Brunei Darussalam: 2019 Article IV Consultation—Press Release and Staff Report
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
10 Oct 2019
eISBN:
9781513516615
Language:
English
Keywords:
ISCR; CR; Brunei; authority; O&G price; oil price shock; budget framework; medium term; asset funds; fiscal consolidation program; balance of payments
Download PDF (3.3 MB)

2019 Article IV Consultation-Press Release and Staff Report

Abstract

2019 Article IV Consultation-Press Release and Staff Report

Context

1. Brunei’s economy has been adjusting to declining oil production since 2010 and lower oil and gas (O&G) prices since 2014, with the authorities undertaking wide-ranging reforms.

The decline in O&G prices led to large budget deficits and narrower current account surpluses. In response, the authorities in 2015 launched a comprehensive reform program aimed at: (i) ensuring long-term fiscal sustainability and intergenerational equity, and (ii) fostering economic diversification by improving the business climate, developing the financial sector, attracting FDI in priority business clusters, and supporting micro, small and medium-sized enterprises (MSMEs).

2. Brunei faces challenges and risks (Appendix I). Its economy remains dependent on the O&G sector, which in 2018 accounted for 58 percent of GDP, 81 percent of government revenues, and 95 percent of exports. Future oil production and prices remain uncertain. Subdued oil production or prices would take a toll on fiscal balances, requiring a drawdown of Brunei’s asset funds, undermining long-term sustainability and intergenerational equity. While non-O&G growth prospects have recently improved, unemployment remains high.

3. Sizable sovereign wealth buffers accumulated through prudent policies allow Brunei to face its challenges from a position of strength. Virtually no public debt and ample international reserves underpin Brunei’s resilience to shocks and provide scope for gradual adjustment.

4. Economic reforms have been broadly in line with Fund policy advice. The authorities have made progress in consolidating the fiscal position, improving the business climate, and developing the financial sector while strengthening regulation and supervision, in line with Fund advice. However, progress on non-O&G revenue measures, energy subsidy reforms, and improvements in data compilation and dissemination could be accelerated (Appendix II).

Recent Developments, Outlook, and Risks

5. Growth in 2018 was lower than expected, slowing to 0.1 percent. Unscheduled maintenance of O&G fields hampered both crude oil and liquified natural gas (LNG) production. Non-O&G growth continued to improve, underpinned by construction projects. In expenditure terms, lower public spending and net exports—reflecting fiscal consolidation and large infrastructure related imports—offset higher private investment. The latest quarterly data show a continued recovery in the non-O&G sector, growing at 2.5 percent year-on-year in the first quarter of 2019, while the overall growth declined to -0.5 percent due to scheduled maintenance of O&G fields. Average inflation moved into positive territory in 2018, at 0.1 percent, but has turned negative again this year, at -0.2 percent in May.

6. Unemployment remains high (Appendix III). The unemployment rate increased to 9.3 percent in 2017 from 6.9 percent in 2014, owing to the slowdown in the economy following the 2014 oil price shock. The youth unemployment rate increased to 28.9 percent from 25.3 percent, higher than ASEAN and Gulf Cooperation Council (GCC) countries. The unemployment rate of locals increased to 11.5 percent and youth unemployment rate of locals reached 31.7 percent in 2017. While the female labor force participation rate declined to 56.5 percent, the corresponding gender gap narrowed.

uA01fig01

Youth Unemployment, Latest

(Percent)

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Source: International Labor Organization estimates.

7. The authorities have made significant progress in fiscal consolidation in the wake of the 2014 oil price shock. The overall fiscal balance recorded a surplus in FY2018/19 for the first time since the oil price shock in 2014, owing mostly to higher O&G revenues, reflecting a rebound in O&G prices, and lower expenditure, mainly capital spending due to the gradual implementation of the 11th National Development Plan (RKN11). The non-O&G deficit—an indicator of underlying fiscal effort and long-term sustainability— narrowed from 61.3 percent of non-O&G GDP in FY2017/18 to 54.9 percent in FY2018/19 (Text Table 1).

Text Table 1.

Brunei Darussalam: Fiscal Development 1/

article image
Source: Brunei authorities, IM F staff estimates

Fiscal year: April-March

In absence of government debt and interest payments, this is also primary balance.

