Brunei Darussalam: 2024 Article IV Consultation-Press Release; and Staff Report
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1. Brunei is facing complex diversification challenges and a protracted post-pandemic recovery. While real GDP rebounded moderately, driven mainly by the non-O&G sector, challenges persisted in downstream and upstream O&G production until H1 and Q3 2023, respectively, impacting fiscal and external positions in 2023. The production from the new Salman oilfield offered some partial relief to the decline in oil production since 2006 as offshore O&G fields mature. External buffers remain strong.

Context and Recent Developments

1. Brunei is facing complex diversification challenges and a protracted post-pandemic recovery. While real GDP rebounded moderately, driven mainly by the non-O&G sector, challenges persisted in downstream and upstream O&G production until H1 and Q3 2023, respectively, impacting fiscal and external positions in 2023. The production from the new Salman oilfield offered some partial relief to the decline in oil production since 2006 as offshore O&G fields mature. External buffers remain strong.

2. Looking ahead, Brunei aims to diversify its economy in line with the authorities’ Vision 2035, focusing on sectors like downstream O&G, Food, Tourism, Info-Communications and Technology (ICT), and Services. The share of non-O&G sector in real GDP increased from 20 percent in 2003 to 53.6 percent in 2023, boosted by the petrochemical plant’s phase 1 venture—and the associated sectoral spillovers. However, challenges remain in addressing job creation and youth unemployment1, reducing the large public sector footprint, improving the business environment to attract private sector involvement, as well as to tackle the large transitions risks linked to diversification and climate change.

3. After two years of recession, real GDP rose by 1.4 percent in 2023. A stronger-than-expected growth contribution came from the non-O&G sector (i.e., finance, as well as construction and transport), helped by improved bank profitability amid globally high interest rate environment, and the post-pandemic reopening momentum, offsetting weak performance in other non-O&G areas. Growth of the O&G sector was held up by maintenance activities in early 2023, but earlier-than-expected supply from a new O&G field in Q4 2023 significantly made up for earlier production losses. On the demand side, household consumption continued to be the key driver of growth. Non-O&G growth in Q1 2024 exceeded expectations, largely due to momentum in downstream O&G and wholesale and retail trade.

4. Disinflation continues but remains volatile, on a sequential basis.2 After peaking at 4.5 percent in August 2022, headline inflation significantly moderated to 0.7 by December 2023 and further declined to -0.2 percent in May 2024, reflecting3 the easing of post-pandemic supply chain disruptions and of global commodity prices, as well as large subsidies and price controls.4

5. A stable exchange rate, underpinned by Brunei's longstanding currency board system with Singapore5 also assisted in anchoring inflation expectations. Brunei’s nominal effective exchange rate (NEER) appreciated in tandem with Singapore’s monetary policy tightening, partially assisting in mitigating the impact of imported inflation. The Brunei Darussalam Central Bank (BDCB) has kept the Overnight Standing Facility Lending Rates in line with Singapore’s overnight policy rate. However, the standing facility deposit rate (SFDR) held steady, thereby widening the corridor. Starting January 2024, the BDCB began including Singapore's interbank transactions in its analysis to understand the influence of Singapore's policy rates on Brunei's market and raised its SFDR to 3.0 percent from 1.5 percent through three consecutive 50 basis points hikes in April, May, and June 2024.

6. The overall fiscal position deteriorated significantly in FY 2022/236. This was led by a large decline in O&G revenue reflecting weaker production and prices. Nominal expenditure was aligned with the budget, but expenditure as a share of GDP increased relative to FY 2022. The non-O&G deficit (excluding O&G revenue and royalty payments) deteriorated by 1.6 percentage points (ppts) of non-O&G GDP compared to FY 2022/23. The impact was offset by tapping on the fiscal buffers built up in FY 2022 and financed in part by a large decline of government deposits.7 The widening non-O&G deficit helped support the fragile recovery by boosting capital spending.

Text Table 1.

Brunei Darussalam: Fiscal Developments 1/

article image
Source: Brunei authorities, IMF staff estimates 1/ Fiscal year: April-March. 2/ In absence of government debt and interest payments, this is also primary balance.

7. Brunei's current account (CA) surplus narrowed significantly to 12.9 (19.6) percent of GDP in 2023 (2022), impacted by lower O&G exports, higher service imports and net income outflows. Exports growth slowed reflecting lower O&G prices and production and due to the oil refinery and petroleum plant’s planned maintenance. Consequently, imports of raw materials, mainly mineral fuels, also declined, and reflecting lower feedstock prices. The financial accounts saw significant outflows, including from increased offshore lending by domestic banks, prompting a survey to better gauge trends in errors and omissions, and payables/receivables. International reserves declined modestly. The weaker-than-expected CA performance is reflected in a substantially weaker external position than the level implied by fundamentals and desirable policy settings (Appendix I).

