## 1. Real and Fiscal Indicators ## Source details **Canonical URL:** [1. Real and Fiscal Indicators](https://www.imf.org/-/media/files/publications/cr/2023/english/1brnea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1brnea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1brnea2023001.pdf.json) --- ### Context and recent developments - Recovery and policy stance - COVID-19 restrictions began removal in November 2021; borders reopened in June 2022. - Policies shifted to restore pre-pandemic macroeconomic framework and scale up public investment to promote recovery and diversification. - Real GDP and sectoral developments - Real GDP fell by 1.6 percent in 2022. - Decline led by O&G production shortfall due to protracted infrastructure maintenance; partly offset by downstream O&G activities and non-O&G sector growth. - Labor market - Unemployment rate fell from 7.3 percent in 2020 to 5.2 percent in 2022. - Employment gains concentrated in lower-paid jobs; manufacturing sector largest contributor to employment gains. - Preliminary 2022 data showed an increase in unemployment among workers with tertiary education. - Inflation and prices - Average headline inflation rose from 1.7 percent in 2021 to 3.7 percent in 2022. - Inflation peaked at 4.5 percent in August 2022 (highest over 25 years), declining to 0.2 percent by April 2023. - Drivers: higher food prices, supply chain disruptions, increased transport costs; moderation aided by administered staples pricing. - Exchange rate and monetary conditions - Stable exchange rate under currency board arrangement with Singapore mitigated imported inflation. - Mild depreciation of Brunei dollar against the USD after the pandemic. - BDCB raised Overnight Standing Facilities Rates in line with global interest rates. - Fiscal position and reserves - Overall fiscal position improved to a surplus of 1.6 percent of GDP in FY2022/23 from a deficit of 5.1 percent in FY2021/22. - Windfall revenues from higher global energy prices and savings from winding down pandemic spending (around 3 percent of GDP) contributed to improvement. - Non-O&G balance (excluding O&G revenue and royalty payments) narrowed by 5 ppts of GDP. - External sector and reserves - Current account balance increased from 11.2 percent to 19.6 percent of GDP in 2022. - Brunei’s international reserves (excluding gold) stood at around 195 percent of the Fund’s assessing reserves adequacy (ARA) metric in 2022; the entire SDR allocation (US$412 million) is currently saved as reserves. - International reserves (excluding gold) in 2022 were estimated at USD 4.8 billion, equivalent to 6.7 months of imports and 40 percent of broad money. - Financial sector soundness - Bank capital ratio around 20 percent of risk-weighted assets in 2022 (regulatory requirement 10 percent). - Gross non-performing loans (NPL) fell from 3.6 percent in 2021 to 3.3 percent in 2022. - NPL (net of provisions) to capital ratio rose from 4.9 percent to 5.5 percent due to write-offs. - Banks have abundant liquidity funded mostly by domestic deposits (around 15 percent of deposits are from the government). - Credit and lending - Domestic credit increased by 6.0 percent y/y in 2022 (after 0.2 percent decline from 2019 to 2020). - Banks’ lending to domestic corporate sector grew by 8.8 percent y/y in 2022; credit to households grew by 1.3 percent. - Private sector credit remains low at around 40 percent of GDP. - Resource longevity note - Proven reserves likely to be depleted in about 27 years (BP Statistical Review of World Energy 2021), subject to production capacity of 110 thousand barrels a day and assuming no further discovery of oil fields. ### Outlook and risks - Growth and output gap - Real GDP projected to decline by around 1 percent in 2023. - Negative output gap in 2022 expected to remain negative in 2023 and gradually close over the next couple of years. - Downstream sector growth expected to flatten due to maintenance at the Hengyi refinery; O&G production will continue to negatively impact real GDP in 2023 owing to prolonged drilling and maintenance delays. - Private consumption expected to remain a key growth driver; investment to pick up moderately supported by infrastructure investments. - Inflation outlook - Projected to moderate to 1.7 percent on average in 2023. - Easing driven by resolution of global supply chain bottlenecks and commodity price moderation; currency board and administered end-user prices will soften pass-through. - Fiscal outlook (FY2023/24 projections) - Overall fiscal deficit projected to widen to 9.2 percent of GDP in FY2023/24 due to lower O&G revenues and higher capital spending. - Total revenue projected to decline to 19.5 percent of GDP in FY2023/24. - Total expenditures projected to increase to 28.7 percent of GDP in FY2023/24, led by expanded capital spending. - The deficit would be financed by drawing down the Fiscal Stabilization Reserve Fund (FSRF). - Non-O&G balance expected to continue a gradual decline by about 1 ppt of GDP in the fiscal year. - External sector outlook - Current account surplus projected to narrow to around 10 percent of GDP in 2023 due to lower oil prices and buoyant imports as domestic demand rebounds. - Key risks (tilted to the downside) - Oil price uncertainty and sharp declines. - Geopolitical tensions leading to supply chain disruptions. - Weaker global demand. - Domestic production disruptions. - Climate transition: potential to strand downstream assets if not repurposed. - Upside risks: higher O&G prices and O&G discoveries. ### Authorities’ views - Near-term outlook and O&G activity - Authorities concur with staff’s near-term outlook and risk assessment. - Deferred O&G rejuvenation and development activities are beginning to normalize in the year of the report; rejuvenation expected to continue for the next couple of years with overall production recovery starting in 2024. - Authorities expect O&G sector’s overall growth to be positive over the medium term. - Inflation and diversification - Despite recent drop in