Brunei Darussalam: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brunei Darussalam

1. The Brunei economy has been buffeted by the COVID-19 pandemic and the associated oil and gas (O&G) price decline. The first confirmed COVID-19 case was reported in the Sultanate on March 9, 2020. The number of cases increased rapidly to 100 cases in just 15 days, with the first COVID-19 fatality reported on March 28, 2020. In addition to the health shock, Brunei had to contend with the pandemic-induced decline in global oil and gas prices, which dropped by 22 percent from 2019 to 2020. Thanks to early and decisive interventions, the authorities succeeded in suppressing the first wave of the outbreak (as of mid-July 2021, there had been no cases of community transmission since May 5, 2020) and rolled out economic relief measures to cushion the economic toll (Appendix I). As a result, the economy performed well in 2020, with real GDP posting 1.1 percent growth—a rare outcome amidst a sea of negative growth in the region.

Abstract

1. The Brunei economy has been buffeted by the COVID-19 pandemic and the associated oil and gas (O&G) price decline. The first confirmed COVID-19 case was reported in the Sultanate on March 9, 2020. The number of cases increased rapidly to 100 cases in just 15 days, with the first COVID-19 fatality reported on March 28, 2020. In addition to the health shock, Brunei had to contend with the pandemic-induced decline in global oil and gas prices, which dropped by 22 percent from 2019 to 2020. Thanks to early and decisive interventions, the authorities succeeded in suppressing the first wave of the outbreak (as of mid-July 2021, there had been no cases of community transmission since May 5, 2020) and rolled out economic relief measures to cushion the economic toll (Appendix I). As a result, the economy performed well in 2020, with real GDP posting 1.1 percent growth—a rare outcome amidst a sea of negative growth in the region.

Context and Recent Developments

1. The Brunei economy has been buffeted by the COVID-19 pandemic and the associated oil and gas (O&G) price decline. The first confirmed COVID-19 case was reported in the Sultanate on March 9, 2020. The number of cases increased rapidly to 100 cases in just 15 days, with the first COVID-19 fatality reported on March 28, 2020. In addition to the health shock, Brunei had to contend with the pandemic-induced decline in global oil and gas prices, which dropped by 22 percent from 2019 to 2020. Thanks to early and decisive interventions, the authorities succeeded in suppressing the first wave of the outbreak (as of mid-July 2021, there had been no cases of community transmission since May 5, 2020) and rolled out economic relief measures to cushion the economic toll (Appendix I). As a result, the economy performed well in 2020, with real GDP posting 1.1 percent growth—a rare outcome amidst a sea of negative growth in the region.

2. Economic performance has varied across sectors. The oil and gas sector saw a significant output contraction in 2020—the largest since the oil price shock in mid-2014. Despite the pickup in global oil prices since October last year, Brunei’s O&G sector in Q4 2020 has remained in large contraction (-8.6 percent yoy) due to the unscheduled shutdown and maintenance of some offshore O&G facilities. In the non-O&G sector, growth performance was more heterogenous. Stringent containment measures implemented in the early stages of the pandemic negatively affected contact-intensive sectors (such as hotels, restaurants and air transport) which contracted by 1.6 percent. In contrast, growth in the downstream non-O&G sector, led by manufacture of petroleum and chemical products, was exceptionally strong (+324 percent yoy) contributing 4.6 percentage points to real GDP growth in 2020. 1

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Contributions to Real GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Sources: Brunei authorities, CEIC Data.1/ Annual growth figure for downstream non-O&G activities are not available for 2019, as operations commenced in late-2019,

Real GDP Growth

(In percent)

article image
Sources: Brunei authorities, CEIC Data.

Annual growth figure for downstream non-O&G activities are not available for 2019, as operations commenced in late-2019,

3. The pandemic has affected local and non-local workers differently. While employment of local workers increased due to positive economic growth and the facilitation of job matching through the JobCentre Brunei website and expanding the I-Ready Apprenticeship program, non-local employment was negatively impacted by entry restrictions to Brunei. The combined result was a decline of the labor force and a potential increase in the unemployment rate. Across sectors, employment increased in wholesale and retail, health and social work, and construction, while it declined slightly in manufacturing and mining and quarrying.

4. Headline inflation rose to 1.9 percent in 2020, mainly on account of higher food prices-reflecting supply constraints—and an increase in insurance prices.

5. The fiscal deficit increased from 5.6 percent of GDP in FY2019/20 to 19.7 percent in FY2020/21. The widening of the deficit largely reflected lower energy prices and oil production and exports, which reduced O&G revenue from 19.8 percent of GDP in FY2019/20 to 7.7 percent in FY2020/21. The decline in revenue has been partly offset by a trend decline in expenditure, reflecting authorities’ efforts to improve fiscal sustainability. The government allocated BND15 million in FY2020/21 to meet the immediate needs of the health sector. The government also rolled out a sizeable economic relief package to support the households and firms most affected by the pandemic, including the deferment of payments on Employee Trust Fund and Supplemental Contributory Pensions contributions, discounts on corporate income taxes, rents and utilities, deferment on principal payments of financing to all sectors, and 25 percent payroll subsidies to affected micro, small and medium enterprises (MSMEs) with less than 100 employees (Appendix I). The stimulus package amounted to BND450 million-about 2.7 percent of GDP.

