Brunei Darussalam: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Asia and Pacific Dept
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Publication Date:
16 Sep 2022
eISBN:
9798400219085
ISBN:
9798400219085
Language:
English
Keywords:
public finance; credit growth; Oil and gas GDP; Brunei authorities; ITU ICT price basket; Fiscal stance; COVID-19; Fiscal consolidation; Global
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1. New COVID-19 waves significantly affected the Brunei economy. The country was hit by the Delta variant in August 2021 and then by the Omicron variant in 2022, with new COVID cases increasing substantially in February 2022. New cases have declined since March, to 535 cases per million people as of end-May 2022 (see Annex 1). The authorities reintroduced partial lockdowns in August 2021, which negatively affected wholesale and retail trade activity in 2021Q3 (-4.3 percent decline y/y). The removal of many restrictions from mid-November and strong progress in vaccination have contributed to stronger activity in the contact-intensive sectors in Q4 (the service sector grew 2.1 percent y/y) and improved business sentiment. Brunei’s Business Sentiment Index remained above 50 (the threshold indicating economic expansion) in April 2022.

Abstract

1. New COVID-19 waves significantly affected the Brunei economy. The country was hit by the Delta variant in August 2021 and then by the Omicron variant in 2022, with new COVID cases increasing substantially in February 2022. New cases have declined since March, to 535 cases per million people as of end-May 2022 (see Annex 1). The authorities reintroduced partial lockdowns in August 2021, which negatively affected wholesale and retail trade activity in 2021Q3 (-4.3 percent decline y/y). The removal of many restrictions from mid-November and strong progress in vaccination have contributed to stronger activity in the contact-intensive sectors in Q4 (the service sector grew 2.1 percent y/y) and improved business sentiment. Brunei’s Business Sentiment Index remained above 50 (the threshold indicating economic expansion) in April 2022.

Context and Recent Developments

1. New COVID-19 waves significantly affected the Brunei economy. The country was hit by the Delta variant in August 2021 and then by the Omicron variant in 2022, with new COVID cases increasing substantially in February 2022. New cases have declined since March, to 535 cases per million people as of end-May 2022 (see Annex 1). The authorities reintroduced partial lockdowns in August 2021, which negatively affected wholesale and retail trade activity in 2021Q3 (-4.3 percent decline y/y). The removal of many restrictions from mid-November and strong progress in vaccination have contributed to stronger activity in the contact-intensive sectors in Q4 (the service sector grew 2.1 percent y/y) and improved business sentiment. Brunei’s Business Sentiment Index remained above 50 (the threshold indicating economic expansion) in April 2022.

2. Reduced activities in mining and (liquified natural gas) LNG manufacturing have affected economic performance. Oil and gas (O&G) mining sector production continued its downtrend since 2020—as work stoppage occurred due to maintenance and COVID-19 restrictions— declining by 3 percent y/y in 2021. Similarly, LNG manufacturing declined by 10.6 percent y/y, largely due to the diversion of gas supply to other downstream activities. Meanwhile, activity in the downstream non-O&G sector declined slightly in 2021, following the exceptional growth (324 percent y/y) recorded in 2020.

Contributions to Real GDP Growth

(In y-o-y percentage points)

article image

3. Agriculture and non-O&G manufacturing rebounded strongly in 2021. On the back of diversification efforts, the agricultural, forestry and fishery sector activity increased by 16.9 percent y/y in 2021, due to the strong expansion of the livestock subsector and subsectors under fisheries. After the sharp contraction in 2020, some non-O&G manufacturing sectors, such as textile, saw strong rebound. Despite the encouraging diversification trend in recent years, the share of agriculture and non-O&G manufacturing (excluding downstream activities) in total GDP remains small at around 2 percent. As a result, GDP contracted by 1.6 percent in 2021.

uA000fig03

Total Sales of Retail and Food Services

(In BND mn)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

4. The resurgence of COVID-19 and weaker demand have negatively affected the labor market. While hires of local residents have declined by 4.4 percent in 2021-based on administrative data-the authorities have strengthened measures to support job matching (through the JobCentre Brunei) and job training (through the I-Ready Apprenticeship program). The decline in recruitment has been stronger for vulnerable workers—such as young and less educated—and in sectors such as wholesale and retail trade and professional and technical activities.

5. Inflation has increased since the pandemic due to higher food and fuel prices. The new COVID-19 waves coincided with renewed increases in inflation, after subsiding in early 2021. The CPI inflation reached 3.8 percent by March 2022. The increase is mainly driven by higher food prices (3.8 percent growth y/y), as well as higher transport costs associated with higher airfares and supply chain disruptions (6 percent growth y/y).

6. The fiscal deficit has declined to 4.6 percent of GDP in FY2021/22 from 19.9 percent in FY2020/21. Revenue in FY2021/22 has significantly increased to BND4.7 billion from BND2.1 billion in FY2020/21, owing to the sharp rise of oil and LNG prices. While the expenditure-to-GDP ratio has declined following the sharp increase in O&G prices and nominal GDP, the level of expenditure has been expanded by about 7 percent (from BND5.3 billion in FY2020/21 to BND5.7 billion in FY2021/22) in response to COVID-19 developments (see Annex I). In particular, about BND182 million (0.9 percent of the GDP) has been used for containment measures such as testing laboratories, vaccines, isolation facilities, food supplies for people under quarantine and allowances for frontliners. The remaining spending increase was partly due to expenditure targeted to hard-hit households and businesses, including through discounts on corporate income tax, rents and utilities, deferment of pension contributions, payroll subsidies to affected micro, small and medium size enterprises (MSMEs) and financial assistance to local employees and self-employed whose employment and/or income was affected.

Text Table 1.

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.

7. The current account surplus remained stable in 2021. The current account surplus is estimated to have increased slightly from 4.5 percent of GDP in 2020 to 4.6 percent in 2021, owing to a pickup in exports in H2 2021. Non-O&G exports, including refinery and petrochemical products, exceeded O&G exports for the first time in 2021 to 54.9 percent of total exports, indicating encouraging progress in export diversification. Preliminary estimates for 2021 suggest the external position is substantially weaker than suggested by fundamentals and desirable policies (Appendix II).

8. The banking system appears to remain sound. The capital ratio is high, at over 20 percent of risk-weighted assets by the end of 2021. NPL ratio has declined from 4.7 percent in 2020 to 3.6 percent in 2021. Private sector credit growth picked up in the second half of 2020, likely reflecting increased economic activities post-Pandemic, but has dropped again in H2 2021 as the new COVID-19 variants affected the economy.

Outlook and Risks

9. The recovery is projected to strengthen in 2022-23 on the back of further lifting of COVID-19 restrictions, investment in large petrochemicals projects, and higher oil and gas prices. Economic activity in the non-tradable services sector is expected to strengthen in 2022, as domestic containment measures are further phased out, amid high vaccination rates (almost all the population is fully vaccinated with two doses and more than 60 percent has received a booster). The downstream activities in the non-O&G sector are expected to pick up, driven by the commencement of production of the Brunei Fertilizer Industries, investment in the Pulau Muara Besar (PMB) Phase II refinery and petrochemical complex, and expansion of the Muara Port. In the O&G sector, gas production is expected to remain broadly stable as the rejuvenation program of offshore facilities continue and new upstream projects come into production, but the significant increase in oil and gas prices will provide a positive terms-of-trade shock with positive spillovers to domestic demand through income and wealth effects. For 2022, growth is projected to rebound to 1.2 percent, and reach 3.5 percent over the medium term as new oil production capacities come online.1 With continued diversification, the share of non-O&G is projected to rise further to 54 percent of GDP by 2027.

10. The labor market is expected to pick up in 2022 as the economy recovers and travel restrictions are lifted. Businesses intend to hire more employees, as suggested by the May reading of the employment sub-indicator of the Business Sentiment Index. Easing border control will help boost employment of the non-local labor force. However, structural problems including shortage of high-skilled workers and frequent turnovers of local employees may continue to persist in the short term.

11. Inflationary pressure is expected to persist. Global supply chain disruptions due to the pandemic have proven persistent so far and are expected to continue throughout 2022. The war in Ukraine further adds to supply pressures in key commodities, which will likely result in higher import prices, especially food. The COVID lockdown measures increased consumer spending in domestic markets, which also contributed to higher inflation. For 2022, headline inflation is projected at 2.5 percent. In the short term, domestic subsidies may alleviate the impact of higher prices on lower income populations and consumer demand. Over the medium term, inflation pressure associated with higher import prices is expected to subside as supply chain bottlenecks are resolved overtime.