inflation, authorities view future prices as difficult to predict due to international price influence. - Authorities reiterate commitment to continued diversification and consider climate transition an important medium-term risk. ### Fiscal policy — findings and recommendations - General guidance and stance - Investment-driven fiscal expansion in FY2023/24 is appropriate given cyclical position and pandemic scarring, but a growth-friendly fiscal consolidation should be prioritized. - Targeted fiscal consolidation (reductions in spending and/or revenue-raising) recommended to reduce the overall deficit while protecting vulnerable groups and productive investments. - Any revenue overperformance and/or under-execution of subsidies should be saved on a precautionary basis to restore buffers for climate transition risks. - Fiscal reserves can be leveraged for temporary support if downside risks materialize; build capacity for targeted cash transfers and contingency planning for varying shocks, including climate shocks. - Medium-term consolidation need (PIH assessment) - PIH norm indicates need for further fiscal consolidation of cumulative 10 percent of non-O&G GDP between 2023-28 relative to the baseline during the transition period. - Alternative lower-energy-demand scenarios (net-zero targets) would require additional consolidation during the transition period. - Specific medium-term measures and quantitative pointers - Wage bill rationalization - Public sector wage bill increased by around 10 percent over the last decade. - Wage bill amounts to around 35 percent of total expenditures, compared with 25 percent for ASEAN and less than 30 percent average for Emerging Market Economies (EMEs). - Measures: downsizing through attrition (<1:1 replacement), intensified manpower auditing, tightening temporary jobs, strengthening public sector productivity. - Targeted subsidies - Energy subsidies estimated at around 6 percent of GDP in 2022. - Shift from broad-based to targeted subsidies recommended; gradually phase out energy subsidies and allow gradual pass-through of international prices for import-controlled products while protecting vulnerable households. - Implementing digitalized National Welfare System will improve targeting. - Pensions - Recent pension reforms allow greater flexibility and wider coverage; new scheme needs careful management to limit spending pressures with an aging population. - Revenue mobilization - Current tax reliance on CIT, Customs Duty, Stamp Duty viewed as least efficient tax bases. - Scope to broaden tax base: recalibrate property taxes, adopt goods and services taxes (GSTs), expand excise taxes on goods with negative externalities, reduce tax exemptions. - Tax policy diagnostic recommended to prioritize reforms. - Implementing carbon pricing could provide significant additional revenues: estimated 1.6 -7.2 percent of GDP above the baseline in 2030. - Policy mix with greatest emissions reduction and highest revenues: carbon tax reaching $50 per tonne by 2030 combined with fuel subsidies phase-out; feebates could bring additional 1.6 percent of GDP in medium-term savings. - Strengthen revenue administration (e.g., continue “One Common Billing System” (OCBS)). - Corporatization and privatization - Accelerate corporatization efforts of GLCs as laid out in the Fiscal Consolidation Plan (FCP); strengthen corporate governance and transparency and privatize some GLCs to generate fiscal savings and promote competition. ### Fiscal institutions, transparency, and public financial management - Fiscal framework and sustainability - Establish a credible risk-based medium-term fiscal framework (MTFF) to provide forward guidance and reduce fiscal procyclicality, building on the RKN framework and Fiscal Outlook and ensure integration with the upcoming 12th National Development Plan (2023-27). - Consider introducing a long-term fiscal anchor reflecting Brunei’s fiscal objectives, natural resource endowments, and expected returns from accumulated net financial assets, with flexibility to respond to shocks. - Integrate fiscal risk analysis, incorporating climate risks, into economic and fiscal planning. - Enhancing PFM and transparency - Publish business plans, reports, and audited financial statements for Government-Linked Companies (GLCs). - Establish an integrated PFM system including central government, extra budgetary funds, GLCs, and the sovereign wealth fund. - Prepare realistic budgets, strengthen budget execution, implement a Treasury Single Account, and streamline procurement practices across line ministries. - Funds and governance - FSRF is an extrabudgetary fund providing funding to the annual budget to eliminate revenue shortfalls; it is a sub-fund of the Sustainability Fund within the Consolidated Fund (CF). The CF includes the Sustainability Fund and the sovereign wealth fund (General Reserve Fund (GRF)), managed by the Brunei Investment Agency. The CF is not part of the GIR; there are no explicit rules on allocations between sub-funds; funds can flow both ways. ### Monetary policy, exchange rate, and liquidity management - Currency arrangement - Currency board arrangement with Singapore is sound and has supported macroeconomic and financial sector stability. - Recommendation: further align policy rates with the Monetary Authority of Singapore, adjusted for country risk premia, to stabilize money market rates closer to the level implied by the uncovered interest rate (UIP) condition. - Liquidity management and market development - Recommendation: step-up I-bills issuance and more active liquidity management to strengthen transmission from the overnight policy rate to banks’ retail rates. - Structural excess liquidity has hampered interbank market development and weakened monetary transmission. ### Financial sector soundness, supervision, and market development - Key metrics and findings - Aggregate capital adequacy ratio (CAR) of 21.3 percent as of Q1 2023; regulatory minimum CAR is 10.0 percent. - Gross NPL at 3.2 percent (Q1 2023) and 3.3 percent