8. Brunei’s external position is assessed to have been weaker than fundamentals in 2018 (Appendix IV). The current account surplus narrowed to 7.9 percent of GDP in 2018, due to higher temporary imports linked to the construction phase of large infrastructure projects. However, the surplus is expected to rebound on current policies, closing the gap over the medium term as new downstream exports rise and the temporary imports fade.

9. The peg to the Singapore dollar remains appropriate, providing a credible nominal anchor and stability to the financial system. The currency board has helped keep the inflation rate and its volatility low, suggesting that the credibility of the peg anchors inflation and preserves macroeconomic stability. The peg also helps Brunei benefit from Singapore’s deep financial markets in managing its large external assets without incurring exchange rate risks. Official reserves are assessed to remain above the adequacy benchmarks.

10. The banking sector remains sound, with solid capital and liquidity buffers. Indications are that banks are well capitalized—the capital adequacy ratio increased from 18.6 percent in 2018Q1 to 20.7 percent in 2019Q1, well above the regulatory minimum requirement of 10 percent. Banks hold considerable excess liquidity, with the overall liquid asset ratio hovering around 50 percent. Gross non-performing loans and financing ratio remained stable at 5.1 percent. Banks are profitable—the return on assets increased to 1.5 percent from 1.2 percent, and the return on equity increased to 10.4 percent from 8.6 percent. The pickup in the non-O&G growth has attenuated the decline in private sector credit, recovering from -3.9 percent to -3.0 percent, while total banking sector loans, which include loans to the government-linked companies (GLCs), increased from -2.0 percent to 5.4 percent.

uA01fig02

Brunei Darussalam: Direction of Loans and Private Sector Credit Growth

(in billions of Brunei Dollars, unless otherwise indicated)

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Sources: Brunei authorities; and IMF staff estimates

11. Growth is expected to pick up in 2019, with the outlook improving further over the medium term, driven by expansion in the O&G sector and large investment projects. Growth is projected to accelerate to 1.8 percent in 2019, reflecting stronger O&G activities from asset rejuvenation and planned investment. The ramp-up of capital spending related to the RKN11 would also support the non-O&G growth. The fiscal position would deteriorate this year owing to lower O&G prices and higher capital spending. In the medium-term, however, the fiscal position is expected to recover. The start of operations of the large downstream investment projects—the Hengyi refinery and Brunei Fertilizer Industries—and stronger O&G activities would further improve the outlook from 2020 onward. Inflation would remain low, but positive, over the medium term. The current account surplus would increase, reflecting stronger exports of O&G and downstream products, and fading temporary imports related to large investment projects. Private sector credit growth would recover in line with the non-O&G growth.

12. Risks to the near-term outlook are tilted to the downside (Appendix I). Lower-than-expected energy prices would reduce fiscal revenues and exports, with significant spillovers to the non-O&G sector. Disruption in domestic O&G production caused by aging fields and lower than expected production from new projects are also important risks to the outlook, as are possible delays in large downstream FDI projects. A sharp tightening of global financial conditions and rising protectionism may slow global growth and dampen energy demand. On the upside, geopolitical tensions may push O&G prices higher than expected. In addition, the ongoing asset rejuvenation and planned exploration could deliver higher-than-expected O&G production over the medium term.

uA01fig03

Brent Crude Oil

(U.S. dollars a barrel)

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Sources: Bloomberg L.P.: and IMF staff calculations.

13. A sharp decline in O&G prices would have large impacts on macroeconomic balances. To illustrate the impact of lower O&G prices on fiscal position and current account, in an adverse scenario staff assumes medium-term Brunei O&G prices to fall back to the lowest levels observed in 2016 (oil price at US$34.4 and gas price at US$6.4) and remain there. In this low probability scenario, the fiscal deficit is projected to be lower by about 10 percentage points over 2019–2024, compared to the baseline scenario, requiring the use of the sovereign asset funds and undermining intergenerational equity. Staff sees this as a tail risk, given the authorities’ capacity for fiscal consolidation, demonstrated over the past years, and the available policy options such as raising tax and non-tax revenues.

uA01fig04

Brunei Darussalam: Baseline vs. Adverse Scenario

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Authorities’ Views

14. The authorities broadly agreed with the assessment of recent developments. While acknowledging the risks and challenges faced by the Brunei’s economy, they are more optimistic about the short-to-medium-term outlook, given new investment in the upstream O&G sector and scheduled asset rejuvenation, which could generate higher O&G production than staff’s baseline scenario. They noted the continued recovery in the non-O&G growth due to large investment in infrastructure projects and ramp-up of capital spending related to RKN11. The Hengyi refinery may start operations this year, further boosting spin-off activities in both the O&G and non-O&G sectors. While the authorities acknowledged that the unemployment rate is high, efforts are ongoing to significantly reduce it over the next few years, through active labor market programs, including the Bruneianization and the start of operations of the large downstream investment projects.