Text Table. Brunei Darussalam: Fiscal Development 1/

article image
Source: Brunei authorities, IMF staff estimates

Fiscal year: April-March

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

6. The current account surplus narrowed. Exports contracted in 2020 in line with declining O&G production amid a downturn in global demand. Imports have held up, led by robust demand for imported crude as downstream refinery activities expanded. As a result, the current account surplus narrowed to 4.5 percent of GDP in 2020 (2019: 6.6 percent of GDP). The external position is assessed to be substantially weaker than the level implied by medium-level fundamentals and desirable policies (Appendix II).

7. The banking system remains sound and well-capitalized. The bank capital ratio remains adequate, well above regulatory requirements (2020: 20.8 percent), while the gross performing loan ratio remains stable (2020: 4.7 percent) partly due to policy support. However, private sector credit growth has slowed since Q1 2020, reflecting the weaker demand, mainly by the household sector.

Authorities’ Views

8. The authorities broadly agreed with the assessment of recent developments. While the pandemic continues to have disproportionate impact on some sectors (notably hotels and air transport), it has also contributed to higher domestic consumption. This has benefited local businesses (such as the wholesale and retail sectors) which saw an increase in activities during the pandemic. As a result, there has also been a notable shift in the direction of bank lending to the business sector. They expect these positive developments to continue given that with current travel restrictions Bruneians will spend more domestically rather than abroad. The key growth driver stemmed from the robust activities in the downstream non-O&G sector, which helped to mitigate the decline in upstream O&G production, which was weighed down by ongoing rejuvenation and major maintenance works. The authorities reiterated that through a ‘whole-of-government’ 2 approach, Brunei was able to contain the spread of the virus early, which resulted in over a year of zero cases of community infections so far. Together with timely rollout of economic relief measures, it helped to support vulnerable households and businesses affected by the pandemic, while paving the way of a swift re-opening of the economy.

Outlook and Risks

9. Growth is projected to improve in 2021–22. The O&G sector is projected to recover marginally in 2021 (+0.5 percent yoy) amid ongoing rejuvenation program and scheduled major maintenance of offshore facilities, with the outlook gradually strengthening over the medium term. In the non-O&G sector, downstream activities are expected to remain strong, driven by the commencement of new FDI projects, particularly Brunei Fertilizer Industries, which are expected to come onstream towards H2 2021. The contact-intensive non-O&G sector is also expected to pick up in 2021 3 as domestic containment measures are phased out and vaccination is progressing (as of mid-July 2021, one-quarter of the population had received at least one dose—Appendix I). For 2021–22, growth is projected to accelerate to 2–3 percent, before slowing to around 2 percent over the medium term. 4 With continued diversification, the share of non-O&G is projected to rise further to 52 percent of GDP by 2026.

10. Employment is expected to increase in 2021 as the recovery strengthens. The number of workers paying pension contributions in 2021 has exceeded the peak in 2020 (increasing from 58,630 in July 2020 to 61,088 in January 2021), suggesting a continuous improvement in local private employment. However, given that travel restrictions remain in place, the extended border closure will continue to have a negative impact on non-local employment.

11. Headline inflation is projected to remain relatively high, averaging 2.5 percent in 2021, given the anticipated cost-push inflation from limited alternative import supplies and higher logistics costs due to the pandemic. Over the medium term, price pressure is expected to subside, including through ongoing measures to increase domestic food supplies. Structural factors, including subsidies and the currency’s peg to the Singapore dollar, will help mitigate upside risks.

12. The fiscal balance is expected to improve in 2021 as energy prices and economic activity pick up. However, absent strong consolidation measures aimed at reducing spending, the fiscal deficit is projected to fluctuate at 9–11 percent of GDP during FY2021/22–2026/27. Revenues are projected at about 18.7 percent of GDP in FY2026/27, with declining energy prices and oil production being offset by higher gas production and non-O&G revenue. Expenditures are projected at about 29.8 percent of GDP in FY2026/27.

13. The current account surplus is projected to increase in 2021–22. The current account surplus has narrowed over the past several years, mainly due to large import demand for FDI-related infrastructure and weaker oil and gas prices. With the completion of major FDI projects, imports are starting to slow and exports proceeds are expected to increase. The current account surplus is projected to be at about 5 percent of GDP in 2021–22, before increasing to about 13 percent of GDP in 2026. Taking into account the new SDR allocation of about US$650 billion in 2021 (of which Brunei’s allocation would be US$412 million), Brunei’s reserves (excluding gold) under this baseline scenario would stand at around 210 percent of the Fund’s assessing reserves adequacy (ARA) composite metric in 2021. 5

14. Projections are subject to unusual uncertainty, with significant risks skewed to the downside. In particular, the continuing weakness in the O&G sector could weigh on growth over the forecast horizon. Resurgence of the pandemic and delayed structural transformation would slow the recovery. New waves of infections around the world and the potential for new virus strains in undermining vaccine efficacy are concerning and could undermine global confidence. In addition, COVID-19 infection spillovers from other countries in the region is a material risk. 6 However, stronger energy prices could surprise to the upside. A setback to the global economic recovery would have knock-on effects of global oil prices (Box), derailing the prospects of recovery but large fiscal buffers could be deployed if necessary. Unexpected changes in energy production and delays in large-scale FDI projects are additional risks.