12. Higher energy prices are expected to lead to a fiscal surplus of 1.0 percent of GDP in FY2022/23. The expenditure-to-GDP ratio, after declining in FY2022/23 because of higher nominal GDP, is expected to stay at about 23 percent. Despite the increase in O&G production, revenues from FY2023/24 are projected to decline in tandem with falling energy prices. As a result, the fiscal balance is projected to return into deficit in FY2023/24. In the absence of substantial fiscal consolidation measures, the fiscal deficit is expected to increase to 3.1 percent of GDP in FY2027/28.

13. The current account surplus is projected to increase in 2022-23. Strong growth in O&G prices is expected to boost exports in the near term despite negative growth in oil production volume, while FDI-related import growth is projected to decline. On the other hand, higher global prices and increased domestic demand due to economic recovery would sustain import growth. Overall, the terms-of-trade growth is expected to be positive in 2022-23, leading to higher current account surplus (about 11 percent of GDP), before stabilizing to about 15 percent of GDP in 2027. Taking into account the SDR allocation of about US$650 billion in 2021 (of which Brunei’s allocation was US$412 million), Brunei’s reserves (excluding gold) stood at around 210 percent of the Fund’s assessing reserves adequacy (ARA) composite metric in 2021. The entire SDR allocation is currently saved as reserves.

14. Risks are tilted to the downside. Outbreak of lethal and highly contagious COVID variants may disrupt the recovery through extended supply chain disruption and a reassessment of growth prospects. Persistently higher worldwide inflation may hurt global demand, including for energy. Monetary tightening from the US and major central banks could result in a tightening of global financial conditions. Abrupt growth slowdown in China could further weigh on global demand and reduce commodity prices. An escalation of the war in Ukraine could add to global uncertainty. Unexpected changes in energy production and delays in large-scale FDI are additional risks. On the upside, persistently higher energy prices would further improve the terms of trade with positive income and wealth effects on domestic demand (see Annex III).

Authorities’ Views

15. The authorities agree with the challenges to the near-term outlook. They expect the economy to grow by 0.4-0.8 percent in 2022, mostly driven by the growth in agriculture and the rebound in services. They prefer staying conservative in projecting the positive impact of the terms of trade shock, as the high oil prices may not last. In addition, they see the income/wealth effect from commodity price increases to be limited. In their view, the near-term growth outlook is also constrained by the ongoing maintenance activities in the O&G sector and the potential production delay in the new fertilizer sector. Though they see it as a positive upside risk if the rejuvenation program can be rescheduled to increase O&G production in the short term. Regarding inflation, they concur with the assessment that inflation from higher food prices and supply-chain bottlenecks may persist longer than expected, and are actively working towards ensuring food security, including by supporting the expansion of domestic food production. The authorities’ outlook for the medium term remains positive, as they expect the various diversification efforts and continued investments in the O&G downstream sectors to bear fruits over time and improve the sustainability of growth.

Economic Policies

The high uncertainty about the path of the pandemic and the global economic outlook poses major headwinds for Brunei. While higher energy prices are providing a short-term boost to economic activity, structurally-low productivity in the non-O&G sector is weighing on medium-term potential growth and job creation. The macroeconomic policy mix should continue to support the economy until the output gap is closed and the recovery is entrenched, while strengthening resilience and promoting economic diversification in the longer term. In the short term, Brunei’s ample fiscal reserves with virtually no public debt should be leveraged to sustain the recovery in private demand. In the medium term, fiscal policy should normalize, and high energy prices are an opportunity to restore fiscal space and advance the implementation of measures to strengthen fiscal sustainability, rebalance external position and improve intergenerational equity . A reform push to foster export diversification and attract higher value-added FDI would boost medium-term growth. Accelerating digital and green growth will be critical to foster resilience.

A. Protecting Long-Term Fiscal Sustainability While Enhancing Economic Recovery

16. While targeted fiscal support is needed to support the recovery until there is economic slack, exit plans to foster resilience should be prepared. Fiscal support remains critical in the near term to alleviate households and firms affected by the pandemic and containment measures. Targeted fiscal support is also key to mitigate the impact of the recent rise in international food prices on those most vulnerable. Looking ahead, fiscal policy should normalize, and support be geared towards achieving reallocation of resources to new dynamic (green and digital) sectors.

17. High energy prices are an opportunity to restore fiscal space and advance the implementation of measures to improve fiscal sustainability and intergenerational equity in the longer term. The government had made good progress in fiscal consolidation before the COVID-19 pandemic. But the unprecedented fiscal measures deployed to address the health crisis and prevent scarring have resulted in a deterioration of the fiscal balance. The current high energy prices provide an opportunity to restore fiscal positions and enable the government to adjust public finance, limiting the negative growth impact. The gap between baseline expenditure and sustainable long-term expenditure-under the permanent income hypothesis (PIH) used for oil-exporting countries frequently-is projected at about 3.1 percent of non-O&G GDP (1.8 percent of GDP) in 2027 and requires sustained medium-term fiscal consolidation including through cutting inefficient spending and expanding revenue base delinked from the O&G sector.

Fiscal Consolidation

18. Fiscal consolidation efforts have been intensified in the FY2022/23 budget. According to the FY2022/23 budget, the authorities have reduced expenditure by 2.7 percent (from BND5.86 billion to BND5.70 billion) mostly on the account of significant capital spending cuts—about 41.7 percent (from BND0.60 billion to BND0.35 billion). In this regard, while the reduction in expenditure is consistent with fiscal consolidation efforts, it would be important to preserve and expand capital spending going forward to foster physical and human capital accumulation and facilitate diversification. Furthermore, capital expenditure in the budget should be executed without delay. A performance assessment of the 3-years consolidation program launched in FY2020/21 would help identify areas of improvements.

19. Containing employment and wages in the public sector would help improve fiscal positions and develop the private sector. The authorities have made substantial progress to curb public employment by tightening temporary public jobs. However, public wages have been much higher than the average income and have exceeded 30 percent of the government expenditure since FY2015/16.2 Policies to improve public sector productivity and service quality remain a priority.

20. Untargeted subsidies and social spending need to be reformed to improve equity and long-term sustainability. The authorities have provided strong social safety nets and a variety of services such as pension, health care, education, housing, and subsidies (on fuel, electricity, water, etc.) to the entire population. A comprehensive reform of the social expenditure system would improve efficiency, equity and sustainability. First, policy effect should be maximized under limited fiscal resources by targeting assistance to the most vulnerable, streamlining redundant assistances and bolstering coordination among fragmented agencies. The authorities’ recent initiatives, such as the digitalized National Welfare System and the MoFE’s incorporation of subsidies data across line ministries, are important steps to improve cost-effectiveness. Second, the level of assistance should be appropriate to prevent over-consumption in energy and reduce inefficient resource allocations. Third, some non-essential social spending services could be transformed into contributory schemes. A new pension scheme to increase employer’s contribution rate will be implemented in 2023 and is a good step to expand pension benefits and stabilize future pension payments.

21. Revenue mobilization would reduce dependence on O&G sector and volatility of public finance. The authorities plan to expand excise taxes on goods with negative health and environmental externalities. The tax system should be broadened in line with non-O&G sector development, including through a recalibration of property tax and the adoption of goods and services taxes (GSTs) and a carbon tax. Active assets management on government lands and buildings would also increase fiscal revenue.

22. Active implementation of privatization and Public-Private-Partnership (PPP) and better performances in Government-Linked Companies (GLCs) would improve the fiscal position and promote economic growth. The authorities have promoted corporatization and PPP to improve fiscal management and develop the private sector, while identifying new projects especially in utilities and transportations. Darussalam Assets-a private-limited company owned by the government since 2012-and Strategic Development Capital (SDC) Fund -a governmental investment fund for economic development-have managed 52 GLCs.3 However, information on financial performances and dividends in Darussalam Assets, SDC Fund and GLCs is not publicly available. Improved performances of GLCs would increase investment returns and fiscal revenues. Furthermore, privatization of some GLCs would help reduce barriers to entry, develop the private sector, and provide additional fiscal revenues.

23. Sustained fiscal consolidation would contribute to build buffers needed to ensure stronger intergenerational equity. Substantial reforms of fuel subsidies, public wages and wide-scale revenue mobilization would lead to fiscal saving of about 5.5 percent of GDP in the medium term (the adjustment scenario). Such an improvement in the fiscal balance would help bridge the gap between currently projected expenditure and sustainable long-term expenditure. The remaining gap could be closed by accelerating reforms on social spending and other subsidies on housing, electricity, water, and food, streamlining inefficient spending, and promoting corporatization and privatization. Sustained fiscal consolidation will also help rebalance the external position.