Macroeconomic Policies

A. Continuing Fiscal Consolidation and Reducing the Procyclicality of Fiscal Policy

15. The authorities formulated the FY2019/20 budget based on more realistic expenditure assumptions. In recent years, spending outturns have been on average about 10 percent higher than budgeted. As part of strengthening the budget framework, the authorities seek to enhance the credibility of the fiscal framework by aligning the budget with actual spending and reinforcing accountability.

16. The authorities introduced a medium-term fiscal consolidation program. The program aims to help each ministry formulate its own fiscal consolidation plan and reassess government revenue and expenditures to rebalance the budget toward growth-promoting activities. To monitor implementation of the program, line ministries are required to communicate regularly with the Ministry of Finance and Economy (MOFE) on its progress. The consolidation initiatives include corporatization and privatization, public-private partnership, evaluation of subsidies against targets, fiscal management enhancement, revenue diversification, and amalgamation of the government’s asset management system.

17. Staff supports the authorities’ fiscal consolidation program, although more ambition is called for to ensure long-term sustainability and to bring the fiscal position gradually closer to that implied by intergenerational equity considerations. Sustainable long-term expenditures—under the permanent income hypothesis (PIH) commonly used for oil-exporting economies—point to a need for continued fiscal consolidation and making the budget less reliant on O&G revenues. The gap between the non-O&G balance and that consistent with the intergenerational equity level is estimated at about 10 percent of non-O&G GDP in 2024. Brunei’s sizable fiscal buffers and virtually no public debt provide fiscal space to carry out the needed adjustment in a gradual manner and limit the adverse effects on growth and employment.

uA01fig05

Brunei Darussalam: Non-O&G Fiscal Deficit vs. PIH Norm

(In percent of non-O&G GDP)

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Source: IMF staff estimates.1/ Using a constant real per-capita annuity

18. To ensure long-term fiscal sustainability and intergenerational equity, staff recommends the following medium-term reforms:

  • Continue reforming public services and the wage bill. Reforms should be designed to foster public sector productivity and incentivize Bruneians to seek more job opportunities in the private sector. The wage bill could be further contained by streamlining civil service vacancies.

  • Reform fuel subsidies in line with the IMF technical assistance (TA). In addition to being costly, subsidies encourage excessive consumption and inefficient allocation of capital. The TA estimated the fiscal cost of fuel subsidies at 1–1.5 percent of GDP. Furthermore, subsidies benefit the wealthier group more than the vulnerable. International experience suggests that a well thought-out and comprehensive reform strategy is key to ensuring success, which includes a clear communication strategy and compensatory measures to protect the vulnerable.

  • Rebalance further budget spending toward growth-enhancing activities. Measures could include reducing untargeted subsidies (for example, on housing and food) and promoting more efficient use of energy and water. Priority spending should concentrate on physical infrastructure (public transportation system), human capital (high quality education and training), institutional frameworks, MSME support, active labor market programs, and digitalization.

  • Increase non-O&G revenue. Additional revenue mobilization can be achieved by recalibrating property taxes, expanding further excise taxes, and adopting a Goods and Services Tax (GST).

19. These reforms would contribute to economic diversification and development of the private sector, while achieving long-term fiscal sustainability earlier than under the baseline scenario. Relative to the baseline scenario, which reflects the authorities’ planned efforts over the medium term, the adjustment scenario, comprising gradual reform of fuel subsidies and a lower wage bill, would lead to an additional reduction in the deficit path by 1.4 percent of GDP on average annually (Text Table 2). Such an adjustment scenario would reduce the gap between the non-O&G balance and that consistent with the intergenerational equity to 7 percent of non-O&G GDP in 2024. The adjustments would help achieve the sustainable long-term non-O&G deficit level gradually, reaching the level consistent with intergenerational equity considerations in 10 years, instead of 15 years in the baseline scenario.

Text Table 2.