Authorities’ Views

15. The authorities concurred that despite the challenges, the outlook remains positive. They expect the economy to grow between 0.8 and 1.6 percent in 2021, driven by continuing strong momentum in the downstream non-O&G sector. The scheduled commencement of production by Brunei Fertilizer Industries towards end of 2021, and the planned Hengyi Industries’ Phase 2 construction project in 2022 are expected to provide growth impetus over the medium term. However, as in any major FDI project, the authorities acknowledged that there are uncertainties surrounding the commissioning of such activities and are mindful of the risks. Inflation pressures have risen, mainly from higher cost-push inflation stemming from limited alternative import supplies and higher logistics costs due to the pandemic. To address rising price pressures, the government has introduced measures to increase domestic food supplies (such as the collaboration between the Ministry of Primary Resources and Tourism and local entrepreneurs to increase the number of chicken coops to meet the local demand for broilers). While the uncertainties of the pandemic will continue to be a risk to the broader economic outlook, vaccination will be key in helping to prevent a second wave of infections. In this regard, the authorities are making good progress in the vaccine rollout and are expecting more supplies of vaccines this year.

Economic Policies

The high uncertainty about the path of the pandemic and global economic outlook as well as vulnerabilities to global oil price shocks pose major headwinds for Brunei. Persistent low oil prices would gradually erode fiscal buffers, while low productivity in the non-O&G sector would weigh on medium-term potential growth and job creation. The macroeconomic policy mix should continue to support the recovery in the short term, while aiming to strengthen resilience and promote economic transformation in the longer term. Continued short-term fiscal support is necessary to put the recovery on a solid footing. Brunei’s ample fiscal reserves, with virtually no public debt, should be leveraged to underpin the recovery in private demand, while incentivizing resource re-allocation. At the same time, reforms aimed at improving the fiscal position—including a strengthening of the medium-term fiscal framework—should continue in order to achieve sustainable long-term expenditure and improve intergenerational equity. Structural policies to build human capital and attract higher value-added FDI would need to be strengthened. Accelerating digital and green growth will be critical to foster resilience.

A. Supporting the Economy While Improving Intergenerational Equity

Dual Approach for Recovery and Sustainability

16. Fiscal policy should remain supportive until the private sector recovery is entrenched. Fiscal support targeted to address the health crisis and prevent scarring has been implemented, including the establishment of a national isolation center, special allowance for healthcare workers, and a 50 percent discount on corporate income tax in affected sectors. 7 The authorities’ plan to keep expenditure in FY2021/22 unchanged at the FY2020/21 level despite decreased revenue is appropriate, given the current slack in the non-downstream of the non-O&G sector. 8 While the unprecedented fiscal measures in the economic relief package expired in September 2020 as COVID-19 was well contained, some fiscal and financial support measures have been extended until September 2021. Broad lifelines should be phased out gradually and support withdrawn once there are signs of a self-sustained recovery in private domestic demand, and future support should then be geared towards achieving re-allocation of resources to new dynamic (green and digital) sectors.

17. Looking ahead, a resumption of medium-term fiscal consolidation efforts is called for. The government has made good progress in fiscal consolidation, consistent with the Fund’s recommendations. However, the fiscal deficit could further widen if O&G prices drop to the lowest level during the pandemic (Box). The gap between expenditure and sustainable long-term expenditure—under the permanent income hypothesis (PIH) used for oil-exporting economies—has declined since the previous Article IV consultation and is now projected at about 2.6 percent of GDP in 2026. Closing the current gap would require further efforts, including through a reduction in inefficient spending and reliance on O&G revenue. Substantial fiscal buffers with virtually no public debt enable the government to adjust public finance gradually, limiting the negative growth impact.

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Brunei Darussalam: Cumulative Fiscal Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Sources: Brunei authorities. IMF staff calculations.
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Brunei Darussalam: Non-O&G Fiscal Deficit vs. PIH Norm

(in percent of non-O&GGDP)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Source: IMF staff estimstes.1/ Using a constant real per-capital annuity

Fiscal Consolidation

18. Fiscal consolidation strategies should preserve growth-enhancing spending. The government has been implementing the fiscal consolidation program since 2018, requesting ministries to prepare a five-year plan that includes reforms to reduce inefficient spending. Government expenditure has steadily declined from 39.3 percent of GDP in FY2016/17 to 32.2 percent in FY2020/21. At the same time, while spending on physical infrastructure has been curtailed substantially, undermining potential growth, limited progress has been made in restraining current spending.