Text Table

Brunei Darussalam: Medium-Term Fiscal Balances under Different Scenarios

article image
Source: IMF Staff calculations

Policy adjustments relative to the baseline: wage containment (0.2 percent of GDP), revenue mobilization (0.1 percent of GDP), and fuel subsidy reform (1.2 percent of GDP) gradually from 2023/24 to 2027/28.

Public Finance Management

24. The full implementation of the Medium-Term Fiscal Framework (MTFF) and a contingency plan for energy price disruptions would help stabilize public finances. While medium-term economic projections have been used for annual budgeting purposes, the implementation of the MTFF remains still in the early stage and more progress is needed to better prioritize expenditure in the medium term. The preparation process of the 12th national development plan (2023-2027) could be a valuable opportunity to incorporate the national strategy into the MTFF. The adoption of a fiscal rule—such as a non-hydrocarbon primary balance-to non-hydrocarbon GDP target—and contingency plans identifying revenue and expenditure measures that could be taken in the event of a sharp drop in energy prices would help reduce fiscal procyclicality.

25. Advanced fiscal management in public investment and digitalization would improve efficiency. Improving public investment management including through implementing the Public Investment Management Assessment framework (PIMA) and installing digitalized tools such as the application of Treasury Single Account and Enterprise Resource Planning and extension of One Common Billing System would contribute to fiscal savings and public-sector productivity. The authorities have launched the One Common Portal to manage business obligations including registration and corporate tax filing at once. The “Financial Regulations” introduced in 2022 is expected to improve revenue collection and procurement in the government.4 In addition, the establishment of integrated public financial management system including a central government, extra budgetary funds, SOEs and a sovereign fund would improve fiscal efficiency, transparency and accountability.

Authorities’ Views

26. The authorities broadly agreed with the fiscal policy recommendations and emphasized their efforts in making public finance more efficient, while helping to develop the private sector. Fiscal support has played a significant role to help COVID-affected households and firms. The authorities plan to implement the fiscal consolidation program continuously, making the most of recent high energy prices for strengthening fiscal sustainability. The authorities expressed their commitment to containing subsidies even in the face of higher oil and food prices and abundant oil and gas revenues. It has been discussed among related agencies to adjust tariffs of electricity and water and consolidate subsidies data across the line-ministries through the Treasury Accounting and Financial Information System 2.0. The new national pension scheme will be implemented in 2023 and is expected to encourage local labor participation by safeguarding more pension benefits. The authorities have converted temporary public employees meeting specific requirements into permanent positions and abolished temporary positions, which would reduce personnel expenses in the public sector in the long term despite budget rise in FY2022/23. The launch of excise taxes on goods harmful to environment and health would help secure more fiscal resources. They expect that corporatization of government services, including in the electricity service sector, and improved management of government linked companies would support private sector development. The authorities have made progress in digitalization of public finance management by launching the One Common Portal and expanding services in One Common Billing System.

B. Safeguarding Financial Stability and Promoting Financial Deepening

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. This framework has been beneficial for macroeconomic stability and keeping inflation low. Additionally, the currency peg allows financial institutions in Brunei to benefit from Singapore’s deep financial markets given that excess liquidity in Brunei is largely re-invested in Singapore dollar assets. The peg also serves to bolster diversification efforts by helping to attract FDI.

uA000fig06

BDCB Overnight Standing Facilities Rates

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Source: BDCB

28. Monetary policy has been appropriately accommodative. The BDCB set up overnight standing facilities in 2018. Although the room for monetary policy actions is limited by the currency board arrangement, these facilities aim to improve liquidities in the inter-bank market. After the pandemic hit, the BDCB lowered its overnight liquidity provision rate three times from 1.75 to 1 percent. In addition, the BDCB allowed temporary flexibility on loan/financing classification for specific and targeted loan/financing facilities and waived fees and charges for online local interbank transfers to alleviate the pandemic impact. These regulatory notices are set to expire by end-June 2022. Persistent inflation pressures, tightening global financial conditions and higher short-term liquidity in the banking system due to positive export price shocks in the O&G sector calls for a gradual normalization of the monetary stance, while still providing adequate support to the recovering domestic economy. In recent months the standing facilities rates have appropriately increased, in response to higher inflation outlook and monetary tightening measures by the Monetary Authority of Singapore.

29. The financial sector remains sound. After slight uptick at the end of 2020, likely due to the impact of initial pandemic shock, NPL ratio has dropped and stays low. Capital adequacy ratio, at around 20 percent, is well above the statuary requirement of 10 percent. Banking sector balance sheets have continued to expand throughout the pandemic period, increasing by 5.8 percent y/y in 2021, with the growth of bank assets largely placed in offshore investments. Bank credit grew 4.6 percent in 2021, with corporate loans leading the growth. Bank liquidity ratios remain high, but have dropped significantly, from close to 140 percent of short-term liabilities a decade ago to 80 percent at end-2021, indicating a gradual shift towards loans in banks’ asset composition, as well as increases in deposits.

30. Private sector credit remains low relative to peers. Credit to the private sector, at around 40 percent of GDP, is low by regional standard and compared to other O&G intensive economies such as the Gulf Cooperation Council (GCC) countries. This is in line with the relatively low level of economic diversification in the private sector activities. Holistic approaches to support non-O&G private sector development, including through strengthening the credit provision to Micro, Small and Medium size Enterprises (MSMEs), could help enhance the country’s long-term growth potential.

31. Meaningful progress is being made to foster financial sector development and safeguard financial integrity. As part of its effort to leverage digital technology in banking, The BDCB has added a licensing module to its Centralized Statistical System (CSS), which enables the automation of both new applications and renewal of licenses to be issued by the BDCB. The BDCB has also refined the existing public disclosure requirements of banks by issuing a regulatory notice on Pillar 3—Public Disclosure Requirements, with the goal to improve banking sector transparency. The authorities have continued to strengthen the AML/CFT legal and regulatory framework. The amendments to the Anti-Terrorism Order and Anti-Terrorism (Terrorist Financing) Regulations are expected to be completed in 2022, while the Counter Proliferation Financing Order is also being finalized. The BDCB is also in the process of issuing guidelines on E-KYC to facilitate non-face-to-face customer onboarding and due diligence. Effective implementation of the AML/CFT framework, including AML/CFT risk-based supervision, will be critical to ensure an effective AML/CFT regime. Brunei’s Mutual Evaluation process by the Asia Pacific Group on Money Laundering (APG) has commenced, pending the rescheduling of the on-site visit which has been postponed due to COVID-19.

Authorities’ Views

32. The authorities concur with the need to retire the COVID relief measures in the financial sector. Currently only 2 percent of bank loans are using the repayment deferment measure. The authorities think the economy is ready for these measures to be removed. They are committed to safeguarding financial sector stability, and plan to implement the liquidity standard of Basel III agreement in 2022. They found the recent Fund capacity development on macro stress testing useful and are in the process of determining the data collection needs for the stress test model. Regarding AML/CFT, they emphasized that the pandemic resulted in the shift of AML/CFT supervision towards offsite examinations. A total of 27 supervisory letters were issued in 2021, which highlighted concerns and deficiencies that were identified through the offsite reviews. As for financial development, they agree with the need to increase credit to the private sector. But they emphasized that there have been long standing efforts to encourage banks to channel credit for the business sectors and in providing the infrastructures. They pointed out that credit to the corporate sector has increased by over 10 percent in 2021, and is now over 50 percent of private sector lending, which is consistent with the initiatives made by the BDCB to encourage banks to diversify its lending activities to productive sectors such as corporates and MSMEs. They expect corporate loans to continue increasing with the development of new downstream industries and financing needs from the government-linked companies. On monetary policy, the authorities are happy with the current progress of issuing BDCB I-bills and having them serve as collaterals for the overnight lending facilities in addition to the Brunei Government Sukuk. They see the overnight facilities as serving a useful role in supporting liquidity and stability of the domestic banking system, and the I-bills as a great complement at the short-end of the yield curve to the government bond issuance.