8. The banking sector remains stable. The capital ratio of banks is strong at around 21 percent of risk-weighted assets in 2023, well above regulatory requirements (10 percent). Gross NPL as a share of total loans declined from 3.3 percent in 2022 to 2.6 percent in 2023, owing both to a decrease in loans classified as NPLs and to an increase in gross loans. Banks’ return on assets (before tax) improved to 2.1 percent in 2023 from 1.3 percent in 2022 as the global higher interest rate pushed up their earnings from offshore assets. Banks continue to have abundant liquidity funded mostly by domestic deposits.8

9. Foreign lending surged, while domestic lending slowed. In particular, offshore (i.e. foreign) loans by Brunei-based banks to Bruneian corporates, which invest in high creditrated assets, rose by 64 percent year-on-year by the end of 2023.9 Over the past years, banks have preferred offshore activities in a context of an open capital and financial account and high global interest rates, as well as in the search for diversification opportunities. Banks have generally kept offshore assets relatively stable (ranging around 51-53 percent of total, over the past five years). Overall domestic credit growth slowed to 2.0 percent year-on-year in 2023 from 6 percent, largely due to reduced corporate credit growth (to 3.5 percent from 8.8 percent in the same period). However, household credit picked up, considering both bank and finance company loans, at a slightly faster pace of 5 percent than past peaks. With the oil price slowdown and the credit gap estimated to have closed, the authorities are monitoring the acceleration of personal loan growth and continue to cap the total debt service ratio at 60 percent.10

Outlook and Risks

10. Real GDP is projected to increase by around 2.4 percent in 2024, supported by O&G production from the new offshore oil field.11 The domestic non-tradeable sector growth is expected to plateau, as the finance and transport sectors stabilize, due to anticipated global interest rate cuts and the disappearance of one-off base effects post-reopening in H2 2022, respectively. Downstream sector and investment activities are expected to increase on account of the oil refinery and petrochemical plant Phase II investments and budgeted developmental spending, respectively. Household consumption will remain a key growth driver. While subject to uncertainty, the estimated output gap is expected to close by 2025 and medium-term growth is expected to be impacted slightly by the China slowdown.12

11. Inflation is projected to stay broadly unchanged at an average of 0.5 percent in 2024.13 Easing global supply chains, Brunei's currency board with the Singapore dollar, along with administered prices covering 16.4 percent of CPI items will keep inflation under control, as evidenced in early 2024 outcomes (¶4).14

12. In 2024, Brunei's current account surplus is expected to increase to around 15 percent of GDP. This is supported by improvements in the income account and non-O&G exports, amidst a reduced fiscal deficit and corresponding lower imports (¶15). Over the medium term, the lower export revenues (reflecting softer O&G prices) will be partly mitigated by production of new deepwater oilfields, and the pick-up in the downstream sector, and services exports. The latter are expected to be boosted by tourist arrivals, which more than doubled in 2023, and are projected to reach pre-pandemic levels by 2025. Imports would stay buoyant as the economy rebounds. Brunei’s international reserves (excluding gold) were assessed to be adequate at around 185 percent of the Fund’s reserve adequacy (ARA) metric in 2023.

13. Risks to the outlook are broadly balanced. Downside risks include supply chain disruptions led by heightened geopolitical tensions and negative spillovers from possible further growth slowdown in China. Food price spikes due to extreme weather shocks could also be a risk. A disorderly transition to renewable energy under global decarbonization pressures remains a medium-to longer-term risk. On the upside, offsetting structural reforms and technological advancement, including artificial intelligence (AI), could boost productivity—although they may present economic and social challenges. Higher O&G prices and O&G discoveries could accelerate growth.

Authorities’ Views

14. The authorities broadly concur with staff’s assessment on outlook and risks. The authorities expect slightly higher growth than staff projections, driven by a rebound in upstream and downstream O&G production and growth in sectors like transport and hospitality. They expect two new projects to start in 2024, alongside the Salman field, which became operational since Q4 2023. No major maintenance for the oil refinery and petroleum plant is planned in 3-4 years. They predict stable prices while acknowledging uncertainties in global food and fuel prices. They remain committed to diversifying the economy and view the green transition as both a risk and opportunity.

Economic Policies to Secure Resilience and Support Economic Transformation

A. Fiscal Policy

15. The near-term fiscal stance is appropriate, given the narrowing output gap.15 The authorities frontloaded the fiscal consolidation in FY 2022, leveraging windfalls in O&G prices and the strong non-O&G growth, later unwound in FY 2023/24 (¶6), and are expected to tighten in FY 2024/25 reflecting the cyclical position. As a share of GDP, the overall fiscal deficit is projected to shrink by 1.7 ppts in FY2024/25 due to continued increase in O&G production and related tax revenues. The non-O&G balance would also return to a more prudent stance. The assumed reduction of 2.6 ppts of non-O&G GDP would rely on the continuing non-O&G sector growth and corresponding non-O&G revenue. Reflecting the budget, capital expenditure would be boosted through reallocation from current expenditures. The overall deficit is expected to be financed by the continued drawdown of the Consolidated Fund (CF).

16. Prioritizing growth-friendly fiscal consolidation over the medium-term is essential to support fiscal sustainability. Such consolidation should foster private sector investment and intergenerational equity, while protecting the vulnerable. To achieve this, mobilizing non-O&G revenue must remain a key priority.16 Given the decline in O&G production, limited O&G physical reserves17 and global pressures for decarbonization, securing fiscal space through growth friendly expenditure rationalization, phasing out untargeted subsidies and allowing room for green investments is critical.

