Public Information Notice No. 04/2

Public Information Notice: IMF Concludes 2003 Article IV Consultation with Brunei Darussalam

January 26, 2004

On April 30, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam.¹

Background

Brunei's economy is based on its large oil and gas reserves. In 2002, the energy sector accounted for 89 percent of total exports, 87 percent of government revenues, and 37 percent of GDP. Brunei's GDP per capita of about US$11,500 is among the highest in the region. The government provides a wide range of free or heavily subsidized public services, and it employs over half of the labor force. Under a currency board arrangement, the exchange rate of the Brunei dollar is maintained at par with the Singapore dollar.

The overall level of economic activity has recovered from the recession of the late 1990s, although activity in the private non-oil sector remains relatively subdued. Real GDP growth is estimated to have picked up from ¾ percent in 2001 to 3 percent in 2002, reflecting increased production of oil and gas and government development spending. The pegged exchange rate system has kept inflation firmly in check, while there has been little growth in the monetary and credit aggregates. The primary budget balance shifted from a surplus of 4.4 percent of GDP in 2001 to a deficit of 5.7 percent in 2002, owing mainly to temporary delays in the disbursement of some of the petroleum royalties that had been collected in 2000-01. The external current account surplus, which averaged around 50 percent of GDP in the 1990s, has widened to over 80 percent in 2000-03, reflecting a drop of imports in the late 1990s together with a sharp increase in oil and gas prices since 2000. The overall balance of payments recorded a small surplus in 2002, raising official international reserves to US$445 million, equal to 2.3 months of imports.

The near-term outlook is generally favorable. Real GDP is expected to grow by 3-5 percent in 2003, and with buoyant oil and gas revenues and a closer synchronization of royalty receipts and disbursements, the primary budget is projected to revert to a surplus of about 7 percent of GDP. Inflation is expected to remain low, and the external current account surplus is projected to widen to about 90 percent of GDP. Looking farther ahead, the economy faces significant challenges from possible declines in energy prices over the medium term and, over the long term, the gradual depletion of energy resources.

Executive Board Assessment

Executive Directors noted that economic performance in 2002 had benefited from continued high export prices for oil and gas: economic growth had picked up, the external current account surplus remained very large, and inflation was low. Growth is expected to strengthen further in 2003, largely owing to increased government spending. The primary government balance is expected to revert to a substantial surplus, and the external current account surplus to remain large.

Looking farther ahead, however, Directors considered that the economy faces a number of important challenges. Given the prospective decline in oil revenues over the medium to long term, government spending will need to be adjusted downwards to maintain the modest primary surpluses that are needed to ensure continued sustainability. To put the public finances on a trajectory that is consistent with these requirements, Directors urged the authorities to embark on a medium-term adjustment path that would strike a proper balance between supporting incomes and strengthening the fiscal position. In this context, they encouraged the authorities to re-assess their spending plans for 2003 with a view to containing the projected widening of the non-oil fiscal deficit as much as possible. In particular, they highlighted the importance of carefully prioritizing development expenditures.

Directors saw scope for a further refinement of existing institutional arrangements to facilitate the achievement of medium-term fiscal objectives. The role of expenditure-smoothing should be explicitly assigned to the Consolidated Fund—backed up by an adequate liquidity endowment—while balances in the Brunei Investment Agency should be built up for the benefit of future generations. Directors welcomed ongoing steps in this direction.

Directors agreed that the Currency Interchangeability Agreement, which established the Brunei Currency Board (BCB), continues to provide an effective anchor for price stability. To further enhance confidence in the system, they encouraged the authorities to raise the BCB's required foreign exchange holdings from 70 percent of the domestic currency issue to at least 100 percent. Since the current level of reserves is already close to this target, it would be timely to make this statutory change.

Directors welcomed the careful legal preparations that had preceded the launching of the Brunei Darussalam International Financial Center, including the further tightening of anti-money laundering and counter-terrorist financing provisions. They encouraged the authorities to provide adequate resources to implement these provisions. Despite the stability provided by the presence of large foreign banks, Directors recommended further strengthening of banking regulation and supervision to enhance confidence in the banking system and support the long-term growth of the economy. This should be achieved both through domestic measures and through enhanced consultation with bank regulators in the home countries of foreign banks. Technical assistance may be required to help the authorities overcome capacity constraints in these areas.

Directors underscored the importance of continued structural efforts to develop, over time, a more diversified economic base, while recognizing the challenges which Brunei Darussalam is facing in this regard. They supported the priorities which the authorities are giving to increased participation of the private sector in the economy, and to developing a skilful labor force through increased emphasis on education and training. Directors looked forward to careful further analysis by the staff of these issues.

Directors welcomed Brunei Darussalam's growing role in the international financial system and the important steps forward in Brunei Darussalam-IMF relations, as evidenced by Brunei Darussalam's consent to increase its quota in the Fund and its participation in the Financial Transactions Plan. Directors also welcomed the authorities' intention to participate in the General Data Dissemination System and to publish an International Financial Statistics page, for which, they agreed, Fund technical assistance will be needed.

Directors noted the progress in the authorities' continued efforts to upgrade the quality and availability of key macroeconomic data. However, significant improvements are still needed to enhance the effectiveness of the Fund's surveillance on Brunei Darussalam's economy and to improve policy making, including to ensure Brunei Darussalam's attractiveness as a location for foreign investment. In particular, they underscored the importance that Brunei Darussalam provide the Fund with the best available data on its international investment position (IIP), as required under Article VIII, Section 5, and some Directors expressed great concern that this was not already the case. Information on Brunei Darussalam's IIP, especially of the government, is an important element in formulating policy advice, and Directors therefore urged the authorities to continue to make strong efforts—working closely with the Fund staff—to provide this information in a timely and adequate manner. Some Directors nevertheless noted that Brunei Darussalam was a relatively new member of the Fund and that the authorities should be given sufficient time to build up their capacity in data compilation.