C. Structural Reforms to Support Post-Pandemic Growth and Diversification

33. A more diversified and balanced export structure would support growth and employment, while reducing macroeconomic volatility. Progress in diversification has been made in recent years with the emergence of refinery and petrochemical and fertilizer sectors and the expansion of agricultural exports. Still, exports in Brunei continue to be highly concentrated in the O&G sector. The number of export products with high revealed comparative advantage (RCA) and the alignment between realized export structure and latent comparative advantages have both lagged those of the Gulf Cooperation Council economies. Staff analysis, based on a machine learning algorithm based on collaborative filtering, identifies chemical products, machineries and food as promising sectors with diversification potential for Brunei (see Annex IV for details). Identifying policies that could facilitate the development of these and other export sectors could be a useful step towards more diversification, and thereby foster growth and macroeconomic stability. Staff estimates suggest that a significant diversification push could increase Brunei medium-term growth by over 1.5 percentage points, while reducing growth volatility by 0.5 percentage point (see Annex IV).

uA000fig07

Share of Non-O&G Sector in GDP, Constant Prices

(In percent)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

34. Investments in human capital and infrastructure are key for sustainable growth. Brunei’s growing and relatively young population compared to other high-income countries provides a good demographic basis for medium-term growth. However, the development of human capital and infrastructure would be crucial for realizing the growth potential. Developing a diversified industrial base and supporting diversification through higher value-added service exports both require relatively high human capital inputs.

uA000fig08

PISA Scores

(2018 data)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Source: OECD; PISA 2018 Database

35. Improvements in business environment should be sustained with the goal of attracting more foreign investments into the non-O&G sectors. The continued improvement of Brunei’s ranking in the Global Competitiveness Index over recent years is encouraging. Further efforts to attract quality FDIs in support of further diversification of the economy are welcome.5

36. Developing MSMEs would contribute to diversifying the economy, boosting productivity and creating job opportunities. The MoFE and Darussalam Enterprise (DARe)-the national agency for MSME-have implemented diverse initiatives to develop MSMEs including the bootcamps to create 276 start-ups with 825 job opportunities. However, most MSMEs are still in an early stage of development. Comprehensive policy packages to remove distortions for MSMEs to grow, including through facilitating access to financial resources, simplifying and lowering entry costs, supplying capable workforce, expanding market access and promoting innovation and digitalization, with improved government assistance system are essential to make MSMEs a driver for economic growth (see Annex V for details). The authorities’ digitalization of business registration and preparation of comprehensive MSME policy would expand MSMEs’ access to government assistance.

37. Digitalization accelerated by the pandemic would enhance productivity in the economy. The authorities are implementing various digitalization initiatives, including implementing the Digital Economy Masterplan 2025 for construction of digital platforms, launching the new Personal Data Protection Law for the private organizations, and reducing communication costs. Investing in digital infrastructure-given relatively high cost but low speed of data usage-and building digital platforms, such as a digital payment hub, are key for rapid digitalization. Policy supports should also be provided for the digital transition of firms, such as by offering financial benefits and training programs for digital technology adoption, and nurturing tech-savvy workforce.

uA000fig09

Data Usage Price Among Countries with Similar Per Capita Income

(Percent of GNI per capita, 2020)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Mobile Data 2GB and Voice 140 Minutes.Source: ITU ICT Price Baskets.

38. The Brunei Darussalam National Climate Change Policy (BNCCP) should be implemented without delay to meet the Nationally Determined Contribution (NDC) target. The BNCCP with 10 strategies was launched in 2020 with the NDC to reduce the greenhouse gas emission by 20 percent relative to business as usual by 2030. Prompt implementation of the BNCCP is a priority given more volatile climate and agile responses of peers, including by mainstreaming climate-related projects into the fiscal framework explicitly. Significant progress has been made against the 10 strategies of BNCCP and most of the 2021 target set by the authorities have been met. The authorities have taken steps such as introducing a Standards and Labelling Order for energy efficiency, launching a pilot program for electric vehicles and joining global efforts in 2021.6 Discussion on an institutional framework for carbon trading and carbon pricing and policies on Zero Routine Flaring and As Low As Reasonably Practicable to reduce emissions from industrial sector will be made by end of 2022. Expediting fuel subsidy reform would also help mitigate climate change and relieve fiscal burden. Despite increased natural disaster risks, Brunei has been assessed as “low adaptive capacity” compared to countries with similar income per capita, due to the lack of adequate disaster preparedness, vulnerabilities in the agricultural sector, and low scores on governance and business environment.7 Developing the National Adaptation Plan and investing in climate resilient projects would yield high returns by reducing the costs associated with natural disasters and helping disaster-recovery. The Climate module of the IMF PIMA is recommended to identify potential improvements in institutions and processes to build low-carbon and climate-proof infrastructure. The shift to a low carbon economy would offer green growth and job opportunities through green investment, expansion of renewable energy including solar photovoltaics and construction of climate resilient infrastructure. At the same time, targeted transfers are needed to compensate households, workers, and firms that are affected by higher energy prices.

Text Table

Brunei Darussalam: Roadmap for Brunei’s National Climate Change Policy 1/

article image

The BNCCP will be implemented by 2035 with mid-term reviews and improvements.

Source: Brunei Authorities.

Authorities’ Views

39. The authorities concur with the need for export diversification. They emphasized that much progress has been made in this regard in the last few years, including through attracting large FDIs in the oil refinery sector and increasing investments in strategic industries such as agriculture and O&G downstream sectors. They expect the government-linked companies to play a large role in spearheading investments in strategic sectors. They also point out that their continued efforts in participating in regional economic integration, including the Regional Comprehensive Economic Partnership (RCEP) agreement that came into force this year and the new Indo-Pacific Economic Framework, should help providing new market access and investment opportunities for entrepreneurs and industries in Brunei. The authorities acknowledged the importance of human capital development to support diversification. They are implanting various programs, such as the i-Ready apprenticeship program and SkillsPlus program, to upskill and reskill the workforce and to adapt to the evolving demand of private sector employers. Drive towards developing local talent pools are being implemented where company such as HengYi have collaborated with Universiti Brunei Darussalam (UBD), Politeknik Brunei and the Institute of Brunei Technical Education (IBTE) to conduct several education programs that will be able to provide additional specialized talent pool for the company.

40. The authorities agreed on the importance of MSME development for sustainable and inclusive growth. They are implementing various MSME support policies, such as facilitating access to financial resources and improving entrepreneurship skill training. Digitalization has been a policy priority, with projects such as the national information hub and continued increase in fixed broadband user rate. Initiatives to transition to a low carbon society have made good progress, such as the expansion of solar power capacity from 1.42MW in 2020 to 5.42MW in 2021.

D. Data Issues and Capacity Building

41. Progress in data compilation and dissemination and continued collaboration in capacity development are welcome. Data provision continues to improve and is broadly adequate for surveillance. The Brunei Darussalam Central Bank has been publishing the Business Sentiment Index since November 2021. Staff supports the authorities’ continuous efforts to follow international data standards and best practices. However, economic data including national accounts, balance of payment and labor force should be published in more timely manner with better quality. A capacity development mission from the Fund on external sector data compilation was concluded in July 2020. A mission on macro-stress testing took place in April 2022 and the PIMA mission schedule is under discussion.

Authorities’ Views

42. The authorities agreed that further progress in data compilation and dissemination is needed. While COVID-19 has impacted the release of statistics, they are committed to focus on the timeliness and strengthen collaborations with data sources agencies. The authorities welcomed the missions on macro-stress testing and PIMA. They called for continuing IMF engagement in recognition of the Fund’s expertise in capacity building.

Staff Appraisal

43. After being significantly affected by the new COVID-19 waves and reduced activity in the O&G sector, Brunei economy is poised to recover in 2022. Growth will be supported by high energy prices and reopening of the economy, while investments in downstream O&G sectors and agriculture lead to new export opportunities.

44. Targeted fiscal support measures remain important to sustain the economic recovery, while pandemic relief measures should be discontinued. Targeted fiscal support to the vulnerable should be provided until the recovery is solid and fiscal buffers should be restored under recent high energy prices. Looking beyond the short term, fiscal reforms should be implemented continuously to make public finance efficient and secure intergenerational equity. Staff therefore advocates increased fiscal consolidation to the level of sustainable long-term expenditure. This effort could include: (i) preservation of growth-enhancing spending, (ii) reform of untargeted subsidy and social spending, (iii) reduction in the wage gap between the public and private sectors, (iv) mobilization of revenues from the non-O&G sector, (v) active promotion of corporatization and PPP, and (vii) improvement of GLCs’ performances. Accelerated digitalization of fiscal activities should help improving efficiency.

45. Preliminary estimates for 2021 suggest the external position is substantially weaker than suggested by fundamentals and desirable policies. Wage containment measures for the public sector and fiscal consolidation would help rebalance the external position.

46. The recent efforts to diversify the economy are welcome and should continue. Compared to other large O&G exporters in the world, the Brunei economy is significantly less diversified. Expanding the export portfolio and increasing the alignment between the export structure and the country’s comparative advantages should help support growth and sustainability. In this regard, recent growth in downstream sectors, as well as in fertilizers and food industries are encouraging. Continued improvement in human capital development and digital infrastructure will facilitate the expansion of diverse industries and private sector led growth.