19. Reforming the current untargeted subsidy scheme is a priority in order to reduce inefficient resource allocation and consumption inequality. 9 Subsidies should be managed in a consolidated way and included as formal budgetary items, and a strategy for subsidies reform should be initiated, with: (i) careful and gradual implementation; (ii) clear and continuous communication; and (iii) compensatory measures for the vulnerable. While the authorities have made tangible efforts to reform subsidies—such as launching high quality fuel without subsidy, installing a smart metering system for electricity and water in 2020, establishing the digitalized National Welfare System for efficient and targeted social expenditure in July 2020 as well as discussing electricity tariff adjustment—additional steps to reduce subsidies gradually—away from the more distorting items (such as fuel) and from the high-income groups (such as the abolition of fuel subsidy on luxury cars) —are encouraged.

20. Reducing the wage gap between the public and private sector would help addressing labor market duality. The authorities have narrowed public employment opportunities by tightening temporary job offerings and reformed the pension system to eliminate differences between public and private workers. However, public wages remains well above private-sector levels and represent more than 30 percent of government expenditure, despite a decrease in the number of public officials in FY2021/2022. 10, 11 Policy reforms are needed to contain civil service hiring through intensified manpower auditing, control of the level of public salaries and strengthened labor productivity in the public sector.

21. Curtailing reliance on O&G sector would reduce fiscal vulnerabilities. The recent developments in downstream industry give an opportunity to redesign the tax system associated with non-O&G sector. 12 Tax administration should be strengthened, and the tax system needs to be broadened from recalibrating property taxes, expanding excise taxes particularly on products with a negative impact on health and environment, and adopting a Goods and Services Tax (GST).

22. The reforms laid out above would contribute to economic diversification while strengthening the fiscal position. More ambitious reforms of fuel subsidies and public wages (the adjustment scenario) could achieve a reduction in the deficit path by 1.4 percent of GDP annually in the medium term, relative to the baseline scenario reflecting the authorities’ current policies. Such an adjustment would contribute toward closing the gap between expenditure and sustainable long-term expenditure. The remaining gap could be filled by (i) bolstering subsidy reforms on housing, electricity, water, food, and healthcare, (ii) cutting in inefficient spending, and (iii) implementing corporatization and privatization.

Text Table. Brunei Darussalam: Medium-Term Fiscal Balances under Different Scenarios

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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 2022/23 to 2024/25, and sustained in the medium term.

Public Finance Management

23. Strengthening public finance management would improve spending efficiency. Brunei’s quality of infrastructure falls short of that in countries with similar economic structures and income levels. The Public Investment Management Assessment (PIMA) of the IMF would help the authorities to improve the efficiency of the public investment process by evaluating the current system and identifying effective policy options (Appendix IV). The recently adopted Medium-Term Fiscal Framework (MTFF) and the inclusion of medium-term projections for annual budgeting purposes are important reforms. Further development of the MTFF, such as the inclusion of potential gains from fiscal consolidation programs and taxation changes into the medium-term budget, would bolster the fiscal framework. The adoption of fiscal rules—including the introduction of a primary balance-to non-hydrocarbon GDP target and a contingency plan identifying revenue and expenditure measures that could be taken in the event of a sharp drop in energy prices—would reduce fiscal procyclicality and help anchoring medium-term fiscal targets.

24. The authorities’ efforts on corporatization, privatization, and public-private partnership (PPP) are tangible steps to strengthen public finance management. A corporatization and PPP special committee was established under the Ministry of Finance and Economy (MoFE) in 2018 and has reviewed a range of sectors (electricity, water, post office, and air transportation) for corporatization. 13 Further efforts on corporatization, PPP as well as privatization should contribute to fiscal consolidation through increased revenue and private sector development.

25. Reducing the budget-execution gap and off-budget measures would help enhance fiscal transparency. Despite significant efforts to better align actual and budgeted spending— including through more realistic assumptions on economic activity—the gap between budget targets and outturns has not lessened due to drastic volatility in oil and gas prices. Also, public funds have been managed and utilized off-budget. 14 Policies aimed at improving consistency between budgets and outturns—such as strict controls on budget execution and changes—and reducing off-budgets activities would improve the allocation of public resources consistently with national priorities, while improving fiscal integrity and transparency.

