Public Information Notices
Brunei Darussalam and the IMF
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On May 21, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam.1
Brunei's economy is largely based on the oil and gas sector, which accounts for 90 percent of total export earnings, 40 percent of GDP, and over 80 percent of government revenue. Brunei's small population enjoys one of the highest living standards in the region, with per-capita GDP in 2003 estimated at over US$13,000. The government provides a wide range of free or heavily subsidized public services and employs about half of the local labor force. Under a currency board arrangement, the Brunei dollar is maintained at par with the Singapore dollar.
Brunei has experienced a moderate recovery with low inflation since the 1998 recession. GDP growth increased to 3 percent in 2003, slightly up from a year earlier, owing to higher oil and gas production. However, the private non-oil sector's contribution to economic activity has remained subdued. Inflation has remained low, while private sector credit growth has slowed. The primary budget balance increased to a surplus of over 10 percent of GDP in 2003, reflecting higher energy prices, and expenditure restraint. At the same time, the trade surplus widened substantially to over US$3 billion, as oil and gas prices boosted exports while imports remained sluggish.
Temporarily lower oil and gas production, owing to repairs and upgrades of existing facilities, is expected to weigh on the near-term outlook, with real GDP growth declining to about 1 percent in 2004. The primary budget would remain in surplus, as would the current account, as oil and gas prices are expected to stay high. Looking further ahead, Brunei faces the challenge of reducing its dependency on energy resources by creating sustained growth in the non-oil private sector, where progress has been limited.
Executive Board Assessment
Executive Directors welcomed the ongoing recovery of Brunei's economy and the country's strengthened fiscal position. Inflation continues to be subdued, and the current account has remained in substantial surplus.
Looking ahead, Directors considered that the key challenge for Brunei will be to preserve its high standard of living in the face of the eventual depletion of natural resources. They agreed that the establishment of a medium-term oriented fiscal framework, as well as wide-ranging structural reforms to diversify the economy while scaling back the role of government, will be key to addressing this challenge. They were encouraged by the authorities' assurances to use the opportunity provided by higher oil prices to move forward in these areas.
Directors welcomed the authorities' continued commitment to prudent fiscal policies. Going forward, they urged them to move towards adopting a medium-term framework supported by strengthened institutional arrangements with well-defined fiscal rules. To ensure the sustainability of the public finances over the long term, it will be important to save the windfall revenue from currently high energy prices, restrain expenditure, and strengthen the tax effort. In addition, the authorities should establish clear rules for transfers between the government funds for short-term demand stabilization and for savings for future generations. The point was made that public spending restraint should pay due regard to cyclical fluctuations, and carefully protect priority expenditures that are key to Brunei's long-term growth potential.
Directors agreed that the currency peg of the Brunei dollar to the Singapore dollar has provided an effective anchor for price stability. They welcomed the recent adoption of the Brunei Currency and Monetary Board (BMCB) Act, which brings the legal framework up-to-date with daily operations of the currency board, while providing scope for financial market development. Directors also welcomed the authorities' commitment to maintain an adequate reserve coverage, and stressed that publication of all audited financial statements of the BCMB in a timely manner would help strengthen the credibility of this commitment.
Against the background of ongoing financial market development, Directors saw a need for a substantial upgrade of the regulatory and prudential framework, supported by increased human resources. They welcomed the authorities' intention to begin on-site inspections, and urged them to develop supporting regulations to better implement legislation on anti-money laundering and combating the financing of terrorism. Efforts to strengthen financial market supervision should also be linked to the intended development of new markets, such as the off-shore financial center and Islamic banking.
Directors highlighted the importance of efforts to diversify Brunei's economy and create employment opportunities for its growing labor force. They welcomed the authorities' intention to rely primarily on private sector initiative to support these efforts. Directors encouraged the authorities to broaden their current approach, which focuses on a small number of large scale projects to kick-start private sector development, to cover also industries that do not heavily rely on Brunei's energy resources. Directors also underscored the importance of increasing investments in education and training in line with private sector requirements, reducing impediments to private investment, containing wage growth, and pressing ahead with the privatization program.
Directors welcomed the progress made in recent years by the authorities in upgrading the quality and availability of key macroeconomic data, and looked forward to continued improvements to help enhance the effectiveness of Fund surveillance. Concern was nevertheless expressed about the delay in providing the Fund with data on Brunei's international investment position (IIP). Accordingly, Directors welcomed the authorities' commitment to provide the Fund with the best available data on the IIP as soon as the internal institutional procedures are completed. They stressed the importance of providing the data as soon as possible, noting that greater transparency regarding oil funds is important for formulating policy advice and will best serve Brunei's interest over the long term.
IMF EXTERNAL RELATIONS DEPARTMENT