; limiting liquidity mismatches and excessive open foreign exchange positions; requiring that major changes in ownership or management obtain prior supervisory approval; and extending the coverage of reporting requirements. In addition, in light of the intention to launch an International Offshore Finance Center (IOFC), it will be particularly important to guard against money laundering by obtaining approval from home supervisory authorities before issuing IOFC operating licenses and extending prudential regulation to cover banks operating in the IOFC.31 Finally, prudential regulations governing finance, securities, remittance, and insurance companies, along with money changers, will need to be appropriately coordinated and harmonized.

85. Comprehensive and coordinated prudential regulation will need to be accompanied by close supervision and monitoring of financial institutions. This will require effective coordination between BCB and FID, a sharp increase in the number of staff assigned supervisory duties to enable more frequent monitoring of financial data, and the development of an early-warning system such as the CAMELS rating system.32 In exercising its functions, the supervisory agency must be granted sufficient authority and independence from political influence, established by law, to carry out its functions, including powers to control the issue and withdrawal of licenses, request relevant data, conduct regular on-site inspections, demand loan provisions, remove managers, and force the closure of unsound institutions.

Development of the financial sector

86. The authorities have stated that they are committed to maintaining the currency peg and the present currency board arrangement, which have provided a solid framework of monetary stability over the years. Over time, they also view the role of the currency board as a natural complement financial market development. In that context, the authorities are preparing to the transfer settlement services to the BCB, and they see some scope for limited money market operations while maintaining an adequate rule for foreign exchange backing of the currency.

Clearing and settlement services

87. Automatic clearing arrangements have been recently transferred to the BCB, and with some further technical assistance from Singapore, the BCB will soon be operationally ready to take on the additional responsibility of settlement services, as soon as the institutional framework is agreed upon. As the BCB accumulates sufficient experience in operating the clearing and settlements system and demonstrates the ability to closely monitor the overall liquidity of the banking system on a daily basis, including in the interbank market, the authorities plan to offer shorter-term maturities in the primary market, to divert some of the excess funds that are currently placed abroad to finance local investment while reducing reliance on transfers from the stock of external assets, and develop a secondary market in government securities, as an indirect tool of monetary management.

The securities market

88. Though the authorities have yet to decide whether to issue conventional-type securities which would be consistent with Islamic banking principles, or conventional-type securities alongside Islamic-based securities, as in Malaysia, draft legislation (including specific provisions on Islamic-based securities) has been prepared and is scheduled to be enacted shortly.33 Initially, the securities would have a maturity of not less than one year, yield a market rate of return, and be available to commercial banks (but not the BCB) and other interested parties. The latter would include religious organizations, with total assets of around B$300 million, the Employees’ Trust Fund, which has accumulated B$285 million in pension contributions since 1993, and insurance companies, with assets of around B$60 million. Yields would probably be at a small premium over the equivalent yield in the Singapore market for government securities to compensate for the (low) exchange and country risks. Over time, the development of a long-term government bond market could be used for funding infrastructure investment and act as a useful benchmark cost of capital for assessing government projects.34

C. Economic Diversification and Development of the Private Sector

89. The authorities’ medium-term economic objectives, as elaborated in the current Seventh National Development Plan, 1996-2000 (NDP7), are to diversify the country’s productive base away from oil and gas and enhance economic efficiency by expanding the role of the private sector. The strategy to achieve these goals is based on a broad corporatization/privatization effort; greater foreign investment; and a more competitive labor market.

90. In response to recent events; namely, the economic turmoil in nearby Asian countries, sharply lower oil prices, and the collapse of a large domestic company, the authorities decided to accelerate the implementation of their strategy to achieve their objectives. In particular, in mid-1998, the Brunei Darussalam Economic Council (formerly known as the Ministerial Economic Council) was established under the Sultan’s brother Prince Mohamed Bolkiah to come up with specific recommendations on how to restructure the economy over the short- to medium-term away from dependence on oil and gas activities and toward greater private sector participation, including through corporatization/privatization, encouraging foreign investment by extending the scope of activities open to foreign participation and streamlining approval procedures, and reducing the disparity between government and private sector remuneration.35