17. Broadening the tax base and reducing the reliance on O&G revenues are crucial. While the non-O&G sector's share in nominal GDP has grown significantly, from 26.2 percent in 2008 to 53.6 percent in 2023, its share in total revenue remains low. It only reached 25.0 percent in FY2023/24 from 7.3 percent in FY2008/09. To address this, measures such as reducing tax exemptions, implementing a goods and services tax (GST) and personal income tax, adjusting tax rates (including property tax), and expanding excise taxes on goods with negative externalities are recommended. Carbon pricing, along with phasing out of fossil fuel subsidies, as suggested by recent work,18 could generate additional revenues, (1.6-7.2 percent of GDP above the baseline in 2030, with a $50 per tonne carbon tax by 2030), and help to reduce emissions. If recycled, the revenues could effectively shield the vulnerable and economic growth from the higher tax. Digitalizing the tax system would enhance efficiency and compliance in tax administrations.19

18. Revenue mobilization should be prioritized as tax revenues are below regional peers. The estimated tax revenue to GDP ratio fell to around 6 percent in FY2023/24 (Table 2). On average, tax revenue in Brunei between FY2020-FY2023 was 7.8 percent of GDP, lower than the estimated tax capacities20 of advanced and emerging market economies, 26.9 percent, and 19.3 percent, respectively21. Brunei has a narrow tax base including Corporate Income Tax (CIT) and Withholding tax (only on non-residents), with taxes on goods and services (GSTs) and on individual income not yet implemented. (Text Table 2)

19. More efforts to rationalize expenditure are needed. While revenue fluctuates exogenously and mostly linked to changes in global hydrocarbon prices, downward rigidity of spending makes fiscal consolidation difficult. Brunei’s large public footprint is evident in the high public wage bill to GDP vis-à-vis its regional peers, ASEAN-5 countries.22 Wage bill rationalization by downsizing through attrition and continued tightening of temporary positions is called for. Targeting broadbased subsidies (e.g., energy, housing, utilities, etc.)23 would help reduce market distortions and secure resources for development expenditures listed in the 12th National Development Plan (RKN 12), including for building resilience.

Table 2.

Brunei Darussalam: Tax Rates by Type

(percent)

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Source: PWC Worldwide Tax Summaries, Deloitte International Tax Highlights 1/ Value added tax (VAT), Goods and services tax (GST), Sales tax 2/ Brunei has Property tax (levied on properties under commercial use), Import duty, Excise duty (liquor, cigarettes, and manufactured tobacco), and Stamp duty besides above taxes. 3/ Numbers inside brackets are tax rates for petroleum companies.

20. A sustainable fiscal position will require continued strengthening of rules-based fiscal frameworks. The authorities have taken steps toward establishing a MTFF to delink spending from short-term volatility in O&G prices, protect priority spending, and support fiscal consolidation over the medium term. The government introduced a Fiscal Consolidation Programme (FCP) in FY 2018/2019; this should be updated with clear fiscal targets based on regular assessments.24,25 Focusing more on the non-O&G balance to delink fiscal policy from oil price volatility would enhance the feasibility and credibility of emerging frameworks. Based on staff’s analysis, under current policies, a permanent income hypothesis (PIH) norm of a constant annuity in real terms, indicates a need for further fiscal consolidation of cumulative 9-10 percent of non-O&G GDP between 20242029, relative to the baseline; continued fiscal prudence is needed in the long-run to close the gap.26 An alternative PIH anchor under Net Zero Emissions (NZE) by 2050 scenario would imply even higher, adjustment needs, about 12 ppts27, suggesting vulnerabilities to climate change pressures.28

21. Broadening the coverage of the fiscal framework would enhance fiscal transparency and support policy design and fiscal risk analysis. More comprehensive data could include the activities of extrabudgetary funds, government-linked companies (GLCs), joint ventures, PPPs, and the associated risks and contingent liabilities. Increased transparency around key long-term fiscal policy issues could promote budget planning in line with longer-term goals, improve investment efficiency and strengthen credibility for the macroeconomic framework. Developing a systematic approach to identifying and reporting climate-related expenditures within the budget framework that aligns with the BNCCP, analyzing climate-related economic and fiscal risks (both direct physical climate risks and indirect economic transition risks) and integrating the analysis into economic and fiscal planning are also recommended.

Authorities’ Views

22. The authorities agreed with the need for growth-friendly fiscal consolidation, revenue mobilization and enhanced fiscal frameworks. Brunei aims to boost revenue with potential tax strategies, including a low-rate carbon tax. The authorities have initiated subsidy reforms by launching non-subsidized premium fuel, implementing smart meters, discussing tariff reforms, and digitizing the National Welfare System to target and support the neediest. Efforts are underway to enhance fiscal planning and management by establishing the MTFF and fiscal rules and reviewing the FCP introduced in FY2018/19 with greater focus on reducing the non-O&G balance and improving public service delivery via corporatization, privatization, and PPPs. The authorities are in the process of consolidating subsidy data across the line ministries through the strengthening of the financial management system by implementing Treasury Accounting Financial Information Systems (TAFIS 2.0), with a revised Chart of Accounts (COA), for better oversight, transparency, efficiency, and accountability since April 2024. Furthermore, the virement rules have been enhanced to provide more flexibility and accountability to the line ministries. The government is also continuing its efforts on economic diversification through Brunei Darussalam Economic Blueprint to achieve Brunei Vision 2035.