Authorities’ Views

26. The authorities agreed with continuing fiscal reforms, underscoring budgetary investment on diversification and private sector development and cost-effective spending. The authorities have advanced fiscal consolidation, implementing the Fiscal Consolidation Program since FY2020/21 with 117 initiatives and reallocating inefficient spending to future investment. The development expenditure execution delayed by COVID-19 is expected to resume in FY2021/22. The authorities have taken steps to reform subsidies in more efficient manner such as through the launch of premium fuel without subsidy, smart meter for water and power as well as exploratory discussions on power tariff improvements. The establishment of the National Welfare System is also aimed to ensure support to those most in need and enables the government to conduct assessments in more targeted and systematic manner. The MoFE is in the process of consolidating subsidies data across the line-ministries through the ongoing Treasury Accounting and Financial Information System 2.0 project. Strengthening the Public Service Department/Commission ensured optimization of manpower through the implementation of manpower auditing. This also avoided duplication of functions and redundancy whilst ensuring equitable and efficient deployment through redeployment and retraining and only resorting to new recruitment only when deemed necessary. Deliberations are being undertaken on possible expansions of excise taxes in the near future, especially on goods harmful to the environment and health, which will serve a dual purpose of achieving socio-economic sustainability and increasing government revenue. The authorities agreed with the need to strengthen public finance management, showing interest in the PIMA of the IMF to optimize the public investment. Capacity building would be beneficial to strengthen the MTFF and the adoption of fiscal rules such as targeting a primary balance to non-O&G GDP will take time for review, while looking appropriate to Brunei. As part of its efforts to ensure efficient public finance and stimulate the private sector, the authorities have undertaken to corporatize the printing service of the government and to implement PPP in the health and fisheries sector. In addition, the authorities adopted timely fiscal measures including the deferment on contributions towards Employee Trust Fund and Supplemental Contributory Pension as well as the salary subsidies for sector-targeted MSMEs to mitigate negative impacts from COVID-19. All budgetary expenditures and procurements for responding COVID-19 have been examined by the Auditor General.

B. Safeguarding Financial Stability

27. The Currency-Interchangeability Agreement between Brunei and Singapore promotes monetary and financial stability. Under this arrangement, the monetary authorities and licensed banks in both countries are obliged to accept and exchange each other’s currencies at par and without charge, into their own currency. As the Brunei dollar is anchored to the Singapore dollar, Singapore’s monetary policy has a direct influence on monetary conditions in Brunei. This framework has been beneficial for macroeconomic stability—inflation in Brunei has been low and stable, averaging 1.1 percent over 1983–2020.

28. While the banking system is sound, domestic credit continues to lag as compared to peers. Brunei’s banking system loan-to-deposit ratio has declined due to weaker credit demand associated with the pandemic and remains much lower than peers in the GCC countries. This difference reflects structural factors such as Brunei’s small domestic market and the relatively shallow financial system. However, the composition of lending has seen a positive shift towards the business sector in recent years.

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Selected Indicators of Financial Development (2020 or latest),

(In percent)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Sources: Haver Analytics, World Bank, IMF staff calculations

29. The authorities have taken wide-ranging measures to develop and improve the resilience of the financial sector. The authorities have taken steps to put all three pillars of Basel II in place. Early this year, the Brunei Darussalam Central Bank (BDCB) issued a consultation paper to the industry on Basel III Implementation Roadmap, paving the way for the introduction of the Basel III framework. Discussions are on-going to develop a holistic macroprudential framework to safeguard financial stability, including a preliminary assessment of the countercyclical capital buffer. On MSME financing, given that most MSMEs typically lack proven track records and collateral, access to financing would continue to be a key hurdle, impeding private sector development. It is encouraging to note that the Credit Bureau continued to serve its purpose, helping to promote greater lending transparency, as well as prudent lending and borrowings. The Credit Bureau is planning to roll out other services, such as the Portfolio Alerts and Monitoring module by end of the year. The module will allow the banks and finance companies to monitor their existing customer accounts portfolio in order to provide customer behavioral insights and therefore support decision-making. Robust implementation of AML/CFT regulatory and supervisory framework is also critical to safeguard financial integrity. In this regard, staff notes that two laws were amended in 2020, namely the Criminal Asset Recovery Order and the Companies Act. In addition, amendments to the Anti-Terrorism Order and Anti-Terrorism (Terrorist Financing) regulations are currently being prepared, while the Counter Proliferation Financing Order is being finalized. 15

30. Volatility in global oil price calls for a careful monitoring of risks associated with banks’ placement of excess liquidity abroad. Given the low intermediation, banks in Brunei tend to place excess liquidity abroad, notably in the inter-bank market, as well as in short-term money market instruments and government securities, for example in Singapore. Such placement of excess liquidity abroad would depend on the volume of export proceeds and investment income, which is in turn subject to fluctuations in global oil prices. The risk could stem from foreign currency exposure to large exchange rate fluctuations for non-Singapore dollar-denominated placements, resulting in large financial losses. The authorities should remain vigilant and strengthen the risk management framework for monitoring and controlling liquidity risk, as financial conditions may shift abruptly and be accompanied by weaker global oil prices.

Authorities’ Views

31. The authorities broadly agreed with the assessment of financial policies. In response to the pandemic, the authorities moved quickly to put in place targeted financial assistance as part of the broader economic relief package. This has helped to alleviate financial distress of affected households and businesses. They noted that further extension of these regulatory measures will depend on evolving macroeconomic conditions, and be done in consultation with other stakeholders. On the financial risks from banks’ offshore placement activities, the authorities acknowledged the inherent risks from large exchange rate swings and are actively monitoring banks’ foreign currency exposure continuously. On broader financial policies, the BDCB has put in place regulatory and supervisory framework for domestic systemically important financial institutions. The authorities also indicated that the development of a holistic macroprudential policy framework remains in progress. The authorities considered that the Currency Interchangeability Agreement has been mutually beneficial for both Brunei and Singapore, which reflects both countries’ underlying economic fundamentals, such as the strong external balance position, which in turn enabled both countries to benefit from stronger trade and investment linkages.