Brunei Darussalam: Medium-Term Fiscal Balances Under Different Scenarios

article image
Source: IMF Staff calculations

Policy adjustments relative to the baseline: containing wage bill (0.2 percent of GDP) and fuel subsidy reform (1.2 percent of GDP) gradually from 2020 to 2022, and sustained in the medium term.

20. Adopting a formal medium-term fiscal framework (MTFF) would help control spending and delink it from O&G revenue fluctuations (Appendix V). The authorities have taken steps toward establishing an MTFF, by establishing a fiscal forecasting unit and requesting that line ministries prepare three-year spending plans. Despite this progress, Brunei’s MTFF is still in an early stage. The MTFF should be incorporated into a fiscal strategy that includes aggregate and sectoral ceilings and fiscal risk analysis. Adopting a medium-term budget framework focused on strategic prioritization of expenditure by ministries and programs would help insulate spending from volatile O&G prices and reduce the procyclicality of fiscal policy. The annual budget process would be further enhanced by strengthening fiscal transparency, for instance, by publishing more detailed budget execution data and reconciling budget projections with outcomes. Implementing a treasury single account and a well-functioning financial management information system would enhance budget control and monitoring.

21. Digitalization can help improve public financial management. For example, integrated beneficiary databases for social safety nets can reduce inclusion and exclusion errors. E-procurement can generate budgetary savings by promoting competition among contractors, increase transparency, and reduce vulnerabilities to corruption. Staff welcomes the newly introduced e-invoice procurement system and supports the efforts to create a National Centralized Database—a centralized database for welfare assistance programs, while emphasizing the need to ensure privacy and cyber security.

Authorities’ Views

22. The authorities agreed on the need for further fiscal consolidation in a gradual manner. The authorities underscored that the FY2019/20 budget does not entail an easing of fiscal policy—the budget is based on more realistic spending assumptions, by aligning the budget with actual spending. They emphasized that fiscal consolidation efforts will continue in line with their medium-term fiscal consolidation program. To achieve a balanced budget, fiscal consolidation policy requires a “whole of government” approach. To operationalize the consolidation program, the government is assessing fiscal consolidation plans formulated by each ministry, which includes three program components namely Policy Review, Sector Reform Plan, and Fiscal Consolidation Plan. The consolidation initiatives include further corporatization—building on the successful corporatization of Muara port. Any subsidy reform will be assessed thoroughly and will be implemented gradually to protect the most vulnerable. As a first step, the authorities’ efforts focus on minimizing leakages by introducing a smart metering system for electricity and water. Plans are also underway to introduce initiatives which will reduce fuel subsidies without affecting the vulnerable. To support budget execution, the monitoring system has been strengthened by introducing the e-invoice system for procurements. They are currently reviewing the current tax policy and structure, and the feasibility to further broaden the current tax base. Efforts are underway to implement a medium-term expenditure framework and to improve budget presentation. They also plan to focus more on the non-oil balance to delink fiscal policy from oil price volatilities.

B. Structural Reforms to Support Diversification, Inclusive Growth, and Job Creation

23. The authorities’ initiatives toward economic diversification are commendable, but challenges remain. To support the Wawasan Brunei 2035 development plan, the authorities have focused on five priority business clusters: Downstream O&G, Food, Tourism, Services, and ICT. Brunei’s characteristics, however, pose challenges. Its small size makes it difficult to exploit economies of scale. Like other oil exporters, private sector activity remains weak, while the preference for public sector employment limits private sector growth.

24. The efforts to enhance the business environment need to be sustained. Brunei has made important progress in improving the business climate. For example, from 2016 to 2019, Brunei made strides in improving the World Bank Doing Business scores, with strong progress in access to credit and starting a business (Figure 6). More reforms, however, are needed to further improve the ease of doing business scores, in particular, in registering property and trading across borders. Making the regulatory framework more consultative, transparent and predictable would also help improve the business environment. A better business environment is paramount to support private sector-led growth and reduce unemployment, including youth unemployment.

25. Brunei should continue efforts to attract quality FDI, while deepening its global integration. Brunei has attracted sizable FDI in the five business clusters, mainly in the downstream O&G sector. The expansion and modernization of the Muara Port, and trade agreements (for example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP) may further enhance Brunei’s attractiveness for FDI and help global integration. More efforts are needed to generate stronger positive spillovers from FDI to the domestic economy, including by integrating local MSMEs into the supply chains. Brunei would also benefit from further improving trade facilitation, such as advance rulings, information availability, and formalities (for example, promoting more automated process for Customs). In this regard, staff welcomes the introduction of the common online platform (the National Single Window), which will reduce face-to-face interactions and increase economic efficiency. Linking the National Single Window and the ports’ Equipment Interchange Receipts would further enhance trade facilitation. The authorities are also making progress in advance rulings as part of the preparation to ratify the CPTPP.