B. Protecting Financial Stability and Enhancing Financial Market Depth

23. The currency board arrangement with Singapore is sound and has played a key role in supporting Brunei's macroeconomic and financial sector stability. This monetary policy framework has helped to stabilize exchange rate fluctuations and minimize the impact of imported inflation to the domestic economy. The currency board is safeguarded by the BDCB adhering to the coverage of all issued liabilities in Brunei dollars (BND) by foreign currency, and with no monetary financing.

24. Improving monetary operations is recommended to enhance interest rate transmission and facilitate financial deepening. The authorities have widened the interest corridor to be equal or larger than the MAS corridor, and continue to align interest rates with Singapore through the standing facility rate changes, while disconnecting the limit on the standing lending facility from collateral. To develop liquidity management and the interbank market, I-bills are now included as eligible assets in the Asset Maintenance Ratio (AMR) and a dedicated website to enhance communication on monetary frameworks implementation has been established. Increasing issuance of I-bills to allow more active management of liquidity to strengthen the signal from the overnight policy rate to retail rates is underway. Additionally, absorption of structural liquidity through the lock-in of the proceeds from the Brunei Government Sukuk in the Treasury account with the BDCB will enhance liquidity management. Over the medium term, the BDCB is encouraged to build internal capacity in liquidity forecasting to calibrate I-Bill issuance and consider establishing a single treasury account.

25. The financial sector has strong capital buffers and abundant liquidity, and systemic risk is assessed to be contained. The rapid growth in foreign lending by Bruneian banks, (¶9), suggests the need for diligent market risk management. Interest rate risks and liquidity tail risks related to further rapid increase in interest rates and the unavailability of liquidity placed offshore in times of extreme stress, appear to have improved since last year and can be mitigated by the existing strong capital and liquidity buffers. BDCB continues its efforts to strengthen prudential regulatory framework for the banking industry and is expected to formally implement the Basel III liquidity coverage ratios (LCR) before end-2024. Basel III liquidity measures are already being deployed internally in some banks, particularly in Domestic Systemically Important Banks (DSIBs).

26. Close monitoring of sectoral credit growth is warranted, ¶929. Vulnerabilities could emerge if oil prices decline, notwithstanding low NPLs (¶10). Thus, remaining vigilant and continuing to strengthen regulatory frameworks is important.30 Continued implementation of prudential measures like capping the Total Debt Service Ratio (2015), assessing the unsecured personal loan exposure (2015), and enhancing and maintaining NPL definitions (2018), are welcome. Further strengthening risk-based supervision, including enhanced stress testing, and for climate transition and physical risks, could be considered.

27. Efforts are needed to further enhance the depth of financial markets and promote financial sector growth. Excess liquidity hampers Brunei's interbank market development, crucial for financial sector deepening. As of June 2024, BDCB completed four high priority, near-term reforms in this area, (¶24). BDCB is currently working on further six needed measures, focused on: (i) establishing a Master legal documentation for interbank placements, Commodity Murabaha, and Unrestricted Investment Wakalah Agreements to reduce market segmentation (ii) stepping up in BDCB I-Bills issuance, (iii) better aligning overnight standing facility (deposit), and (iv) establishing a Brunei reference rate. In efforts to deepen markets and improve payment efficiencies, in April 2024, Brunei joined the Regional Payment Connectivity (RPC) to foster payment connectivity with participating Asian peers31. An ongoing digital payment hub is integrating existing payment systems. Guidelines for issuance of debentures in 2022,32 and amended in January 2024, are expected to facilitate green bond issuance, but more is needed on green taxonomy and unifying disclosure standards. Islamic investment regulations were legislated in September 2023, but more effort is needed to enhance the business environment for financial growth, including deepening sukuk markets.

28. The authorities are taking steps to enhance the AML/CFT framework and its implementation. The authorities remain committed to strengthening AML/CFT regulatory and supervisory frameworks to safeguard financial integrity, in line with the recommendations in the Asia Pacific Group on Money Laundering (APG) Mutual Evaluation completed in 2023. Two laws were amended in 2022, namely the Anti-Terrorism Order and Anti-Terrorism (Terrorist Financing) Regulations and the Criminal Asset Recovery Order. The BDCB also introduced provisions requiring oversight of virtual assets and virtual asset service providers (VASPs) in line with the Financial Action Task Force’s (FATF) Recommendation 15, through amendments to the Money-Changing and Remittance Business Act and Notice on Requirements for Payment Systems and issuance of new Guidelines on Offering Trading of Security Tokens.