in 2022. - Sectoral loan exposures are at 30 percent of total banking assets, or 27 percent of GDP. - Over 50 percent of banks’ portfolio is allocated to investments offshore. - Credit-to-GDP gap is estimated to be negative. - Supervisory and macroprudential measures - BDCB implementing risk-based supervision and invested in a macro stress testing framework since 2019. - Additional capital buffer requirement for D-SIBs imposed in 2023. - Macroprudential toolkit includes: (i) Total Debt Service Ratio (TDSR) < 70 percent; (ii) Cap on Unsecured Personal loans at 18 times net monthly income; (iii) Minimum Cash Balance requirement at 6 percent. - Suggested wider use of macroprudential tools including a countercyclical capital buffer. - Recommendation: BDCB could consider climate stress tests for financial institutions as part of the sustainable finance roadmap. - Financial market development and payments - Financial Development (FD) Index for Brunei is low compared to ASEAN and GCC peers. - Recommendations: develop domestic interbank markets; promote secondary market for government sukuks and I-bills; encourage issuance of corporate bonds/sukuks; establish a stock exchange. - Digital Payment Hub expected to be ready by the end of 2023. - BDCB issued E-KYC guidelines in July 2022 to facilitate non-face-to-face onboarding. - Addressing APG priority recommendations from the Mutual Evaluation Report adopted in July 2023 would improve AML/CFT effectiveness. ### Structural reforms, diversification, and human capital - Diversification priorities - Reduce reliance on the O&G sector and build resilience by enhancing resilient infrastructure, improving business environment, attracting FDI, and stimulating domestic entrepreneurship. - Policy focus on five priority sectors: Downstream O&G; Food; ICT; Tourism; and Services. - Contribution of priority sectors to GDP increased from 46.9 percent in 2010 to 55.9 percent in 2022. - Public investment and PPPs - Strengthen public investment institutions and enhance PPPs; prioritize PIMA reforms to better plan and execute capital projects. - Human capital and labor - Address skills mismatches and underemployment, particularly among youth; note relatively low PISA scores relative to income level. - Authorities implementing training initiatives such as the Brunei ICT Industry Competency Framework (BIICF) launched in August 2022. - Digitalization - Implement the Digital Economy Masterplan 2025; flagship projects include Digital Identity and Digital Payment Hub. ### Climate change mitigation, adaptation, and policy instruments - Commitments and targets - Commitment: Net Zero Target by 2050. - BAU emissions in 2030: 29.5 MtCO2e. - NDC unconditional GHG target (2020) in 2030: 23.6 MtCO2e (calculated as 20 percent reduction from BAU). - Government on track to achieve the 20 percent reduction NDC target by 2030. - Mitigation measures and scenarios - Planned 30 MW solar power plant; impact limited—less than three percent of existing generation capacity. Net-Metering system being implemented across sectors. - Scenario results: mitigation gap between baseline and Net Zero pathway in 2030 might be closed by 13 (power and industry feebates) to 65 (combination of carbon tax and subsidies phase-out) percent under different scenarios. - Negative impact of reforms on GDP can be offset by revenue recycling, lowering GDP growth in 2030 only by 0.1-0.2 percentage points. - Implementing carbon pricing could raise revenues estimated at 1.6 -7.2 percent of GDP above the baseline in 2030; a $50 per tonne carbon tax by 2030 combined with fuel subsidies phase-out yields the largest emissions reduction and revenues. - Climate risks and adaptation - Annual mean temperature has risen steadily at 0.25°C per decade and would rise by 1.7-3.3°C towards 2100 relative to the 1995–2014 baseline. - Sea level could rise by 0.3-0.6 meters on average by 2100 in some scenarios, posing threats to coastal zones. - Recommendations - Fully integrate BNCCP objectives in the upcoming medium-term national development plan (RKN12) and sectoral plans/regulations. - Formalize the role of Brunei Climate Change Secretariat (BCCS) as BNCCP implementation coordinator. - Develop systematic identification and reporting of climate-related expenditures. - Finalize institutional framework for carbon pricing and policies to reduce industrial sector emissions. - Develop National Adaptation Plan (NAP) and invest in climate-resilient infrastructure projects. - Authorities’ stance on climate measures - Authorities concur more efforts are needed to reach Net Zero but energy subsidy reform is not part of their strategy. - Focus on improving emissions data before establishing carbon pricing. - Mandatory Directive launched in April 2023 directing facilities that emit/remove GHGs to report regularly; national online reporting platform expected to be live by end of year. - 30 MW solar plant planned for commissioning by Q4 2024 (on top of 6MW already installed). - First iteration of the NAP expected to be completed and submitted to UNFCCC in 2023. ### Data issues, capacity building, and technical assistance - Data adequacy and gaps - Data quality broadly adequate for surveillance; improvements needed in timeliness of national accounts and frequency/timeliness of balance of payments data. - Quarterly GDP available with a one-period lag; GDP rebased to 2010 in 2015 and needs rebasing to a more recent year. - Monthly CPI available within six weeks from the end of the reference month; CPI weights derived from 2015/16 Household Expenditure Survey and should be updated. - Balance of payments data reported to STA in BPM6 format on an annual basis; compilation challenges remain and quarterly reporting needs improvement. - Compilation of international investment position on BPM6 basis finished but not released. - Actions and TA - Authorities working to implement Fund’s TA 2020 recommendations to close external sector data gaps and add outward investment data to business survey. - TA mission on liquidity management