26. The government’s focus on human capital development and private sector employment is welcome but incentive structures could be further improved. The authorities have set up centers and programs, such as JobCenter Brunei, I-Ready, and the Center for Capacity Building, to foster job opportunities and increase job matching. These steps need to be accompanied by reforms to remove structural rigidities. For example, labor market and civil service reforms should continue to encourage Bruneians to create and seek private sector jobs and ensure that talent is directed to its most productive uses. This will require incentives for private sector employment—by aligning public and private sector wages and benefits, lowering reservation wages by signaling that government employment will be limited, and supporting entrepreneurship and private sector competitiveness. Policies should aim at building expertise in the five priority business clusters, while investment in human capital should target the specific skills needed in these clusters. Policies should also aim at boosting sectors, rather than specific firms, and preserving competition. The authorities should continue to support MSME development, while holding the recipients accountable. In this regard, encouraging start-ups and established firms to compete in international markets will provide discipline and valuable market signals to gauge performance.

27. Digitalization can support diversification efforts, given Brunei’s young and tech-savvy population. The authorities have identified digitalization as one of the five priority business clusters. To maximize the benefit of digitalization, policies should focus on upgrading physical and soft infrastructure, and improving the quality of education. Digitalization brings innovation and new opportunities, generating potentials for new jobs that give young people comparative advantages. For example, e-commerce could overcome challenges stemming from Brunei’s small market size. Moreover, initiatives such as coding bootcamps could help tackle youth unemployment.

Authorities’ Views

28. The authorities emphasized the progress made in economic diversification, while recognizing that more efforts are needed to reach the objectives of the Wawasan Brunei 2035. While Brunei’s small size poses challenges, they have a comprehensive strategy and government agencies are working coherently toward the same goals. The government is tackling the diversification reforms from a position of strength, given Brunei’s strong external and fiscal buffers. The authorities agreed on the need to better integrate and generate stronger positive spillovers from the FDI sector to the rest of domestic economy. They plan to leverage these large projects to develop further downstream activities, which would support MSMEs and create high-quality jobs for Bruneians. In addition, to achieve private sector-led growth, the government strategy encompasses corporatization, public-private partnership, and privatization. The government also continues to introduce and implement reforms under the Ease of Doing Business initiatives. Furthermore, the authorities remained committed to promote and facilitate cross border trade and investment, among others, through participation in various free trade agreements such as ASEAN and its Plus One FTAs and economic cooperation at bilateral, regional and international forums which are aimed at increasing market access/outreach for regional and international markets for local products. They highlighted that the government has undertaken various initiatives in encouraging Bruneians to pursue jobs in the private sector, including the creation of the Manpower Planning Council to strategize and coordinate efforts in increasing employment, while leveraging the programs such as I-Ready and Center for Capacity Building. To harness the benefits of digitalization, the authorities have taken many initiatives, including establishing the Digital Economy Council and the Unified National Networks.

C. Developing the Financial Sector while Preserving Financial Stability and Integrity

29. While sound overall, the financial system is bank dominated and shallow (Appendix VI). The banking sector accounts for 83.3 percent of total financial sector assets, equivalent to about 100 percent of GDP. Islamic banks account for 65.6 percent of banking assets. The banks’ offshore assets represent 53 percent—consequently, total domestic credit provided by the financial sector stands at about 30 percent of GDP, the lowest compared to peers.

30. Staff supports the authorities’ reforms to foster financial sector development as laid out in the Financial Sector Blueprint 2016–25:

  • Steps to broaden the investor base, establish a secondary bond market, and develop the required infrastructure and rules for establishing a stock exchange are commendable. The authorities’ plans to develop Brunei as one of the international Islamic finance hubs in niche areas as part of the economic diversification strategy are also welcome. Progress in issuing sukuks at longer maturities would help build a yield curve and develop the private sector.

  • The authorities have introduced conventional and Sharia-compliant overnight standing facilities, which will support liquidity management and facilitate smooth functioning of the financial system. The recent implementation of the Bureau Credit Score will improve access to credit, increase transparency in lending, and ensure discipline in the financial sector.