47. Credit to the private sector should be expanded in conjunction with diversification initiatives. Loan to deposit ratio of the banking sector is low while banks place significant amounts of liquidity overseas. Increasing private sector credit will allow more domestic savings to be deployed to support domestic economic development. In this regard, domestic financing options could be usefully explored to fund the investments in new industries that promote economic diversification, including through financing new projects by government linked companies and foreign investors. Efforts to strengthen financial sector supervision and stability should continue. Staff welcome the authorities’ commitment to implement the Basel III framework and improve stress testing.

48. The authorities have made efforts to improve data management. Continued commitment to improve data compilation and reporting is recommended and closer cooperation in capacity development with the Fund is welcome.

49. 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.

Real and Fiscal Indicators

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Figure 2.
Figure 2.

External and Financial Indicators

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Figure 3.
Figure 3.

Fiscal Indicators in Comparison with GCC Countries

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Figure 4.
Figure 4.

Financial Stability Indicators

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Figure 5.
Figure 5.

Labor Market

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Figure 6.
Figure 6.

Governance and Competitiveness

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Table 1.

Brunei Darussalam: Selected Economic and Financial Indicators, 2017–27

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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, 2017/18-2027/28 1/

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

GFSM 1986 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, 2017-27 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, 2017–27

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

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

Ratio of foreign exchange holding to currency.

Table 5.

Brunei Darussalam: Indicators of Vulnerability, 2017–27

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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.

Appendix I. COVID-19 Pandemic Recent Developments

1. Early and decisive interventions by the authorities allowed Brunei to successfully navigate the first wave of the pandemic in 2020. After first cases were detected in March 2020, the authorities took swift actions to contain virus spread. Daily press conference kept the public updated on COVID-19 developments. Border control and travel ban were imposed. A national steering committee was established to oversee containment measures. Hospital bed capacity in the National Isolation Center was increased quickly. Together with enhanced testing and contact tracing, government actions enabled early detection and treatment of cases.

2. However, Brunei was hit hard by Delta and Omicron variants in late 2021-2022. Case numbers went up in August 2021, subsided by December, re-surged in February 2022, and slowed down since March. Daily new cases dropped to around 1878 per million people by end of June 2022. Amid high-vaccination rates, fatality rates have been dropping steadily since the beginning of the pandemic, to 0.14 percent by end of June 2022.

3. Vaccination progressed strongly. Vaccination efforts began in April 2021. After an initial slow start, vaccine coverage increased quickly. As of end of June 2022, about 97 percent of the population are fully vaccinated and about 68 percent of the population has received a booster.

4. Social distancing measures have been tightened in response to the surge in cases. Containment measures were gradually lifted since Q3, 2020 as cases stabilized. But in response to the increase in cases in August 2021, the authorities tightened measures again, closing several public facilities and ordering schools to suspend on-site activities. Food establishments were limited to serve takeaway and delivery orders and public gathering cap was reduced to 30 people. Restrictions started to be gradually lifted since December 2021 as case numbers dropped and vaccination rates reached high levels. The government declared that Brunei would move to the endemic phase according to the National COVID-19 Recovery Framework, starting on December 15, 2022.

5. The government rolled-out sizeable economic reliefs to support firms and households affected by the pandemic. These include fiscal measures (effective April 1, 2020) to support micro, small and medium-sized enterprises (MSMEs) and self-employed groups in sectors such as tourism, hospitality, transport and restaurants, as well as deferment and restructuring of loans (effective April 1, 2020) for all sectors.1 To support the labor market and to limit the potential scarring effects from the pandemic, the government has provided free online training through Coursera and encouraging life-long learning through the Manpower Planning and Employment Council (see summary table for a comprehensive list of measures). The size of the COVID-19 containment measures package amounted to BND182 million (about 0.9 percent of GDP).

Table 1.

Summary of Policy Responses to COVID-19 Pandemic

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Figure 1.
Figure 1.

COVID-19

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Appendix II. External Sector Assessment1

Brunei’s external position in 2021 is assessed to be substantially weaker than the level implied by medium-level fundamentals and desirable policies. The current account surplus narrowed relative to 2020, due to slow growth in exports and robust imports. The current account surplus is projected to increase in 2022 owing to higher energy prices and stabilize over the medium term as downstream activities develop and the country’s export portfolio further diversifies. Ample international and fiscal reserves provide strong buffers against external shocks, while the peg to the Singapore dollar remains appropriate, serving as a credible nominal anchor. Wage containment measures for the public sector and fiscal consolidation could help rebalance the external position.

1. The current account surplus remained stable in 2021 and is projected to rebound over the medium term. Exports of goods declined for the first half of 2021 as maintenance activities interrupted O&G production and exports. But exports started recovering in Q3. Overall goods exports increased by 47 percent y/y in 2021. Imports were strong throughout 2021, increasing by over 58 percent y/y, led by crude material imports used as inputs for the O&G downstream sector. As a result, the current account surplus remained stable at 4.6 percent of GDP in 2021. The current account balance is expected to improve significantly in 2022 due to higher energy prices. Over the medium term, the CA surplus is projected to increase to around 14 percent of GDP on higher export proceeds from new FDI projects and greater export diversification.

2. The macro balance (EBA-Lite CA) approach suggests that the current account balance in 2021 is below its norm, due to the large temporary decline in exports. The EBA-Lite methodology for Brunei suggests that, after taking into account cyclical contributions and one-off COVID-19 pandemic adjustor, the adjusted current account is an estimated surplus of 8.7 percent of GDP in 2021.2 The estimated current account norm—that is, the level of the current account balance estimated based on underlying fundamentals—is of a surplus of 14.5 percent of GDP. Therefore, the current account gap—the deviation of observed current account from its norm—is -5.3 percent of GDP for 2021. The large current account gap mainly reflects the temporary impact of lower Q&G exports due to maintenance and higher FDI-related material imports. The remaining residual could potentially reflect structural impediments and country-specific factors not included in the model, such as the need to save for future generation. The analysis is subject to considerable uncertainties.

3. Capital flows into Brunei have been driven primarily by FDI flows, which saw a strong rebound since 2016. After a period of decline, inward FDI flows picked-up strongly from 2016, in tandem with the rollout of comprehensive reforms to bolster trade and investment. The robust activities in the downstream non-O&G sector are expected to support continuing expansion in this sector. Portfolio capital flows remains modest, given the small domestic capital market and limited portfolio investment opportunities in Brunei. However, the large placements of domestic banks’ holdings of excess liquidity abroad is a vulnerability, although a large portion of the asset holdings are re-invested in Singapore dollar assets, partly mitigating the risk.

Text Table.

Brunei Darussalam: Model Estimates for 2021 (in percent of GDP)

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Additional cyclical adjustment to account for the temporary impact of the pandemic on trade balance.

Cyclically adjusted, including multilateral consistency adjustments.

4. The trade-weighted exchange rates in Brunei remain largely stable. Recent exchange rate developments showed that the nominal effective exchange rate (NEER) remained largely stable, as the BRN/USD exchange rate. The real effective exchange rate (REER) has been declining since 2014, partly reflecting the negative terms of trade shock, which drives down the price of non-traded goods in the economy. The REER model suggest a large REER gap, estimated at 41 percent in 2021, which is directionally consistent with the results from the EBA-Lite model, which suggests a 14 percent REER gap. Based on results from both models, staff considers the external position to be substantially weaker than suggested by fundamentals.

5. The peg to the Singapore dollar remains appropriate, providing a credible nominal anchor and financial system stability. The establishment of the Currency-Interchangeability Agreement between Brunei and Singapore in 1967 has been instrumental in promoting monetary cooperation between the two countries. This allows fund managers in Brunei to benefit from Singapore’s deep financial markets given that excess liquidity in Brunei is largely re-invested in Singapore dollar assets. From a policy viewpoint, the peg also helps to preserve low and stable inflation. Beyond price stability, the peg serves to bolster diversification efforts by helping to attract FDI.

6. Official reserves remain above the adequacy benchmarks. Brunei’s international reserves (excluding gold) in 2022 amounted to USD 3.9 billion, or equivalent to 3.5 months of imports. In terms of reserve adequacy, the level of reserves stands at around 214 percent of the Fund’s composite metric—which is above the recommended 100–150 percent adequacy range. However, as a major energy exporter, the additional precautionary liquidity is needed to buffer against adverse terms of trade shocks. Cross-country comparisons show that Brunei’s level of reserves is in line with GCC peers.

uA000fig11

Reserve Adequacy, 2005-2026

(In millions of Brunei dollars)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Sources: Brunei authorities; and IMF staff estimates.