Authorities’ Views

29. The authorities broadly agreed with the assessment of monetary and financial policies. They emphasized that the banking sector had adequate buffers against global uncertainties. They are focusing on strengthening prudential regulatory framework for improving risk management, and plan to implement Basel III standards for better liquidity management by the end-2024. To enhance monetary operations and financial market depth, the authorities are analyzing interbank transactions in Singapore. They acknowledged the need to strengthen collaboration between the BDCB and the MOFE to introduce sukuks, to promote an investment culture within the local market. Consideration is being given to develop a long-term Sukuk market to support savings and finance long-term projects, aiming to bolster Brunei's financial sector. The authorities reaffirmed their commitment to continue to implement the recommended actions in the Asia Pacific Group on Money Laundering (APG) Mutual Evaluation Report.

C. Structural Reforms

30. Structural reforms can help to improve Brunei Darussalam’s long-term productivity. A recent IMF Staff Discussion Note (SDN) by Budina et al. (2023) advises prioritizing first-generation reforms—governance, external sector, and business regulation—before implementing second-generation reforms like domestic finance and labor market changes for better job creation. This approach can yield significant upfront gains in output growth, facilitate the green transition, and balance growth with climate concerns. Staff analysis33 concludes that Brunei could benefit from closing gaps in some ‘first generation’ structural reforms, vis-a-vis top performing peers, thereby positively affecting future potential output growth.

31. Progress with economic diversification has contributed to a more resilient economy, but challenges remain. Brunei has a low labor force participation relative to peers (Figure 6), challenges remain with youth unemployment, and their potential exposure to job displacement by adoption of AI technology. Domestic product and labor markets are served by dominant GLCs. Structural challenges in the regulatory framework are limiting FDIs and PPPs into Brunei. Brunei’s performance in first-generation reform areas appears broadly comparable to peers – ASEAN-634 and the Gulf Cooperation Council (GCC)35 –indicating progress. Yet, key remaining gaps remain, to enhance the business environment include distortive taxes and subsidies, non-tariff barriers, lengthy property rights transfer processes, and remaining gaps in the legal/regulatory framework36.

A001fig24

Brunei Darussalam: Impact of AI on Labor Market in Brunei

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Source: IMF staff calculations based on Brunei’s labor force survey 2022 by International Labor Organization (ILO).Note: AI occupational exposure (AIOE) is estimated by linking AI applications to workplace abilities based on O*NET, a database developed by US Department of Labor decomposing occupations into 52 abilities. High (low) AIOE is when the exposure is above (below) median occupational exposure across all occupations (Felten et all. (2021)). AI’s potential to complement or substitute for labor is captured in complementarity where high (low) complementarity is above (below) median (Pizzinelli et al., 2023).

32. Brunei is advised to prioritize closing gaps in some first-generation structural reform areas to enhance the business environment. External competitiveness and efficiency would be strengthened by further promoting trade through rationalizing non-tariff barriers and import restrictions on intangible goods, and improving trade facilitation, specifically by simplifying the export/import documentation process,37 and improving the timeliness of appeal procedures.38 Regarding market regulation, reducing the regulatory burden for firms such as business licensing and permits,39 reforming taxes and subsidies that create distortive effects in the product market, and lowering market dominance of large firms, especially GLCs, would foster domestic competitiveness and promote FDI and PPPs. Efficient property rights transfers and commercial case resolutions would further enhance investors’ confidence in the domestic economy. Enhancing the quality of the regulatory framework would also contribute to boosting growth momentum, helping green transition, and laying the groundwork for second-generation reforms.40

A001fig25

Brunei Darussalam: Performance in First-Generation Reform Areas Is Broadly Similar to the Average Performer Comparator Peer-Groups

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Note: The gap is defined by the difference in the scores of Brunei and the top performer in each comparator group. The red bars indicate Brunei’s standing.
A001fig26

Brunei Darussalam: Structural Gaps vis-à-vis the Top Performer in Each Comparator Peer-Group Suggesting Scope for Improvement

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Note: The gap is defined by the difference in the scores of Brunei and the top performer in each comparator group.

Authorities’ Views

33. The authorities agree that diversification is key for building a more robust economy. Brunei is pushing economic diversification with plans like Brunei Vision 2035 and enhancing growth through downstream expansion and related activities. The authorities are boosting private sector activity with export support, including through the availability of Halal Certification, capacity building, and improving business conditions, as well through continuing trade facilitation (Indo-Pacific Economic Corridor (IPEC)) and other economic corridors (BIMP-EAGA/ Brunei-Guangxi). The country is committed to reaching its net zero emissions goal by 2050. The government is preparing a National Adaptation Plan for 2025 and a Climate Vulnerability Assessment to prioritize climate change adaptation strategies.