  • As part of modernizing its financial infrastructure, the Autoriti Monetari Brunei Darussalam (AMBD) published the Digital Payment Roadmap 2019–25 and issued a fintech regulatory sandbox.

uA01fig06

Domestic Credit Provided by Financial Sector, Latest

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Sources: World Bank, World Development Indicators; and IMF staff calcuations.

31. Strengthening banking supervision and regulation, and building a macroprudential framework are vital to preserve financial stability and integrity:

  • The authorities have taken a range of measures to develop the macroprudential framework and supervisory system. Staff welcomes the recent implementation of International Financial Reporting Standard (IFRS) 9 by financial institutions. Implementation of all the three pillars of Basel II is an important milestone in increasing the resilience of the banking system. The AMBD has made progress in developing the Domestic Systemically Important Banks framework. The authorities are also developing a top-down stress testing framework and have planned to introduce the Counter-Cyclical Capital Buffer for the banking sector. Given the size of banking assets placed offshore, the AMBD should closely monitor the potential risks emanating from external shocks. The planned publication of the first financial stability report would be an important communication tool.

  • Continued efforts are needed to put in place a bank resolution framework and contingency planning for crisis management. As a first step, the authorities have set up a working group to develop the framework, including the requirement for banks to submit their own recovery plans.

  • Staff supports the recent progress in strengthening the AML/CFT framework and the additional measures planned for the upcoming mutual evaluation, including measures to support anti-corruption efforts, while underscoring the need of coordination among concerned agencies.

Authorities’ Views

32. The authorities are mindful to progress financial sector development while preserving financial stability and integrity. The authorities remain committed to strengthening and improving financial infrastructures including through digitalization to foster financial sector development, drive new financial linkages internationally, and potentially develop Brunei as one of the Islamic finance hubs. They welcomed staffs acknowledgement on the ongoing efforts to strengthen banking supervision and regulation. The authorities will continue to advance the efforts in developing a crisis management framework, strengthening the financial sector through developments in liquidity management and upgrading macroprudential framework for effective financial sector oversight. In this regard, they welcomed the recommendations of the IMF TA on building a macroprudential framework. Regarding AML/CFT, the authorities highlighted that they are implementing the third cycle of national strategy, focusing on the upcoming mutual evaluation.

D. Data Issues and Capacity Building

33. Further progress in data compilation and dissemination is needed. Staff supports the authorities’ commitment to international data standards and best practices, including the adoption of IFRS 9. The authorities should address delays in releasing national account and balance of payments data and increase data quality. Staff welcomes the authorities’ commitment to publish the National Summary Data Page (NSDP), in line with the recent IMF TA on e-GDDS. Publishing data through the NSDP would help reduce data gaps and increase transparency. The authorities should strengthen capacity on gross external debt reporting. In that regard, staff welcomes the authorities’ plan to request TA from the IMF, including on balance of payments and national account.

Authorities’ Views

34. The authorities agreed on the need for further progress in data compilation and publication. The authorities will improve data dissemination through the e-GDDS in line with the recent IMF TA. They also expressed strong interest in IMF TA and trainings on data compilation and quality. The authorities acknowledged the various IMF TA and capacity building trainings. In this regard, they called for IMF’s flexibilities on the conditions for the provision of these programs for Brunei Darussalam.

Staff Appraisal

35. Brunei Darussalam’s economy has been adjusting to the lower O&G prices since 2014, with the authorities undertaking wide-ranging reforms. Brunei has made significant progress in consolidating the fiscal position, improving the business climate, attracting FDI, developing the financial sector, and strengthening regulation. Growth is expected to pick up in 2019, with the outlook improving further over the medium term, driven by a pickup in the O&G sector and large investment projects. Nevertheless, Brunei faces challenges and risks. Future oil production and prices remain uncertain. Against this backdrop, the reforms should continue to ensure long-term sustainability and intergenerational equity, increase productivity and competitiveness, diversify the sources of growth, reduce unemployment—especially youth unemployment, and build resilience to shocks.

