IMF Executive Board Concludes 2012 Article IV Consultation with Brunei Darussalam

On May 14, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam.¹

Background

Brunei’s economy is dominated by the petroleum sector. Energy production, which accounts for two˗thirds of nominal GDP and 92 percent of government revenues, has allowed the government to fund high levels of social benefits and public sector employment. However, private sector development has remained limited. The government has embarked on an ambitious long term plan to diversify the economy to boost employment prospects.

Brunei continues to experience a high degree of macroeconomic stability. Real Gross Domestic Product (GDP) rose an estimated 1.9 percent, down from 2.6 percent in 2010, as supply disruptions lowered oil and gas production. The non energy sector is expected to have grown 3.0 percent in 2011, led by transportation and services sectors. An excise tax increase in late 2010 pushed CPI inflation to 2 percent in 2011, but overall price pressures remain contained. High oil and gas prices have contributed to substantial increases in both fiscal and current account surpluses.

The outlook for growth is encouraging. Real GDP Growth is projected to be 3.2 percent in 2012 and rise to 3.5 percent on average over the next five years. Over the medium term, investment is expected to accelerate in both upstream and downstream energy projects. Growth in the non energy sector will be sustained by infrastructure and housing investments, and continued expansion of transport, retail and services sectors. There is further upside potential upside potential if government policies to promote foreign direct investment and private enterprise are successful.

Risks to the economy are limited. Brunei is cushioned by its large fiscal and current account surpluses, substantial foreign assets, and the peg to the Singapore dollar. The financial sector is generally resilient, as banks have ample capital buffers and do not rely on external financing.

Executive Board Assessment

Executive Directors noted Brunei Darussalam continues to maintain a high degree of macroeconomic stability as a result of consistent implementation of prudent policies. Conservative fiscal policy has allowed the government to accumulate substantial savings for future generations, while funding high social expenditures. Directors noted that the medium term outlook is positive. Risks to the economy are limited and well managed, and the country has substantial room to absorb adverse shocks.

Directors agreed that the current prudent fiscal policy stance is appropriate. Overall spending growth will remain contained, but there will be an increase in social spending. Directors welcomed the increase in the medium term development budget, which prioritizes infrastructure investment and improvements in human capacity. Directors welcomed the authorities’ ambitious plans to reform public financial management, noting that implementation will require adequate resources.

Directors commended the authorities’ plans for wide ranging reforms to promote private sector development and diversification. They underscored that successful implementation of these reforms will be critical to generate increases in employment, investment, and productivity in the non energy private sector. Directors called for further efforts to improve the business climate, including streamlining regulatory processes.

Directors agreed that the currency board arrangement has delivered exchange rate and price stability. They noted staff’s assessment that the real exchange rate appears to be broadly in line with fundamentals.

Directors noted that the Autoriti Monetari Brunei Darussalam (AMBD) has been successful in fulfilling its core functions regarding financial stability and managing the currency board arrangement. Nevertheless, a sustained effort will be needed to strengthen its capacity to meet increasing and more complex policy challenges. In particular, the AMBD should, in the context of a well sequenced financial sector reform program, work toward building a macroprudential policy framework, and improve the payments system and money market infrastructure. Directors encouraged the authorities to address the remaining Anti-money laundering - combating the financing of terrorism (AML/CFT) deficiencies.Directors welcomed the progress in improving the compilation and dissemination of macroeconomic data, and reporting timely real sector data. Further efforts will be necessary to ensure that the statistical framework can support more detailed policy analysis, including on taxes and subsidies.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.