in February 2023 recommended measures to improve liquidity and forecasting frameworks of the BDCB. - Brunei undertook a PIMA and Climate PIMA in April 2023. - Treasury Accounting and Financial Information System (TAFIS) expected to be rolled out in FY2024/25. - Improvements and commitments - Timeliness of annual BoP publication shortened from 6 to 5 months. - Authorities expressed interest in TA for updating CPI basket and rebasing national accounts statistics. ### Staff appraisal and risk assessment highlights - Staff appraisal summary - 2022 growth was negatively affected by reduced O&G sector activities despite post-pandemic reopening. - Downstream O&G activities and non-O&G sectors contributed positively to growth in 2022 and aided diversification efforts. - Inflation has been moderating with easing global supply chain and commodity price bottlenecks. - Estimates suggest the external position for 2022 is substantially weaker than suggested by fundamentals and desirable policies; output gap assessed to be negative. - External sector assessment (2022 model results and gaps) - Cyclical contributions (from model): (-) 5.5 (in percent of GDP). - COVID-19 adjustors (-): 0.6 (in percent of GDP). - Adjusted CA: 13.5 (in percent of GDP). - CA Norm (from model): 18.7 (in percent of GDP). - Adjusted CA Norm: 18.7 (in percent of GDP). - CA Gap: -5.2 (in percent of GDP) by CA model; -1.7 (in percent of GDP) by REER model. - REER Gap (in percent): 4.0. - CA-Actual: 19.6 (in percent of GDP). - Risk Assessment Matrix — selected risks and policy responses (summary) - External risks: Intensification of regional conflict(s) (Likelihood High; Expected Impact Medium); Commodity price volatility (Likelihood Medium; Expected Impact High); Abrupt global slowdown (Likelihood Medium; Expected Impact Medium). - Domestic risks: Unexpected variations in energy production (Likelihood Medium; Expected Impact High); Delays in FDI projects (Likelihood Medium; Expected Impact Medium); Delays in fiscal consolidation (Likelihood High; Expected Impact High). - Policy responses: Expand fiscal reserves with continuous consolidation; accelerate diversification and public investment; provide targeted and temporary support to vulnerable households; strengthen macroprudential supervision and contingency planning. *Source: 1. Real and Fiscal Indicators (chapter), 1brnea2023001* ### 1. Real and Fiscal Indicators _______________________________________________________________________ 21 ### 1. Real and Fiscal Indicators ### Context and recent developments - Brunei is recovering from the impact of the pandemic; COVID-19 restrictions began removal in November 2021 and borders reopened in June 2022. - Policies have shifted to restoring the pre-pandemic macroeconomic framework and scaling up public investment to promote recovery and diversification. - Real GDP: - Real GDP fell by 1.6 percent in 2022. - Decline led by O&G production shortfall due to protracted infrastructure maintenance; partly offset by downstream O&G activities and non-O&G sector growth. - Labor market: - Unemployment rate fell from 7.3 percent in 2020 to 5.2 percent in 2022. - Employment gains concentrated in lower-paid jobs; manufacturing sector largest contributor to employment gains. - Preliminary 2022 data showed an increase in unemployment among workers with tertiary education. - Inflation: - Average headline inflation rose from 1.7 percent in 2021 to 3.7 percent in 2022. - Inflation peaked at 4.5 percent in August 2022 (highest over 25 years), declining to 0.2 percent by April 2023. - Drivers: higher food prices, supply chain disruptions, increased transport costs; moderation aided by administered staples pricing. - Exchange rate and monetary conditions: - Stable exchange rate under currency board arrangement with Singapore helped mitigate imported inflation. - Mild depreciation of Brunei dollar against the USD after the pandemic. - Brunei Darussalam Central Bank (BDCB) raised Overnight Standing Facilities Rates in line with global interest rates. - Fiscal position and reserves: - Overall fiscal position improved to a surplus of 1.6 percent of GDP in FY2022/23 from a deficit of 5.1 percent in FY2021/22. - Windfall revenues from higher global energy prices and savings from winding down pandemic spending (around 3 percent of GDP) contributed to improvement. - Non-O&G balance (excluding O&G revenue and royalty payments) narrowed by 5 ppts of GDP. - External sector: - Current account (CA) balance increased from 11.2 percent to 19.6 percent of GDP in 2022, driven by higher O&G prices and downstream exports. - Raw material imports (mainly mineral fuels) grew with petrochemical manufacturing expansion. - Preliminary estimates suggest the external position was substantially weaker than the level implied by fundamentals and desirable policy settings (Appendix I). - Brunei’s international reserves (excluding gold) stood at around 195 percent of the Fund’s assessing reserves adequacy (ARA) metric in 2022; the entire SDR allocation (US$412 million) is currently saved as reserves. - Financial sector soundness: - Bank capital ratio around 20 percent of risk-weighted assets in 2022 (regulatory requirement 10 percent). - Gross non-performing loans (NPL) fell from 3.6 percent in 2021 to 3.3 percent in 2022. - NPL (net of provisions) to capital ratio rose from 4.9 percent to 5.5 percent due to write-offs. - Banks have abundant liquidity funded mostly by domestic deposits (around 15 percent of deposits are from the government). - Credit and lending: - Domestic credit increased by 6.0 percent y/y in 2022 (after 0.2 percent decline from 2019 to 2020). - Banks’ lending to domestic corporate sector grew by 8.8 percent y/y in 2022; credit to households grew by 1.3 percent. - Private sector credit remains low at around 40 percent of GDP. ### Outlook and risks - Growth and output gap: - Real GDP projected to decline by around 1 percent in 2023. - Negative output gap in 2022 is expected to remain negative in 2023 and gradually close over the next couple