D. Data Issues and Capacity Building

34. Data provided to the Fund has some shortcomings that somewhat hamper surveillance and quality should continue to improve (Appendix IV). Brunei participates in the IMF’s general data dissemination systems, (e-GDDS) but more efforts are needed for granular, timely, frequent, and consistent reporting, especially for fiscal and external sectors. The underlying CPI consumption basket is dated and may be hampering the quality of inflation data and trends, especially postCOVID. Lack of granularity in external sector statistics, and large errors and omissions limit data accuracy and narrow the scope for detailed discussion on sources of capital outflows. Limited information on activities of extrabudgetary funds, GLCs, joint ventures and PPPs constrain fiscal risk analysis. Providing further breakdowns and improved classifications for BOP statistics, including through survey data, continuing efforts to broaden the dissemination of IIP data, as well as providing more comprehensive data for extrabudgetary funds, GLCs, joint ventures, and PPPs will help to improve surveillance. The authorities plan to improve the timeliness and granularity of their e-GDDS fiscal and external data submissions. Authorities are working on a survey to improve classification of errors and omissions and receivables/payables in BOP statistics and are planning to update the 2015 CPI consumption basket based on the ongoing household expenditure survey (HES). They are working with Fund support, towards aligning a new set of fiscal charts of accounts (COA) with the GFSM 2014. The Fund is assisting Brunei with GDP rebasing and enhancing national income data quality. Strengthening institutional capacity for timely and consistent macroeconomic statistics remains crucial, including building capacity for climate-related data.

Authorities’ Views

35. The authorities agree with the need to enhance data quality and dissemination. They took note of newly introduced data provision requirements by the IMF to become effective only from late 2025, and the Data Adequacy Assessment (DAA), for the AIV 2024 Consultation. They shared actionable plans to address existing data gaps identified under the DAA and potential Technical Assistance (TA) needs. These include (i) improving the timeliness and granularity of their e-GDDS fiscal and external data submissions and (ii) aligning a new set of fiscal charts of accounts (COA) with the GFSM 2014, (iii) improving classification of errors and omissions and receivables/payables in BOP statistics, (iv) updating the 2015 CPI consumption basket based on the ongoing household expenditure survey (HES). They noted progress based on ongoing IMF TA on national accounts, including on resolving gaps in intersectoral consistency.

Staff Appraisal

36. Growth rebounded moderately in 2023. The stronger-than-expected growth turnaround was supported by a new O&G field coming to stream in late 2023, a high interest rate environment and post-pandemic momentum boosting finance, transport, and hospitality. However, persistent O&G production challenges and maintenance related disruptions in downstream activities along with lower O&G prices weakened the fiscal and external positions in 2023. Consequently, the external position for 2023 remained substantially weaker than suggested by fundamentals and desirable policies and the output gap is assessed to be negative. Disinflation continued mainly due to easing supply chain disruptions and the softening of commodity prices, aided by continuing large scale subsidies and price controls.

37. The narrowing output gap, O&G revenue uncertainty and long-term decarbonization trends warrant a prudent fiscal stance, while protecting the vulnerable and public investment. While the use of fiscal buffers in FY 2023/24 was appropriate in view of the cyclical position and to support economic recovery, restoring fiscal buffers through growth-friendly fiscal consolidation should be prioritized going forward. This will require enhanced revenue generation, and could be supported by a low-rate carbon tax, and expenditure rationalization—including via more targeted subsidies. These efforts should be guided by a fiscal consolidation plan with clear fiscal targets. Plans to establish a MTFF and fiscal anchors, strengthening fiscal risk management and transparency are welcome.

38. The currency board arrangement with Singapore is sound and has played a key role in supporting Brunei's macroeconomic and financial sector stability. Efforts to improve monetary operations, by including Singapore's interbank transactions in its analysis to understand the influence of Singapore's policy rates since January 2024, and continuing to narrow the corridor by raising the SFDR, integrating I-bills into the Asset Maintenance Ratio and launching a website for better communication on monetary policies, are welcome. Enhancing inter-agency cooperation regarding the issuance and management of sukuks will be helpful. Over the medium-term, the BDCB is encouraged to build internal capacity in liquidity forecasting to calibrate the issuance of the I-bills and consider establishing a single treasury account.

39. The financial sector remained stable with strong capital and liquidity buffers. Systemic risk is assessed to be contained. Careful tracking of credit growth in both offshore and domestic personal loans is warranted, as declining oil prices could pose risks, despite low NPLs. Ensuring that that the foreign loans continue to be invested in highly credit-rated assets will help to mitigate credit risk. For domestic lending, continuing to deploy prudential measures like capping the Total Debt Service Ratio, assessing unsecured personal loan exposure, and maintaining NPL standards are welcome measures. Authorities are encouraged to stay on track with plans to implement Basel III standards for better liquidity management by the end-2024. Implementation of stress tests is recommended, while considering stress testing for climate transition and physical risks. Efforts to further strengthen prudential frameworks, develop a long-term sukuk markets, green taxonomy and unify disclosure standards, and to improve AML/CFT effectiveness will help to deepen markets, and support long-term green projects. The authorities’ commitment to continue implementing the recommended actions in the APG’s Mutual Evaluation Report is welcome.