Appendix III. Risk Assessment Matrix1

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Appendix IV. An Export Diversification Analysis for Brunei1

Despite progress in recent years, exports in Brunei continue to be highly concentrated in the O&G sector. The number of export products with high revealed comparative advantage (RCA) and the alignment between realized export structure and latent comparative advantages have both lagged those of peer economies. A machine-learning based export recommendation algorithm identifies chemical products, machineries and food as the promising sectors with diversification potential for Brunei. Identifying policies that could facilitate the development of these export sectors could be a useful step towards more diversification, and thereby foster growth and macroeconomic stability.

1. Export diversification can foster sustainable growth and economic stability. Export diversification is a key element in the process of economic development, particularly for emerging markets and developing economies. The relationship between export diversification and countries’ economic performance has been extensively studied in the economic literature and numerous studies provide evidence of a positive association between export diversification and economic growth, and macroeconomic stability (e.g., Imbs and Wacziarg, 2003; Klinger and Lederman 2004 and 2011; Cadot et al., 2011), as a wider range of profitable export products makes growth more sustainable and reduces its volatility. In addition, an export structure aligned with an economy’s comparative advantages is shown to be positively related to strong and stable growth. Che & Zhang (2022) use a machine learning algorithm—product-based collaborative filtering—to construct lists of recommended export products for over 100 countries based on each economy’s latent comparative advantages (see Box 1 for details on the methodology).2 They show that countries whose export structure is more aligned with the recommended structure achieve higher growth and lower growth volatility.

uA000fig12

Export composition

(in USD million)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Sources: Staff calculation

2. Brunei has made progress in diversifying its exports, though the oil and gas (O&G) sector still dominates the country’s export portfolio. O&G exports constitutes over 80 percent of total exports of the country, though it has come down from over 90 percent a decade earlier, owning to diversifications into service exports and downstream products of the O&G sector. The development of the downstream sector has been a key factor in alleviating the pandemic and oil price shocks that buffeted the economy in 2020.

3. The number of export products with a high “revealed comparative advantage” (RCA) is smaller than what Brunei’s size and development level would imply. The RCA score, first introduced by Balassa & Noland (1965), is a popular measure in the economic literature for calculating the relative importance of a product in an economy’s export basket. Formally, the RCA score of economy i in product j can be expressed as:

RCApc=Epc/EcEp/∑p'∈PEp'

where Epc is the export value of product p from economy c, Ec is the total export values of economy c, Ep is the total exports of product p from all economies around the world, and Σp', ∈PEp' is the total world exports. A high-RCA export product for economy c is defined as a product with RCApc > 1. This is the case when a product’s share in the economy’s total exports is greater than the share of the same product in world exports, indicating that the economy has a comparative advantage in the product relative to the rest of the world. Empirical estimates show that the number of high-RCA exports is strongly correlated with economies’ size and development level—more populous and richer economies generally have a larger number of high-RCA exports. As Figure 1 shows, the number of high-RCA exports Brunei has (10 in 2018) is smaller than the level predicted by its economic size and GDP per capita level.3

Figure 1.
Figure 1.

Number of High-RCA Exports vs Population Size and GDP Per Capita, 20184

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

4. The number of high-RCA export products has grown, but less compared to peers. Commodity exporting countries tend to be characterized by a more concentrated export portfolio than the world average, but even compared to some of the Gulf Cooperation Council (GCC) countries—Saudi Arabia, UAE, Oman, Bahrain, Qatar, Brunei has made less progress in export diversification. In particular, the number of Brunei’s high-RCA export products has declined since the early 2000s, while it has increased in some GCC countries—UAE, Saudi Arabia and Bahrain.

uA000fig13

Number of high RCA exports: Brunei vs GCC countries

(in SITC 4-digit export classification)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Sources: Atlas of Economic Complexity

5. The alignment of Brunei’s export structure with the country’s latent comparative advantages has room to improve. Following Che & Zhang (2022), we computed the list of recommended export products that are potentially aligned with Brunei’s latent comparative advantages for each historical year, using a machine learning model based on a collaborative filtering algorithm, and calculated similarity scores between the recommended export structure and the actual export structure of Brunei at the SITC 1-digit product classification level. The results show that after major improvements during the 1990s and 2000s, partly owing to the growth of textile and jewelry manufacturing exports, the similarity score has been declining since 2010, indicating a reduced alignment with the country’s export structure and comparative advantage fundamentals.

Figure 2.
Figure 2.

Similarity Score Between Brunei–s Actual Export Structure and Recommended Export Structure

(Higher = More aligned)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

6. In most of the GCC economies the alignment scores have either remained stable or improved over time. Even though the alignment scores of GCC countries, except UAE, are still below the world average, the similarity score between actual and recommended export structure has improved since the 1990s for Bahrain, Oman, Saudi Arabia and UAE (Figure 3). The improvement is largely achieved by diversifying away from O&G exports and towards other viable sectors given the countries’ economic fundamentals. Saudi Arabia, for example, has reduced the share of O&G exports in total exports from 83 percent in 1995 to 67 percent in 2018, while the share of chemical and related products increased from 6 percent to 16 percent, and the share of service exports (e.g., travel and tourism) doubled. In the United Arab Emirates, the shares of metals, non-fuel minerals, electronics and machineries in total exports have increased over time, while the share of O&G exports has declined.

Figure 3.
Figure 3.
Figure 3.

Similarity Scores Between Actual Export Structure and Recommended Export Structure, GCC Countries5

(higher = more aligned)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

7. The algorithm-generated export product list for Brunei recommends expanding exports in the categories of chemical products, food and machineries. The collaborative filtering algorithm generated a list of 55 export products for Brunei with the highest recommendation coefficients at the SITC 4-digit level. Figure 4 presents the grouping of the recommendations at SITC 1-digit sector level and compares it to the actual sectoral distribution of Brunei’s high-RCA exports. As the chart shows, most of the products in the recommended list comes from the sectors of food, chemical and related products, and machinery and transport equipment. Table 1 presents the full list of algorithm-recommended top export products for Brunei at the SITC 4-digit level, along with their RCA scores in the country’s actual export portfolio. The rows shaded in gray are products that are existing high-RCA products of Brunei, while the rest are products that do not yet have a significant share in the actual export portfolio.

Figure 4.
Figure 4.

Actual vs Recommended Export Structure

(SITC 1-digit level, 2018)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Sources: Staff Calculation

Table 1.

Algorithm-Recommended Export Product List for Brunei

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uA000fig14

Tertiary education enrollment ratio

(in percent, 2020)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Sources: UNESCO In stitute for Statistics

8. Identifying policies that could facilitate the organic emergence of non-O&G export sectors recommended by the algorithm could be an important step towards more diversification. In this context, the experience of other O&G exporting countries that have progressed in diversifying their economies more is useful. For example, beginning in the 1980s, the UAE promoted industrial development by establishing firms in resource-based manufacturing industries associated with oil and gas, including refineries, fertilizer plants and aluminum smelters. In addition, industrial development departments were established to support industrial activity. Manufacturing companies were exempt from customs duties on imports of machinery, equipment, spare parts and raw materials. These firms were also exempt from export duties and taxes. Procedures were simplified to allow foreign talents to work in targeted industries in the UAE. Furthermore, specialized industrial zones were established for different types of industries, ranging from metal products to machinery and mechanical equipment. Other programs include the standardization and modification of investment procedures for the industrial sector and simplifying the approval of industrial licenses and mergers to appeal to investors. Investing in human capital and digital infrastructure would be key for. developing a more modern and sustainable export structure. Several GCC countries have identified the development of knowledge-based industries, including knowledge-intensive manufacturing and high value-added services, as a means towards more diversification. Diversifying in this direction requires the availability of high-quality human capitals and robust infrastructure. Brunei has room to improve on both fronts.

9. Improving Brunei’s similarity score between actual and recommended export structures could potentially boost growth and macroeconomic stability. According to the cross-country estimation of Che & Zhang (2022), if Brunei’s similarity score were to improve to the level of United Arab Emirates, annual GDP per capita growth could increase by 1.6 percentage points annually, while the 5-year standard deviation of annual growth decline by 0.5 percentage point.

The Collaborative Filtering Algorithm for Export Recommendations

The K-nearest neighbor (KNN) algorithm is one of the most frequently used methods in solving classification and pattern recognition problems and is a popular approach in constructing recommender systems. The basic idea of KNN is learning by analogy-classifying the test sample by comparing it to the set of training samples most similar to it. Different KNN implementations vary in terms of their choices of how the similarity between input vectors is calculated. In our setting, the cosine similarity score is used as the similarity measure.