of years. - Downstream sector growth expected to flatten due to maintenance at the Hengyi refinery; O&G production will continue to negatively impact real GDP in 2023 owing to prolonged drilling and maintenance delays. - Private consumption expected to remain a key growth driver; investment to pick up moderately supported by infrastructure investments. - Inflation: - Projected to moderate to 1.7 percent on average in 2023. - Easing driven by resolution of global supply chain bottlenecks and commodity price moderation; currency board and administered end-user prices will soften pass-through. - Fiscal outlook: - Overall fiscal deficit projected to widen to 9.2 percent of GDP in FY2023/24 due to lower O&G revenues and higher capital spending. - Total revenue projected to decline to 19.5 percent of GDP in FY2023/24. - Total expenditures projected to increase to 28.7 percent of GDP in FY2023/24, led by expanded capital spending. - The deficit would be financed by drawing down the Fiscal Stabilization Reserve Fund (FSRF). - Non-O&G balance expected to continue a gradual decline by about 1 ppt of GDP in the fiscal year. - Current account: - Current account surplus projected to narrow to around 10 percent of GDP in 2023 due to lower oil prices and buoyant imports as domestic demand rebounds. - Risks (tilted to the downside): - Oil price uncertainty and sharp declines could spill over to other sectors. - Geopolitical tensions leading to supply chain disruptions. - Weaker global demand. - Domestic production disruptions. - Climate transition: global decarbonization could strand downstream assets (e.g., refineries) if not repurposed or adapted. - Upside risks: higher O&G prices and O&G discoveries. ### Authorities’ views - Authorities concur with staff’s near-term outlook and risk assessment. - They note deferred O&G rejuvenation and development activities are beginning to normalize in the year of the report and expect rejuvenation to continue for the next couple of years with overall production recovery starting in 2024. - Authorities expect O&G sector’s overall growth to be positive over the medium term. - Despite recent drop in inflation, authorities view future prices as difficult to predict due to influence from international prices. - Authorities reiterate commitment to continued diversification and consider the climate transition an important medium-term risk. ### Economic policies to secure resilience and support economic transformation — A. Fiscal Policy - General guidance: - Investment-driven fiscal expansion in FY2023/24 is appropriate given cyclical position and pandemic scarring, but a growth-friendly fiscal consolidation should be prioritized. - Targeted fiscal consolidation (reductions in spending and/or revenue-raising) recommended to reduce the overall deficit while protecting vulnerable groups and productive investments. - Any revenue overperformance and/or under-execution of subsidies should be saved on a precautionary basis to restore buffers for climate transition risks. - Brunei can leverage fiscal reserves for temporary support if downside risks materialize; build capacity for targeted cash transfers and develop contingency planning frameworks for varying shocks, including climate shocks. - Medium-term consolidation need: - Given dependence on uncertain O&G reserves and global price volatility, resumption of medium-term fiscal consolidation is called for. - Assessment based on the Permanent Income Hypothesis (PIH) finds a persistent gap between the staff’s baseline non-O&G deficit path and the sustainable PIH norm. - Under current policies, PIH norm of a constant annuity in real terms indicates need for further fiscal consolidation of cumulative 10 percent of non-O&G GDP between 2023-28 relative to the baseline during the transition period. - Alternative lower-energy-demand scenarios (net-zero targets) would require additional consolidation during the transition period. - Specific medium-term measures and quantitative pointers: - Wage bill rationalization: - Public sector wage bill has increased by around 10 percent over the last decade. - Wage bill amounts to around 35 percent of total expenditures, compared with 25 percent for ASEAN and less than 30 percent average for Emerging Market Economies (EMEs). - Measures: downsizing through attrition (<1:1 replacement), intensified manpower auditing, tightening temporary jobs, strengthening public sector productivity. - Targeted subsidies: - Brunei subsidizes energy, housing, utilities, and telecom services. - Energy subsidies estimated at around 6 percent of GDP in 2022. - Shift from broad-based to targeted subsidies recommended; gradually phase out energy subsidies and allow gradual pass-through of international prices for import-controlled products while protecting vulnerable households. - Implementing digitalized National Welfare System will improve targeting. - Pensions: - Recent pension reforms allow greater flexibility and wider coverage; new scheme needs careful management to limit spending pressures with an aging population. - Revenue mobilization: - Current tax reliance on CIT, Customs Duty, Stamp Duty viewed as least efficient tax bases. - Scope to broaden tax base: recalibrate property taxes, adopt goods and services taxes (GSTs), expand excise taxes on goods with negative externalities, reduce tax exemptions. - Tax policy diagnostic recommended to prioritize reforms. - Implementing carbon pricing could provide significant additional revenues: estimated 1.6 -7.2 percent of GDP above the baseline in 2030. - Policy mix with greatest emissions reduction and highest revenues: carbon tax reaching $50 per tonne by 2030 combined with fuel subsidies phase-out; feebates could bring additional 1.6 percent of GDP in medium-term savings. - Strengthen revenue administration (e.g., continue “One Common Billing System” (OCBS)). - Corporatization and privatization: - Accelerate corporatization efforts of GLCs as laid out in the Fiscal Consolidation Plan (FCP); strengthen corporate governance and transparency