C. Promoting Private Sector Developments and Fostering Economic Transformation

32. The recent initiatives to increase private sector employment are welcome. Private sector employment has grown steadily to about 147,000 in 2019 from 101,000 in 2014, but mainly in low value-added services such as wholesale and retail, and hotel and food. In addition, duality remains high—local workers accounted for 97.5 percent of public employment but only 50.7 percent of private jobs in 2019—as does youth unemployment. To address these challenges, the authorities have developed several initiatives including recently the JobCentre Brunei for job matching, the Institute of Brunei Technical Education, the Politeknik Brunei and the I-Ready Apprenticeship program for job seekers training, the Lifelong Learning Center and the SkillsPlus Program for upskilling and reskilling. They have also introduced a salary guideline for selected job positions to address low pay in the private sector. In particular, the Manpower Planning and Employment Council has integrated and coordinated the efforts in the government and the private sector. Moreover, the Manpower Industry Steering Committee has played the role of collaborative platform between industries, regulator and training agencies, identifying employment demand, developing the competency framework, and reducing skill mismatch in the labor market.

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Brunei Darussalam: Change in Employment

(From 2014 to 2019)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Source: Brunei authorities.

33. Productivity could be boosted by upgrading innovative competency and human capital. Stagnant productivity is holding back potential growth. Enhancing productivity through state-of-the art technology and innovation and boosting human capital are priorities in the FY2021/22 budget. However, R&D expenditure, at 0.3 percent of GDP in 2018, lags that in peers. Further expanding public R&D investment, building incentive system to boost R&D in the private sector and fostering cooperation between the academic and the business sectors are important steps to enhance productivity. Brunei has made significant efforts on human capital development but there is still room to improve in tertiary education—tertiary enrolment is inferior to peers and biased to females (1.4 times larger than for males).

uA001fig06

Brunei Darussalam: Productivity

(In thousands of BND)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Sources: Brunei authorities, IMF staff estimates and calculations.

34. Digitalization—accelerated by the Digital Economy Masterplan 2025—would contribute to diversification. The Masterplan was initiated for a “smart nation” in line with a national vision of Wawasan Brunei 2035 and lists 25 projects to be implemented over five years, covering the public transport information system, a national business service platform, school network infrastructure, a halal certification system, as well as three flagship projects of digital ID, digital payment and national information hub as the backbone of the digital ecosystem. Institutions for personal data protection, cyber security and e-commerce have also been established. To maximize the payoff of the Masterplan, the ICT industry should be further developed, expanding the young and tech-savvy workforce.

35. Efforts to attract and diversify Foreign Direct Investment (FDI) could be enhanced. The FDI Action and Support Center (FAST) established in 2015 has facilitated FDI by streamlining regulation and business environment issues with relevant agencies. The FDI of BND669 million (3.8 percent of GDP) annually during 2018–20 has been attracted and concentrated in the manufacturing sector including mega-projects of Hengyi industries (2017–20, USD3.4 billion) and Brunei Fertilizer Industries (2017–21, USD1.3 billion). Foreign workers who take a substantial part in the initial stage of FDI will be replaced gradually with local employees according to the plan agreed with investors. Further efforts are needed to attract quality FDI—by improving the business climate and upgrading FDI incentives—and diversify FDI across industries to increase inter-sector positive spillovers.

36. The unveiling of the Economic Blueprint is welcome. The Blueprint will align policies to further accelerate economic diversification efforts, advance private sector development, and foster a green and digital economy. It comes at an important time as the economy is emerging from the effects of the pandemic and will serve as a guide for the formulation of Industrial Roadmaps and Key Sector Masterplans in priority areas as engines of growth. The Blueprint’s emphasis on human capital development and further expansion of trade linkages—such as participation in the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—is welcome. The commitment to green investment and infrastructure is appropriate.

37. Brunei Darussalam National Climate Change Policy (BNCCP) would contribute to economic and environmental sustainability. The authorities ratified the Paris Agreement in 2016. In 2020, they launched the BNCCP and submitted—on December 31st—their Nationally Determined Contribution to the United Nations Framework Convention on Climate Change, with the aim of reducing by 20 percent the amount of greenhouse gas emission relative to business as usual by 2030. The authorities are further developing a detailed medium-term plan to achieve the emission objective, including carbon pricing strategies. The shift to a low carbon economy would offer green growth and job opportunities. At the same time, targeted transfers are needed to compensate households, workers, and firms that are particularly affected by the higher energy prices. Complementary policies would be also needed to ensure that potential impacts from the implementation of the BNCCP and other low carbon policies on existing employment would be mitigated, including through opportunities for reskilling and upskilling for green jobs.