36. Staff supports the authorities’ fiscal consolidation program, although more ambition is called for to bring the fiscal position gradually closer to that implied by intergenerational equity considerations. Over the medium term, staff recommends: (i) continue reforms in public services and the wage bill, including streamlining civil service vacancies, (ii) reform fuel subsidies, (iii) rebalance further budget spending toward growth-enhancing activities, and (iv) increase non-O&G revenues. Adopting a formal medium-term fiscal framework would help control spending and delink it from O&G revenue fluctuations. Digitalization can help improve public financial management.

37. The peg to the Singapore dollar remains appropriate, providing a credible nominal anchor and stability to the financial system. The external position is assessed to be weaker in 2018 than fundamentals. However, the current account balance, on current policies, is expected to rebound, closing the gap over the medium term as new downstream exports rise.

38. The authorities’ initiatives toward economic diversification are commendable. Brunei has made strides in improving business environment, while attracting sizable FDI in the priority business clusters, mainly in the downstream O&G sector. Going forward, continued efforts are needed to further improve the business environment, attract quality FDI, enhance human capital, and reform labor market to foster private sector led-growth and reduce unemployment.

39. Staff supports the authorities’ initiatives to develop the financial sector, while safeguarding financial stability and integrity. The initiatives include steps to broaden the investor base, establish a secondary bond market, develop the required infrastructure and rules for establishing a stock exchange, and put all the three pillars of Basel II in place. Given the size of banking assets placed offshore, the AMBD should closely monitor the potential risks emanating from external shocks. Staff supports the recent progress in strengthening the AML/CFT framework and the additional measures planned for the upcoming mutual evaluation.

40. The authorities should address the remaining data gaps. Staff welcomes the authorities’ commitment to publishing the NSDP in line with the recent IMF TA on e-GDDS, as well as the authorities’ plan to request further TA from the IMF to improve data collection and dissemination.

41. It is expected that the next Article IV consultation with Brunei Darussalam will be held on the standard 12-month cycle.

Figure 1.
Figure 1.

Brunei Darussalam: Real and Fiscal Indicators

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Figure 2.
Figure 2.

Brunei Darussalam: External and Financial Indicators

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Figure 3.
Figure 3.

Brunei Darussalam: Fiscal Indicators in Comparison with GCC Countries

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Figure 4.
Figure 4.

Brunei Darussalam: Financial Stability Indicators

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Figure 5.
Figure 5.

Brunei Darussalam: Socioeconomic Developments

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Figure 6.
Figure 6.

Brunei Darussalam: Doing Business and Governance Indicators

Citation: IMF Staff Country Reports 2019, 310; 10.5089/9781513516615.002.A001

Table 1.

Brunei Darussalam: Selected Economic and Financial Indicators, 2014–24

article image
Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections.

Non-oil and gas GDP includes the downstream sector.

In absence of government debt and interest payments, this is also primary balance.

Comprises foreign exchange assets of Autoriti Monetari Brunei Darussalam, SDR holdings, and reserve position in the Fund.

Table 2.

Brunei Darussalam: Budgetary Central Government Developments, 2014/15–2024/251

article image
Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections.

GFSM 1986 Presentation (cash-based); fiscal year ends March 31.

Includes energy sector royalties and dividends.

In absence of government debt and interest payments, this is also primary balance.

Excludes collection and disbursement of royalties and capital transfers.

Includes Fund staff estimates of investment income.

Table 3.

Brunei Darussalam: Balance of Payments, 2014–241

article image
Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections.

Reflects BPM6 presentation adopted by the authorities. Includes official revisions in March 2014, which improved data coverage and methodology, but lack of comprehensive balance of payments data remains.

Projections for 2020–24 include an increase in petrochemical exports with the start of operations of the Heng Yi refinery.

Includes changes in banks’ foreign assets and liabilities and in estimated BIA investments.

Comprises foreign exchange assets of Autoriti Monetari Brunei Darussalam, SDR holdings, and reserve position in the Fund.

Table 4.

Brunei Darussalam: Monetary Developments, 2012–20

article image
Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections.

Comprises central bank’s foreign exchange assets, SDR holdings, and reserve position in the Fund.

Ratio of foreign exchange holding to currency.

Table 5.

Brunei Darussalam: Financial Soundness Indicators and Other Indicators of Vulnerability, 2012–19

article image
Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections.

The calculation of Financial Soundness Indicators is based on the IMF’s Financial Soundness Indicators: Compilation Guide.

Appendix I. Risk Assessment Matrix 1/

article image

Appendix II. Status of Staff Advice Made During the 2018 Article IV Consultation

article image