and privatize some GLCs to generate fiscal savings and promote competition. - Fiscal institutions and funds: - The FSRF is an extrabudgetary fund providing funding to the annual budget to eliminate revenue shortfalls; it is a sub-fund of the Sustainability Fund within the Consolidated Fund (CF). The CF includes the Sustainability Fund and the sovereign wealth fund (General Reserve Fund (GRF)), managed by the Brunei Investment Agency. The CF is not part of the GIR; there are no explicit rules on allocations between sub-funds; funds can flow both ways. - Resource longevity note: - Proven reserves likely to be depleted in about 27 years (BP Statistical Review of World Energy 2021), subject to production capacity of 110 thousand barrels a day and assuming no further discovery of oil fields. *Source: 1. Real and Fiscal Indicators (chapter), 1brnea2023001* ### 21. Ensuring a sustainable fiscal position will require continued strengthening of fiscal ### 21. Ensuring a sustainable fiscal position will require continued strengthening of fiscal ### Fiscal framework and fiscal sustainability - Establish a credible risk-based medium-term fiscal framework (MTFF) to provide forward guidance and reduce fiscal procyclicality, building on experience with the RKN framework and Fiscal Outlook, and ensure integration with the upcoming 12th National Development Plan (2023-27). - Consider introducing a long-term fiscal anchor reflecting Brunei’s fiscal objectives, natural resource endowments, and expected returns from accumulated net financial assets domestically and abroad, with flexibility to respond to shocks. - Integrate fiscal risk analysis, incorporating climate risks, into economic and fiscal planning. - Note: 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. ### Enhancing transparency and public financial management (PFM) - Publish business plans, reports, and audited financial statements for Government-Linked Companies (GLCs). - Establish an integrated PFM system including central government, extra budgetary funds, GLCs, and the sovereign wealth fund. - Prepare realistic budgets and strengthen budget execution. - Implement a Treasury Single Account. - Streamline procurement practices across line ministries. ### Authorities’ views on fiscal measures - Authorities broadly agree with fiscal recommendations and the need for fiscal prudence. - Government remains committed to the Fiscal Consolidation Plan (FCP) delayed by the pandemic; aims to narrow the fiscal deficit and rebuild fiscal buffers. - Revenue mobilization: expand excise tax on goods with negative health and environmental externalities; strengthen revenue administration through digitalization of corporate and land tax payments. - Public wage containment: new posts vetted by a special committee under the Public Service Department. - Darussalam Assets is working with ministries to reassess corporatization requirements and processes. - Darussalam Assets―a private-limited company owned by the government since 2012―and Strategic Development Capital (SDC) Fund manage 33 GLCs, though the total rises to 70 when subsidiaries are included. ### Currency arrangement and monetary operations - The currency board arrangement with Singapore is sound and has supported macroeconomic and financial sector stability; it allows Brunei to benefit from Singapore's macroeconomic management expertise and supports stable inflation. - Recommendation: further align policy rates with the Monetary Authority of Singapore, adjusted for country risk premia, to stabilize money market rates closer to the level implied by the uncovered interest rate (UIP) condition. - Recommendation: step-up I-bills issuance and more active liquidity management to strengthen transmission from the overnight policy rate to banks’ retail rates. ### Financial sector soundness and supervision - Banking sector observations: - Sectoral loan exposures are at 30 percent of total banking assets, or 27 percent of GDP. - The credit-to-GDP gap is estimated to be negative. - Over 50 percent of banks’ portfolio is allocated to investments offshore. - Systemic risk is assessed to be contained due to strong capital buffers and abundant liquidity, but supervisors should remain mindful of tail risks amid tightening global financial conditions. - Recommendation: BDCB could consider climate stress tests for financial institutions as part of the sustainable finance roadmap. ### Strengthening regulatory frameworks and macroprudential policy - BDCB actions and timeline: - Implementing risk-based supervision and invested in a macro stress testing framework since 2019. - Started imposing the additional capital buffer requirement for D-SIBs in 2023. - Using macroprudential tools to address sectoral risks, including debt-service-to-income ratios. - Suggested wider use of macroprudential toolkit, including a countercyclical capital buffer. - Basel and macroprudential context: - All three pillars of Basel II implemented; Pillar I minimum CAR of 10 percent effective March 2017; Pillar II ICAAP annual submission since June 2019; Pillar III enhanced disclosure since March 2019. - Macroprudential toolkit includes: (i) Total Debt Service Ratio (TDSR): borrowers’ monthly total debt obligation relative to net income should be less than 70 percent; (ii) Cap on Unsecured Personal loans: unsecured personal credit facilities are restricted to 18 times of the borrowers’ net monthly income; and (iii) Minimum Cash Balance requirement (reserve requirement) at 6 percent. A cap on loan-to-value ratios was revoked in late 2016. ### Financial market depth and payments infrastructure - Finding: Financial Development (FD) Index for Brunei is low compared to ASEAN and GCC peers. - Structural excess liquidity has hampered interbank market development and weakened monetary transmission. - Recommendations: - Develop domestic interbank markets to support financial deepening and private-sector growth. - Promote development of secondary market for government sukuks and I-bills, encourage issuance of corporate bonds/sukuks, and