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Strategies for Brunei’s National Climate Change Policy

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Source: Brunei Authorities.

Authorities’ Views

38. The authorities underscored the progress towards diversifying the economy and strengthening spillovers of FDI. The COVID-19 crisis provides an opportunity to foster change and step on diversification, digitalization, private sector development and climate change. In January 2021, the authorities launched the Economic Blueprint, which acts as a guide for stakeholders to build on the country’s economic success through well-defined aspirations and policy directions, complementing the efforts to achieve Wawasan Brunei 2035’s Goal 3 (Dynamic and Sustainable Economy). To ensure the success towards this goal, the Macroeconomic Development Committee was formed as a platform to discuss the development of the country’s macroeconomic outcomes as well as to produce a holistic direction. The authorities emphasized the importance of FDI and agreed on diversifying FDI projects to maximize their spin-off effects. Cross-border trade/investment have been encouraged by expanding FTAs (such as the RCEP signed in 2020). Efforts have been made to secure fair competition in the market. Continuing corporatization, PPP and privatization have also facilitated the private sector growth, with SOEs playing a strategic role to further stimulate market development. The authorities agreed on the need to expand high value-added employment, emphasizing education and training for expert competency. A variety of initiatives such as JobCentre Brunei, I-Ready and SkillsPlus has been proceeded on the close cooperation between ministries and industries. The authorities underlined the importance of improving productivity through investment on education and infrastructure, while looking for policies to improve sectors with weak productivity. They welcomed future engagements with the IMF to enhance its sectoral productivity especially in the five priority clusters. The authorities have accelerated digitalization by launching the Digital Economy Masterplan 2025 with sizable investment of about BND74.6 million. The restructuring of the communication industry has contributed to heightening efficiency and lowering consumer burdens with competition being preserved by opening market participation to private companies. The authorities have also implemented the BNCCP launched in 2020, including a pilot program to promote electric vehicles with a target of 60 percent of total car sales in 2035.

D. Addressing Data Issues and Building Capacity

39. Recent improvements in data compilation and dissemination are welcome, but more could be done. Data provision continues to improve and is broadly adequate for surveillance, and the authorities’ commitment to international data standards and best practices are welcome. Staff continues to encourage the authorities to publish national accounts and balance of payments data in a timely manner, while ensuring their quality. The authorities have requested TA to strengthen their capacity on external sector data compilation. Phase 1 of the external sector STA mission has been concluded, providing useful insights into the challenges faced by the authorities and helpful advice, including steps to address the relatively large errors and omissions. Phase 2 of the STA mission is expected to take place this year. Working level officers across ministries/government agencies in Brunei could benefit from the learning opportunities offered by the Fund’s regional training institute (IMF-STI).

Authorities’ Views

40. The authorities remain committed to improving data compilation and dissemination and welcomes further TA from the IMF. Progress has been made in improving data compilation and the quality of data reporting. The authorities acknowledged the Fund’s expertise, and accordingly, expressed strong interest in further IMF TA. In this regard, they called for continuing engagement on these issues.

Staff Appraisal

41. Brunei Darussalam has weathered well the challenges caused by the COVID-19 crisis. The policy response has been strong and expeditious and the multi-year diversification and reforms are paying off at a time when most needed. The growth momentum seen in 2020 is expected to strengthen in 2021–22, reflecting important diversification efforts.

42. Continued fiscal support in the near term should be followed by longer-term fiscal reforms, including measures to reduce subsidies and promote intergenerational equity. Fiscal support should continue until the recovery from COVID-19 is put on a solid footing. Looking beyond the short term, staff recommends a resumption of fiscal consolidation, aimed at aligning the fiscal position with the level of sustainable long-term expenditure. This effort could include: (i) preservation of growth-enhancing spending, (ii) reform of the subsidy scheme, (iii) reduction in the wage gap between the public and private sector, and (iv) a broadening of the non-O&G tax base. Establishment of public investment management system would help put public finances on an efficient and stable basis. Corporatization, PPP and privatization would further help mitigate fiscal pressures and develop the private sector.

43. The authorities’ initiatives to diversity the economy, further attract FDI and improve private employment are commendable. Structural reforms aimed at economic diversification and private sector development should remain a focus. Policies should aim at diversifying FDI to boost its positive spillovers to the local economy, improving the business environment, upgrading the innovative competency, enhancing human capital and strengthening labor policies to provide more job opportunities with high value. In this perspective, the policy priorities of the recently released Economic Blueprint are appropriate. The authorities’ focus on digitalization and the climate change response should provide new opportunities for economic growth and resilience.

44. The peg to the Singapore dollar remains appropriate. The Currency Interchangeability Arrangement has been beneficial to Brunei. The framework provides a credible nominal anchor for macroeconomic and financial stability, and also helps to deepen trade and investment linkages, notably with Singapore.