The intuition behind the product-based KNN used for the export recommendation system is simple. First, it looks at what products a country already has a revealed comparative advantage in, and then recommends other products that are similar to those products. To explain the approach in more details, let’s first rewrite the RCA score matrix R as:

R = [p1, p2, …, pn]

where pj is a vector of length m that represents the RCA scores of product j for all the m countries in the sample:

pj=rijr2j⋅⋅rmj

In machine learning terminology, each product in the sample has m features. The cosine similarity between products i and j is equal to (pi · pl)/(∥pj∥∥pl∥), which ranges from -1, when the two vectors are the exact opposite, to 1, when the two are exactly the same. The intuition behind this is that by comparing the two sets of countries that export i and j, and how important the products are in the countries’ export baskets, information can be inferred regarding how closely related the two products are.

The implementation of the product-based KNN recommender for country i involves the following steps:

  • Represent each product in the SITC 4-digit product space as a vector of RCA scores, pj.

  • Select the set of K products in which country i has a revealed comparative advantage, i.e. rij > 1. Let’s call it the high-RCA product set of country i.

  • For each j ∈ [1, n], calculate the predicted value of rij as the weighted average RCA score of the high-RCA product set, weighted by the cosine similarity between product j and the products in the country’s high-RCA set.

  • The recommended products for country i are the N products with the highest predicted rij values.

We then calculate the similarity score between recommended and actual export structure for each of the sample years. We define the export structure of a country’s actual exports as the number of high RCA exports (at SITC 4-digit level) that belong to each SITC 1-digit sector, as a share of total number of high RCA exports. Similarly, we define the recommended export as the vector for the number of recommended products that belong to each SITC 1-digit sector as a share of the total number of recommended export products. The similarity score between the actual and the recommended export portfolios then calculated as the distance between the two vectors of actual and recommended structures.

References

  • Cadot, Olivier, C’eline Carr’ere, and Vanessa Strauss-Kahn. “Export diversification: what’s behind the hump?” In: Review of Economics and Statistics 93.2 (2011), pp. 590-605.

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  • Che, Natasha. “Intelligent export diversification: an export recommendation system with machine learning”. IMF Working Paper, 2020.

  • Che, Natasha and Xuege Zhang. “High performance export portfolio: design growth-enhancing export structure with machine learning”. IMF Working Paper, 2022.

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    • Export Citation

  • Imbs, Jean and Romain Wacziarg. “Stages of diversification”. In: American Economic Review 93.1 (2003), pp. 63-86.

  • Klinger, Bailey and Daniel Lederman. Discovery and development: An empirical exploration of “new” products. The World Bank, 2004.

  • Klinger, Bailey and Daniel Lederman “Export discoveries, diversification and barriers to entry”. In: Economic Systems 35.1 (2011), pp. 64-83.

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  • Al-Marhubi, Fahim. “Export diversification and growth: an empirical investigation”. In: Applied economics letters 7.9 (2000), pp. 559-562.

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  • Ministry of Economy, United Arab Emirates. Annual Economic Report 2018. Abu Dhabi: Ministry of Economy, United Arab Emirates (2018).

  • Seric, Adnan and Yee Siong Tong. “Progress and the future of economic diversification in UAE”. UNIDO Industrial Analytics Platform (2019).

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Appendix V. Micro-, Small- and Medium-Size Enterprises1,2

The authorities have initiated policy interventions to develop Micro, Small and Medium size Enterprises (MSMEs), recognizing that competitive and innovative MSMEs would play a significant role in boosting productivity and creating job opportunities as well as diversifying the economy. However, most MSMEs are still in an early stage of development. More comprehensive policy actions—in the area of finance, human capital development, innovation and digitalization—are needed to further develop MSMEs and improve their productivity.

1. MSMEs represent the majority of firms in the economy, but their performance has deteriorated in recent years. MSMEs accounted for 97.3 percent of enterprises in 2019, contributing to 43.9 percent of private sector employment (55.7 percent of enterprise employment) and 27.0 percent of GDP.3 Most MSMEs are in the service sector (75.3 percent), in particular wholesale and retail trade (30.9 percent). However, the operating revenue has fallen from BND8.3 billion in 2016 to BND7.5 billion in 2019, despite of an increased number of MSMEs from 5,721 in 2016 to 6,001 in 2019.4 As a result, their contribution to GDP has declined from 34.3 percent in 2016 to 27.0 percent in 2019. Lagging MSMEs would hinder boosting growth, diversification and productivity in the economy.

2. To address the declining performance, the authorities have introduced several policies to facilitate MSMEs growth before the pandemic. The Economic Blueprint-a national strategy to achieve dynamic and sustainable economy-has underlined the importance of re-invigorating MSMEs to foster entrepreneurship, facilitate export orientation and seize larger benefits from FDI and Government-Linked Company (GLC). The Ministry of Finance and Economy (MoFE)—mainly through Darussalam enterprise (DARe), an implementing agency—has promoted several initiatives to enhance financing, capacity building, work and production facilities, market access and digitalization. The details of these measures are reported in the Handbook 2019-Youth Entrepreneurship Ecosystem for bolstering MSMEs’ access to assistance programs (see Table 1).

3. Well-targeted and timely support is needed to develop MSMEs in the post-pandemic transformation period. Even before the beginning of the COVID-19 pandemic, MSMEs have been in a relatively disadvantageous environment, including limited access to financial credit, shortage of capable entrepreneurs, workers and sale markets, and lagged innovation and digitalization. To accelerate the recovery of MSMEs from the pandemic, strengthen their resilience and remove distortions for MSMEs to grow, the authorities should prepare a comprehensive strategy and implement policies in a “whole of government approach” to address these bottlenecks. This would contribute to further diversify the economy, boost productivity and foster sustainable and inclusive growth. Policies priorities include:

  • Facilitate access to finance by ensuring adequate funding and developing new channels to provide financial sources to MSMEs. While government funding through SME Bank and DARe has unmet MSMEs’ demand, access to bank credit has been more restricted than ASEAN peers and alternative financial markets have not been established. 5,6 The authorities should scale up SME bank credit and DARe funding and improve institutional factors including good governance and financial supervisory capacity, and better credit information availability in the banking sector. DARe’s capacity building program for entrepreneurs to build bankable business would promote funding for MSMEs. Developing financial markets, including by creating a national stock exchange, credit guarantee schemes and factoring companies, would help supply operational fund and increase capital for viable MSMEs. Safe access to Fintech would also help, including by strengthening competition among credit providers and expanding credit information.

uA000fig16

MSMEs’ Bank Loans to Total Loans in ASEAN Peers

(2015-19, percent)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Source: Asia Small and Medium-Sized Enterprise Monitor 2021, ADB.

  • Improve human capital through attracting competent workers and targeting assistances to MSMEs. The authorities have tried to foster human capital development through sizeable investment on education (13.5 percent of total expenditure in FY2021/22), active labor market policies (ALMPs) and initiatives such as the I-Ready Apprenticeship.7 However, labor shortages stemming from the small population, the wide wage gap between larger companies and MSMEs, and higher risks and job insecurity associated with MSMEs, have been a barrier to attract capable workers in MSMEs.8 While MSMEs’ wages should rise in line with productivity, providing financial gains exclusively for MSME workers—such as a launch of deposit account with preferential interests in SME bank—would contribute to attract young and competent workers to MSMEs. Targeted and well-designed ALMPs could also help. Finally, fostering education and training of entrepreneurs would help creating more companies and re-invigorate the market.

uA000fig17

Annual Payment per Employee

(2015-19, percent)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Source: Brunei Authorities, IMF staff calculations on public sa laries based on government budget in FY19/20.

  • Expand pathways to domestic and global markets through cooperative efforts among leading companies and MSMEs. MSMEs’ domestic market is limited and lacks large businesses to which to provide products and services. Furthermore, only a small portion of MSME activities have had access to global markets. The authorities should promote initiatives to strengthen collaboration among large firms, GLCs and MSMEs, such as active participation of MSMEs in downstream complex created by FDI. Ensuring a level playing field and reducing the dominance of the public sector in the market would also create more opportunities for development. Enhanced participation in public projects and procurement, including by preferential treatment on innovative products and services from MSMEs, would help accumulate experiences and know-how. Finally, strengthening supports for international access, such as the establishment of an Export Credit Agency, acquisition of standards and certifications, and effective expansion and utilization of FTAs, would encourage MSMEs exposure to overseas markets.

uA000fig18

MSMEs’ GDP Contribution and Employment in ASEAN Peers

(2015-19)

Citation: IMF Staff Country Reports 2022, 302; 10.5089/9798400219085.002.A001

Source: Asia Small and Medium-Sized Enterprise Monitor 2021, ADB.