40. The authorities’ commitment to ambitious and sustained structural reforms will be critical to ensure growth and diversification, including by transitioning to a low-carbon economy. Reaching the authorities’ net zero emissions goal by 2050, will require continued development of the non-O&G sector, including through adoption of green technologies. Continued skill development, while addressing AI-related challenges and closing structural gaps in the firstgeneration reform areas (external sector trade facilitation, improving business regulation, and governance) vis-à-vis top peers, will be key to facilitate FDI and PPPs. Completing the 2025 National Adaptation Plan and a Climate Vulnerability Assessment should support the prioritization of adaptation strategies.

41. Data provided to the Fund has some shortcomings that somewhat hamper surveillance and data quality should be strengthened. Steps are needed to close the identified data gaps in national income, prices, external and fiscal sectors. Efforts for improving external sector data through a survey to better gauge trends in errors and omissions, and payables/receivables and strengthening public financial management (PFM) to build more transparent and accountable fiscal systems and aligning these further with GFSM (2014) are welcome, as are plans to enhance dissemination via the Fund’s e-GDDS portal.

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

Figure 1.
Figure 1.

Brunei Darussalam: Real and Fiscal Indicators

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 2.
Figure 2.

Brunei Darussalam: External and Financial Indicators

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 3.
Figure 3.

Brunei Darussalam: Recent Monetary Sector Developments

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 4.
Figure 4.

Brunei Darussalam: Fiscal Indicators in Comparison with GCC Countries

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 5.
Figure 5.

Brunei Darussalam: Financial Stability Indicators

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 6.
Figure 6.

Brunei Darussalam: Labor Market

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Figure 7.
Figure 7.

Brunei Darussalam: Governance and Competitiveness

Citation: IMF Staff Country Reports 2024, 301; 10.5089/9798400288722.002.A001

Table 1.

Brunei Darussalam: Selected Economic and Financial Indicators, 2019–29

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1/ Non-oil and gas GDP includes the downstream sector. 2/ in absence of government debt and interest payments, this is also primary balance. 3/ 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, 2019/20–2029/30 1/

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Sources: Data provided by the Brunei authorities, and Fund staff estimates and projections. 1/ GFSM 1986 Presentation (cash-based); fiscal year ends March 31. 2/ In absense of government debt and interest payments, this is also primary balance.
Table 3.

Brunei Darussalam: Balance of Payments, 2019–29 1/

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Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections. 1/ 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. 2/ Includes changes in banks' foreign assets and liabilities 3/ Comprises foreign exchange assets of Brunei Darussalam Central Bank, SDR holdings, and reserve position in the Fund.
Table 4.

Brunei Darussalam: Monetary Developments, 2019–29

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Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections. 1/ Comprises central bank's foreign exchange assets, SDR holdings, and reserve position in the Fund. 2/ Ratio of foreign exchange holding to currency.
Table 5.

Brunei Darussalam: Financial Soundness Indicators, 2018–23 1/

(In percent)

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Source: BDCB. 1/ Data excludes finance companies, which is classified as depository corporations. Numbers are for Q4 of each year.
Table 6.

Brunei Darussalam: Indicators of Vulnerability, 2019–29

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Sources: Data provided by the Brunei authorities; and Fund staff estimates and projections. 1/ The calculation of Financial Soundness Indicators is based on the IMF’s Financial Soundness Indicators: Compilation Guide.

Annex I. External Sector Assessment1

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Annex II. Risk Assessment Matrix1

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Annex III. Status of Staff Advice in 2023 Article IV Consultation

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Annex IV. Data Issues

Annex IV. Table 1.

Brunei Darussalam: Data Adequacy Assessment for Surveillance

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Annex IV Table 2.

Brunei Darussalam: Data Standard Initiatives

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Annex IV. Table 3.

Brunei Darussalam: Table of Common Indicators Required for Surveillance

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1Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions. 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 3 Foreign, domestic bank, and domestic nonbank financing. 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 5 Including currency and maturity composition. 6 Frequency and timeliness: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual.; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; and ("NLT") not later than;. 7 Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus. Any flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected. For those countries that do not participate in the IMF Data Standards Initiatives, the required frequency and timeliness under the SDDS are shown for New Zealand, and the encouraged frequency and timeliness under the e-GDDS are shown for Eritrea, Nauru, South Sudan, and Turkmenistan. 8 Based on the information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board (https://dsbb.imf.org/). For those countries that do not participate in the Data Standards Initiatives, as well as those that do have a National Data Summary Page, the entries are shown as "..."
1

The unemployment rate (age 18 years and over) remained flat at, 5.1 (5.0) percent in 2023 (2022), while youth unemployment rate (age 18 to 24 years) slightly fell to 16.8 percent in 2023 from 17.2 percent in 2022.

2

Sequential inflation is measured by month-to-month percentage change of CPI.

3

See accompanying Selected Issues Paper (SIP), Ganpurev (2024). “Drivers of Inflation”.

4

A persistent and broad-based decline in prices of items in the consumption basket to below pre-COVID levels, reflected in part an outdated Consumer Price Index (CPI) basket based on the 2015 Household Expenditure Survey (HES), inaccurately reflecting post-COVID consumption trends.

5

This is also supported by Currency Interchangeability Agreement (CIA) with Singapore.

6

Fiscal year (FY) spans April 1-March 31.