establish a stock exchange. - Payments and digital measures: - A digital payment hub enabling integration of existing payment systems is under development and expected to be ready by the end of 2023. - BDCB issued guidelines to strengthen IT and operational risk management. - Notice and guidelines on E-KYC were issued in July 2022 to facilitate non-face-to-face customer onboarding and due diligence. - Addressing Asia Pacific Group on Money Laundering (APG) priority recommendations from the Mutual Evaluation Report adopted in July 2023 would improve AML/CFT effectiveness. ### Authorities’ views on financial sector - Authorities broadly agree with assessment and welcomed IMF TA recommendations on liquidity management, liquidity forecasting, and interbank market development. - Authorities undertake stress tests for financial institutions at least annually. - Plan to implement the liquidity standard of Basel III between 2023 and 2024 and phase in other Basel III elements. - Several measures in progress to develop secondary markets, encourage corporate issuance, and establish a stock exchange. ### Structural reforms and diversification - Diversification goal: reduce reliance on the O&G sector and build resilience. - Policy priorities: - Enhance resilient infrastructure. - Improve business environment to attract foreign investment and stimulate domestic entrepreneurship. - Participate in regional trade agreements for larger market access. - Human capital: - Address skills mismatches and underemployment, particularly among youth. - Note: Brunei’s relatively low PISA scores relative to income level. - Authorities implementing training initiatives such as the Brunei ICT Industry Competency Framework (BIICF) launched in August 2022. - Public investment and PPPs: - Strengthen public investment institutions and enhance PPPs. - Prioritize reforms from the Public Investment Management Assessment (PIMA) to better plan and execute capital projects. - Digitalization: - Implement the Digital Economy Masterplan 2025 to boost productivity. - Flagship projects include the Digital Identity and Digital Payment Hub. ### Authorities’ views on structural reforms - Authorities agree diversification is key; enhancing five priority sectors with encouraging progress. - Expect continued diversification momentum, with additional O&G downstream activities such as Hengyi phase 2. - Continue pursuing digital transformation and address human capital loss from the pandemic, including skills-based curriculum frameworks for schools. ### Climate change policies and targets - Commitment: Net Zero Target by 2050. - NDC and emissions: - Business-as-usual (BAU) emissions in 2030 specified by the authorities: 29.5 MtCO2e. - NDC unconditional Greenhouse Gas (GHG) target (2020) in 2030: 23.6 MtCO2e (calculated as 20 percent reduction from BAU). - Findings on mitigation measures: - Brunei will meet its unconditional NDC target under BAU projections, but more efforts required to align with Net Zero by 2050. - A broad-based carbon pricing strategy combined with energy subsidy reforms would support targets and raise revenues. - Reaching general targets by 2035 (renewables, electric vehicles, forest coverage, electricity demand efficiency, industrial emissions, climate awareness) would lower abatement costs for Net Zero. - Renewable energy and projects: - Planned 30 MW solar power plant; impact limited—less than three percent of existing generation capacity. - Additional measures required to reach 30 percent renewable generation capacity by 2035. - Net-Metering system is being implemented across sectors. - Scenario results and GDP impact: - Mitigation gap between baseline and Net Zero pathway in 2030 might be closed by 13 (power and industry feebates) to 65 (combination of carbon tax and subsidies phase-out) percent under different scenarios evaluated. - Negative impact of reforms on GDP can be offset by revenue recycling, lowering GDP growth in 2030 only by 0.1-0.2 percentage points. - Climate risks: - Annual mean temperature has risen steadily at 0.25°C per decade and would rise by 1.7-3.3°C towards 2100 relative to the 1995–2014 baseline. - Sea level could rise by 0.3-0.6 meters on average by 2100 in some scenarios, posing threats to coastal zones. - Recommendations: - Fully integrate BNCCP objectives in the upcoming medium-term national development plan (RKN12) and sectoral plans/regulations. - Formalize the role of Brunei Climate Change Secretariat (BCCS) as coordinator of BNCCP implementation. - Develop systematic identification and reporting of climate-related expenditures. - Finalize institutional framework for carbon pricing and policies to reduce industrial sector emissions. - Develop National Adaptation Plan (NAP) and invest in climate-resilient infrastructure projects. ### Authorities’ views on climate actions - Authorities concur more efforts are needed to reach Net Zero but energy subsidy reform is not part of their strategy. - Focus on improving emissions data before establishing carbon pricing; considering a follow-up virtual workshop on CPAT results. - Reporting and projects: - Mandatory Directive launched in April 2023 directing facilities that emit/remove GHGs to report regularly. - National online reporting platform expected to be live by the end of the year. - 30 MW solar plant planned for commissioning by Q4 2024 (on top of 6MW already installed). - Net-Metering program being implemented in all sectors. - First iteration of the NAP expected to be completed and submitted to UNFCCC in 2023. ### Data issues and capacity building - Data quality broadly adequate for surveillance; improvements needed in timeliness of national accounts and frequency/timeliness of balance of payments (BoP) data. - Actions and TA: - Authorities working to implement Fund’s TA 2020 recommendations to close external sector data gaps, improve classification within external sector accounts, and add outward investment data to business survey. - TA mission on liquidity management in February 2023 recommended measures