91. The move toward reducing the scope of government activities began under NDP6 and has continued under NDP7. In particular, partial privatization has been achieved in several areas, including power generation; telecommunications (equipment and mobile cellular telephone system); transportation (taxi and bus services); domestic waste collection outside Municipal areas; meat and poultry processing; some trading activities (Muara Export Zone); and selected government services. Looking to the future, in a bid to secure a larger private sector role in the provision of infrastructure, the government has announced that it will allow broader participation by the private sector in the traditional areas of heavy government involvement, including transportation, communication, and utilities. In preparation, guidelines for large scale privatization are currently being drawn up. In the meantime, the government intends to corporatize/commercialize several government activities and services. In the short-term, targets include telecommunication equipment and services; civil aviation; port services (container terminal); transport (passenger services); and postal services. This will encourage private sector growth and help promote Brunei as a service hub for tourism and trade (SHuTT) through transhipment and export-oriented activities within the Brunei-Indonesia-Malaysia-Philippines East Asia Growth Area (BIMP-EAGA). Over the medium-term, candidates for privatization include downstream activities in the oil and gas sectors, including an ammonia/urea plant, a methanol pant, an export-oriented refinery, and production of plastics and paint. In the non-oil/gas sector, medium-term candidates for privatization include producers of primary products (agriculture, forestry, and fish), construction, trade, and utilities. With regard to human resource development, the authorities have targeted an increase in the participation of the private sector in the areas of education (particularly curriculum development, and technical and vocational training), health services, training and technology transfer.

Foreign investment and regulatory framework

92. On the one hand, Brunei offers many attractive features to potential foreign investors, including a stable political climate and macroeconomic conditions, a liberal exchange and trade system, good physical infrastructure, and a strategic location. In addition, the authorities believe that the Investment Incentive Act of 1975 contains many incentives which should encourage start-up and ongoing businesses. On the other hand, limits on foreign ownership and cumbersome and sometimes unclear approval procedures and practices continue to act as major disincentives to foreign investment. In particular, while industries for the local market not related to national food security, as well as those for the export market, can be totally foreign-owned, industries relating to national food security and those based on local resources require a minimum share of local participation. Moreover, limits on foreign ownership prevent the transfer of much-needed expertise and technology. Finally, a recent attempt by the Ministry of Industry and Primary Resources (MIPR), which is responsible for promoting and facilitating the industrial development of the country, to coordinate all industrial development activities and act as a “one stop agency” to assist investors in acquiring: physical facilities (land and buildings); local primary and natural resources; commercial advantages and incentives; technical and production services; and administrative services, has proved unsuccessful. The government will need to revisit this issue, as experience across many countries has shown that prospective foreign investors are more likely to be attracted by clear and transparent rules of operation, including bidding processes, and streamlined and efficient approval procedures, rather than by tax incentives and exemptions.

Labor market

93. Economic diversification remains seriously hampered by the relatively high level of remuneration in the government sector. Though the creation of the Employees Trust Fund in January 1993 with a mandatory contribution for private sector employees since 1994 has helped improve the relative attractiveness of seeking private sector employment, the large differential between public and private sector remuneration continues to act as the main disincentive to private sector employment. In particular, as explained above (Section I.B), the estimated average annual salary of a government employee (B$l5,800) is over 30 percent higher than the comparable average annual wage of professional staff in the private sector. Moreover, the higher average government wage is supplemented by various allowances, which amount, on average, to around 70 percent of base salary. In these circumstances, only the Brunei Shell group of companies and some of the private financial institutions, can afford to compete with remuneration levels in the government sector. Over time, a reduction in the size of the public sector and a gradual narrowing of wage differentials will be necessary to encourage private sector activity and employment.

94. In addition, though labor regulations appear relatively transparent, especially with regard to hiring and firing of expatriate labor, in practice, hiring decisions of private companies are not entirely free of government involvement. In particular, the government’s “Bruneization” policy, according to which priority of employment is to be given to locals over expatriates, except in cases where there is no local interest or suitably qualified candidate, often acts as a further disincentive to private sector employment, as employers fear that it may be harder to shed local labor.36