45. While the financial system is sound, financial supervision should remain vigilant. Continuing volatility in global oil prices calls for careful monitoring of financial risks of the banking system. The initiatives to enhance overall risk-based supervision through an early warning exercise, to introduce the Basel III framework, and to develop a holistic macroprudential framework are positive developments in this direction. To safeguard financial integrity, staff also notes the recent legislative changes aimed at strengthening the AML/CFT regulatory and supervisory framework and look forward to the next stage of the Asia Pacific Group on Money Laundering (APG) Mutual Evaluation.

46. Due primarily to falling exports and the pandemic-induced decline in oil prices, Brunei’s external position in 2020 is assessed to be substantially weaker than the level implied by medium-level fundamentals and desirable policies. Looking ahead, the current account surplus is projected to rebound over the medium term in line with the recovery in O&G production and prices. Ongoing diversification efforts in the downstream non-O&G sector are important and will help to strengthen the external position.

47. The steps taken to address data gaps are welcome. Staff commends the commitment by the authorities to further improve data compilation and reporting and welcomes the authorities’ plan to leverage the IMF for future TA and training needs.

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

Implications of Oil and Gas Price Developments for the Outlook

Renewed spikes of global uncertainty concerning O&G prices would likely put a break on the recovery in economic activity. Staff analysis suggests that a one standard deviation increase in global oil prices uncertainty—as occurred, for example, in 2014–2016—would lower output by close to 2 percent over a four-year period. In a downside risk scenario in which O&G prices fall back to the lowest level observed at the height of the global lockdown recession in Q2 2020, i.e. oil price at US$29.34/barrel, and gas price at US$2.8/MMBTU, and assuming these low prices are sustained until 2026, the impact on macroeconomic balances will be significant. In this tail risk scenario, relative to the baseline, the fiscal deficit is projected to widen by 11 percentage points of GDP on average, over 2021–26. The current account would shift to a deficit of 2 percent of GDP on average, over 2021–26. In an upside risk scenario with sustained strong oil and gas prices, i.e. oil price at US$70/barrel and gas price at US$9/MMBTU, the improvement in fiscal deficit and the current account will be around 50 percent and 70 percent, respectively, compared to the baseline, on average over 2021–26.

uA001fig08

Brunei: GDP response to Oil Price Uncertainty

(Cumulative change in real GDP growth in response to 1 std. dev. shock to oil price uncertainty; in percent)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Note: Figure depicts values obtained from a VAR(3) model’s cumulative orthagonalized IRF.Sources: Brunei Dept. Economic Planning & Development; Ahir, H., N. Bloom, and D. Furceri. 2018. “World Uncertainty Index,” Unpublished; and IMF Staff Calculations.
uA001fig09

Overall Fiscal Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Sources: IMF staff estimates.Notes: Under the baseline scenario, O&G prices are based on the global assumptions in the World Economic Outlook April 2021 vintage, where Brunei oil price is assumed to be USD64.2/barrel and gas price at 5.84 per million metric British thermal unit (MMBTU). Downside risks to O&G prices refer to a scenario in which prices fall back to the lowest level observed at the height of the global lockdown recession in Q2 2020 (i.e. oil price at USD29.34/barrel and gas price at USD2.8/MMBTU. Upside risks to O&G prices refer to the scenario in oil price stays at USD70/barrel and gas price at USD9/MMBTU.
uA001fig10

Total Revenue

(in percent of GDP)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

uA001fig11

Current Account Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 1.
Figure 1.

Brunei Darussalam: Real and Fiscal Indicators

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 2.
Figure 2.

Brunei Darussalam: External and Financial Indicators

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 3.
Figure 3.

Brunei Darussalam: Fiscal Indicators in Comparison with GCC Countries

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 4.
Figure 4.

Brunei Darussalam: Financial Stability Indicators

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 5.
Figure 5.

Brunei Darussalam: Labor Market

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Figure 6.
Figure 6.

Brunei Darussalam: Governance and Competitiveness

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Note: WGI is a perception-based indicator, summarizing views of enterprises, citizens and expert survey respondents on the quality of governance in a country. The WEF’s Global Competitiveness Index combines both official data and survey responses from business executives on several dimensions of competitiveness.
Figure 7.
Figure 7.

Brunei Darussalam: COVID-19

Citation: IMF Staff Country Reports 2021, 214; 10.5089/9781513597102.002.A001

Table 1.

Brunei Darussalam: Selected Economic and Financial Indicators, 2016–26

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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 Brunei Darussalam Central Bank, SDR holdings, and reserve position in the Fund.

Table 2.

Brunei Darussalam: Budgetary Central Government Developments, 2016/17–2026/27 1/

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Source: Data provided by the Brunei authorities and Fund staff estimates, and projections.

GFSM 19S& Presentation (cash-based); fiscal year ends March 31.

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

Table 3.

Brunei Darussalam: Balance of Payments, 2016–26 1/

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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.

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

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

Table 4.

Brunei Darussalam: Monetary Developments, 2016–26

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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: Indicators of Vulnerability, 2016–26

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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.