7

Monetary data suggests a large draw down of government deposit in 2023 (8.9 percent of GDP), in part reflected in decline of central bank reserves.

8

Around 12.3 percent of deposits are from the government as of March 2024, declining from 13.9 (32.2) percent in December 2023 (2022).

9

82 (11) percent of industry counterparties offshore have a rating of A- (BB) and above.

10

In Brunei, there are finance companies, which take certain types of deposits and provide car-financing and hirepurchases primary to households.

11

Brunei’s oil production decline since 2006, noted by Centre for Strategic and Policy Studies, is countered by efforts like developing marginal fields and deepwater exploration. The Salman oilfield, a joint venture with BSP, began production in 2023 after COVID-19 delays.

12

China is one of the top three trading partners and the largest FDI provider.

13

Average inflation was -0.1 percent during Jan 2011-Feb 2020.

14

AMRO’s 2022 Annual Consultation Report on Brunei Darussalam. Long-term price controls are maintained for 10 products, including petroleum products, rice, sugar, and cooking oil.

15

The non-O&G output gap is expected to have closed.

16

The share of revenues from O&G sectors in total revenue is 75.0 percent in FY2023/24.

17

Proven reserves are likely to be depleted in 27 years (BP Statistical Review of World Energy 2021), subject to a production capacity of 110 thousand barrels a day and assuming no further discovery of oil fields.

18

See Zhunussova and Basu (2023) IMF Country Paper No 23/347.

19

The “One Common Billing System” (OBCS) —launched in February 2020—to help facilitate government’s revenue collection by allowing the public to make payments online has expanded coverage and contributed to improved revenue collections.

20

The maximum level of tax revenue in percent of GDP that a country can achieve. (Fenochietto and Pessino, 2013)

21

See Appendix VI. Raising Revenues for a Sustainable Future (IMF staff report for the Malaysia 2024 Article IV consultation)

22

Sourced from latest staff reports of each ASEAN-5 country. In Brunei, wages and salaries include benefits (bonus, special allowance, etc.) based on the information in the Budget book 2023/24.

23

Brunei has the lowest electricity rate and the highest energy and water consumption intensity of all ASEAN countries.

24

The Ministry of Finance and Economy (MOFE) had tasked line ministries and departments to prepare a five-year FCP including structural reforms and policy changes (2019 Article IV). It includes measures on corporatization and privatization, PPPs, subsidy programs, fiscal management enhancement, revenue diversification, and government’s asset management system.

25

The annual Fiscal Outlook provides 5-year forecasts of aggregate budget components, but they do not constitute a MTFF that aligns fiscal policy and budget preparation.

26

Balasundharam and Kim (2023), IMF Country Paper No 23/347.

27

An upside scenario from the baseline, assuming O&G depletion by 2060 with new O&G discoveries, would need fiscal consolidation of cumulative 5 percent of non-O&G GDP between 2024-2029.

28

See accompanying SIP, Kim and Basu (2024). “Long-term Fiscal Trajectory Based on the Permanent Income Hypothesis” for details.

29

See accompanying SIP, Kawase and Basu (2024). “Brunei Financial Sector”.

30

While all three pillars of the Basel II have been implemented including, 10 percent minimum CAR, annual submission of Capital Adequacy Assessment Process (ICAAP) and provision of enhanced risk disclosures and capital management, along with additional capital buffer requirements for DSIBs. Basel III Liquidity Coverage Ratio (LCR) measures is planned to be implemented by end-2024. The 1st and 2nd rounds consultation on LCRs with the banks were completed in January 2023 and November 2023, respectively.

31

RPC is an initiative that aims to promote faster, cheaper, more transparent, and more inclusive cross-border payments in the region. In April 2024, the members of the RPC consist of central banks of Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Brunei Darussalam and Lao PDR. (Joint Press Release, 3 April 2024)

32

BDCB. Amendment to the Guideline on the Issuance of Debentures.

33

See accompanying SIP, Basu, Augsten, Kim, Kawase, Ganpurev and Medici (2024). “Augmenting Growth Prospects: The Role of First-Generation Structural Reforms”.

34

ASEAN-6 include Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam.

35

GCC countries include Bahrain, Kuwait, Oman, Saudi Arabia, UAE, Qatar.

36

The Financial Regulations of 2022 need updating, and Public-Private Partnership guidelines lack detail compared to global standards. See also accompanying SIP, Basu, Augsten, Kim, Kawase, Ganpurev and Medici (2024).

37

According to OECD Trade Facilitation Performance, time to prepare documents for exports (imports) in Brunei Darussalam is 155 (132) days, which is longer than the 70th percentile of the country sample.

38

According to OECD Trade Facilitation Performance, no set periods specified in the laws and regulations for providing a decision on appeal in Brunei Darussalam.

39

The Ministry of Home Affairs of Brunei exempted seven business activities scheduled under the Business License Act from the rule requiring a business license in 2016.

40

See the IMF Staff Discussion Note (SDN/2023/007) “Structural Reforms to Accelerate Green Growth and Ease Policy Trade-Offs in EMDEs”.

1

Prepared by Shohhei Kawase and Ganchimeg Ganpurev.

2

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.

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