  • Boost productivity and competitiveness through innovation and digitalization. The contribution of MSMEs to GDP and employment in Brunei is lower than ASEAN peers. Key factors beyond this gap are the limited progress in innovation and digitalization and the concentration of MSMEs in traditional businesses such as trade, accommodation and restaurants. The authorities should encourage MSMEs to extend their operation in innovative and digitalized industries such as professional services, information and computer technology, and e-business. Financial support and tax benefits for capital investment—specially on intangibles—would accelerate this transformation.9 In addition, fostering cooperation with universities and research institutes would strengthen the innovative capability of MSMEs. Finally, building reliable and efficient digital infrastructure, such as broadband, would speed up digitalization and reduce costs.

  • Upgrade government assistance in a strategic and coordinated way, customizing policies for MSME needs. Despite incessant efforts for MSME developments, there is room to improve. The government assistances have been disorganized and fragmented without a national strategy and a coordination scheme dedicated to MSME initiatives. The absence of policy consideration exclusively for MSMEs might cause unfavorable impact to MSMEs-such as applying foreign labor quota and financial regulations on all companies despite critical needs of MSMEs. A national MSME strategy should be established, building a MSME-friendly environment by robust legal, regulatory and taxation frameworks. Strong collaboration with the business community including the National Chamber of Commerce and Industry and the Young Entrepreneur Association Brunei would help enhance effectiveness of policies. Establishing an inter-ministerial body for MSMEs and strengthening MSME-related governmental agency would also contribute to promote better coordinated policy initiatives.10

Table 1.

Summary of the Main Assistances to MSMEs

article image

(BSP) Brunei Shell Petroleum, (MCYS) Ministry of Culture, Youth and Sports, (MPRT) Ministry of Primary Resources and Tourism, (AITI) Authority for Info-communications Technology Industry.

References

  • Asian Development Bank. 2020. Asia Small and Medium-Sized Enterprise Monitor 2020: Volume I— Country and Regional Reviews. Manilla: ADB.

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  • Association of Southeast Asian Nations. 2017. Future of ASEAN-50 Success Stories of Internationalization of ASEAN MSMEs. Jakarta: ASEAN Secretariat.

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    • Export Citation

  • International Monetary Fund. 2019. Enhancing the Role of SMEs in the Arab World—Some Key Considerations. Washington, DC: IMF Policy Papers.

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    • Export Citation

  • International Monetary Fund. 2019. Financial inclusion of small and medium-sized enterprises in the Middle East and Central Asia. Washington, DC: IMF Middle East and Central Asia Department.

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    • Export Citation

  • International Monetary Fund. 2021. Boosting Productivity in the Aftermath of COVID-19. Washington, DC: IMF G-20 Note.

  • Organization of Economic Cooperation and Development. 2018. Economic Outlook for Southeast Asia, China and India 2019: Towards Smart Urban Transportation. Paris: OECD.

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Appendix VI. Status of Staff Advice in 2021 Article IV Consultation

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1

Despite a projected growth recovery in 2022, staff assesses the current cyclical position of the economy to be on the weak side, with the negative output gaps recorded in 2020 and 2021 expected to be gradually closed by 2024. Medium-term output losses due to the pandemic and the decline in O&G activity—defined as revisions to projected 2025 GDP levels between the January 2020 and current forecasts—are estimated to be around 4.1 percent compared to 7.5 percent for Asia.

2

Wage budget per public employee in FY2020/21 is BND29,646 but average annual income is BND20,928 in 2020.

3

GLCs cover a wide range of businesses including downstream, aviation, telecommunications, power utilities, logistics, agribusiness, food and beverage, leisure and tourism, medical care, education, hospitality, and real estate.

4

The “Financial Regulations” define procedures on revenue collection, procurement and expenditure payment in the government and roles of related public officials.

5

The WEF’s Global Competitiveness Index combines both official data and survey responses from business executives on several dimensions of competitiveness. Measuring competitiveness through survey responses and a fixed set of indicators may have its limitations.

6

The authorities have participated ’Glasgow Leaders’ Declaration on Forests and Land Use’ and ’The Global Coal to Clean Power Transition Statement’ on UN COP26.

7

IMF. (2021). Fiscal Policies to Address Climate Change in Asia and the Pacific.

1

These measures were later extended to end-2021.

1

Prepared by Natasha Che.

2

The EBA-Lite methodology uses regression analysis to predict the equilibrium current account level consistent with a range of structural and policy factors. The EBA-lite current account model is estimated on a wide range of countries, and it may not fully capture the features of commodity exporters such as Brunei.

1

Prepared by Sangmok Lee. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

1

By Natasha Che.

2

The paper identifies countries’ latent comparative advantages by looking at export structures of other countries with similar export portfolios and products related to the ones that the underlining county already demonstrates a strong revealed comparative advantage in.

3

Note that due to lags in data, the current analysis does not take into account more recent progress in export diversification in Brunei, including, for example, the establishment of Hengyi oil refinery complex.

4

Partial regression plots.

5

See Box 1 for the definition of the similarity score and how it is calculated.

1

Prepared by Sangmok Lee.

2

MSMEs in Brunei are classified by the number of people engaged: a micro enterprise under four people, a small enterprise with 5– 19 people, and a medium-sized enterprise with 20–99 people.

3

Annual Census of Enterprises 2019, Department of Economic Planning and Statistics, Ministry of Finance and Economy. Asia Small and Medium-Sized Enterprise Monitor 2021, Asian Development Bank.

4

Underdeveloped MSMEs in Brunei are much smaller than large companies. For instance, operating revenues of micro, small and medium-size enterprises are only 0.4, 0.9, 4.7 percent of that of large company respectively.

5

Bank Usahawan-SME bank-was established by the government in 2017. While its loan was only 0.15 percent of total loan in the banking sector in 2019, it has provided cash flow-based loans, differently from collateral-based loans in the commercial banks.

6

While no aggregate MSME credit data have reported in bank credit statistics, 6 percent of total loans and 14 percent of total business lending belong to MSME credit according to BDCB internal research (Asia Small and Medium-Sized Enterprise Monitor 2020, Asian Development Bank).

7

The program links unemployed graduates to industries and offers opportunities for unemployed graduates to gain work experience and on-the-job-skills and for companies to scale up manpower with less financial burden by providing a monthly allowance to participating graduates for 18 months.

8

Payment per employee is only 30.7 percent in micro enterprises, 38.1 percent in small enterprises and 47.4 percent in medium-size enterprises, relative to that in large companies.

9

While a ten percent rise in intangible capital investment-such as digital technologies-increases labor productivity by 4.5 percent, the same increase in tangible capital-such as buildings and machinery-improves productivity by 3.5 percent (IMF, 2021).

10

For example, the Korean government has heightened a MSME agency of the vice-ministerial level into the formal ministry in 2017 and the number of venture enterprises-MSMEs with technology recognition-has increased from 33,289 in 2016 to 39,101 in 2020.

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Cover IMF Staff Country Reports
Brunei Darussalam: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2022: Issue 302
Publisher:
International Monetary Fund
ISBN:
9798400219085
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9798400219085.002

Total Sales of Retail and Food Services

(In BND mn)

BDCB Overnight Standing Facilities Rates

Share of Non-O&G Sector in GDP, Constant Prices

(In percent)

PISA Scores

(2018 data)

Data Usage Price Among Countries with Similar Per Capita Income

(Percent of GNI per capita, 2020)
Figure 1.

Real and Fiscal Indicators
Figure 2.

External and Financial Indicators
Figure 3.

Fiscal Indicators in Comparison with GCC Countries
Figure 4.

Financial Stability Indicators
Figure 5.

Labor Market
Figure 6.

Governance and Competitiveness
Figure 1.

COVID-19

Reserve Adequacy, 2005-2026

(In millions of Brunei dollars)

Export composition

(in USD million)
Figure 1.

Number of High-RCA Exports vs Population Size and GDP Per Capita, 20184

Number of high RCA exports: Brunei vs GCC countries

(in SITC 4-digit export classification)
Figure 2.

Similarity Score Between Brunei–s Actual Export Structure and Recommended Export Structure

(Higher = More aligned)
Figure 3.

Similarity Scores Between Actual Export Structure and Recommended Export Structure, GCC Countries5

(higher = more aligned)
Figure 3.

Similarity Scores Between Actual Export Structure and Recommended Export Structure, GCC Countries5

(higher = more aligned)
Figure 4.

Actual vs Recommended Export Structure

(SITC 1-digit level, 2018)

Tertiary education enrollment ratio

(in percent, 2020)

MSMEs’ Bank Loans to Total Loans in ASEAN Peers

(2015-19, percent)

Annual Payment per Employee

(2015-19, percent)

MSMEs’ GDP Contribution and Employment in ASEAN Peers

(2015-19)