to improve liquidity and forecasting frameworks of the BDCB. - Brunei undertook a Public Investment Management Assessment (PIMA) and Climate PIMA in April 2023. - Authorities’ views: - Agree on need to enhance data quality and dissemination. - Timeliness of annual BoP publication shortened from 6 to 5 months. - Increasing data frequency is challenging due to reporting constraints of some government agencies and private companies. - Authorities expressed interest in TA for updating CPI basket and rebasing national accounts statistics. ### Staff appraisal summary - 2022 growth was negatively affected by reduced O&G sector activities despite post-pandemic reopening. - Downstream O&G activities and non-O&G sectors positively contributed to growth in 2022 and aided diversification efforts; the O&G sector registered negative growth due to protracted infrastructure maintenance. - Inflation has been moderating with easing global supply chain and commodity price bottlenecks. - Estimates suggest the external position for 2022 is substantially weaker than suggested by fundamentals and desirable policies and the output gap is assessed to be negative. *Source: IMF staff summary of the chapter.* ### 43. Given the uncertainty around O&G reserves and prices, and the long-term ### 1brnea2023001 - 43. Given the uncertainty around O&G reserves and prices, and the long-term ### Fiscal policy and fiscal framework - Key findings: - Investment-driven fiscal expansion in FY 2023/24 is described as appropriate given the cyclical position and scarring from pandemic, but a growth-friendly fiscal consolidation should be prioritized. - A credible medium-term fiscal framework focused on the non-O&G balance as a share of non-O&G GDP should anchor consolidation efforts. - Fiscal reserves could be leveraged to deploy temporary policy support should downside risks materialize. - Policy recommendations: - Mobilize non-O&G revenue. - Contain the wage bill. - Shift from broad-based to targeted subsidies. - Improve fiscal transparency of GLCs. - Enhance fiscal risk analysis. - Use fiscal reserves to provide temporary support if downside risks materialize. ### Monetary policy, exchange rate, and liquidity management - Key findings: - Brunei's longstanding currency board arrangement with Singapore supports macroeconomic and financial stability. - Further alignment of policy rates with the Monetary Authority of Singapore, adjusted for the level of the country risk premia, would help bring money market rates closer to the level implied by the uncovered interest rate (UIP) condition. - A step-up in I-bills issuance to absorb excess liquidity and a more active liquidity management would strengthen the price signal from the overnight policy rate towards banks’ retail rates. - Policy recommendations: - Align policy rates with MAS, adjusted for country risk premia. - Increase I-bills issuance to absorb excess liquidity. - Adopt more active liquidity management. ### Financial sector resilience and deepening - Key findings: - The financial sector is stable, has strong capital buffers and abundant liquidity. - Systemic risk is assessed to be contained, but supervisors should remain mindful of tail risks from tightening global financial conditions. - Developing the domestic interbank money market and deepening the financial system will encourage private sector credit growth. - Policy recommendations: - Continue implementation of prudential frameworks. - Improve AML/CFT effectiveness. - Promote development of domestic interbank money market to support credit growth. ### Climate objectives, net zero target, and revenue diversification - Key findings: - Brunei has committed to an ambitious Net Zero Target by 2050 despite its negligible share of global emissions. - A multipronged approach for climate objectives and revenue diversification will facilitate the transition. - Policy recommendations: - Consider implications of carbon pricing for emissions reduction and revenue diversification while providing well-targeted fiscal support for affected communities and workers. - Prioritize National Climate Change Policy (BNCCP) objectives in new development plans. - Formalize the role of the Brunei Climate Change Secretariat (BCCS). - Consider implementing climate stress tests for the financial sector. ### Structural reforms and diversification - Key findings: - Structural reform efforts should focus on reducing O&G dependency. - Develop human capital, enhance public investments and PPPs, and improve digitalization to support economic diversification. - Policy recommendations: - Increase public investment and PPPs focused on diversification. - Improve human capital and digitalization to expand non-O&G sectors. ### Data, consultation, and governance - Key findings: - Data quality should be improved, including the timeliness of national accounts and frequency of balance of payment data publication. - Consultation was enriched by strong CD-surveillance integration. - Expectation: - The next Article IV consultation with Brunei Darussalam will be held on the standard 12-month cycle. ### External sector assessment — current account, reserves, and capital flows - Current account and trade (2022 and near-term projections): - Current account balance reached an estimated surplus of 19.6 percent of GDP in 2022. - Exports of mineral fuels registered an increase of close to 40 percent y/y in 2022. - Exports of chemical products (O&G downstream) grew by around 30 percent in 2022. - Imports increased by 27 percent y/y in 2022. - Imported raw materials (including crude oil) constituted 63 percent of total imports in 2022 and grew near 50 percent y/y. - The current account balance is projected to moderate in 2023 as fuel prices decline. - Over the medium term, the current account surplus is expected to stabilize at around 14 percent of GDP as export products diversify. - EBA-Lite and REER model results (2022): - Cyclical contributions (from model): (-) 5.5 (in percent of GDP). - COVID-19 adjustors (-): 0.6 (in percent of GDP). - Adjusted CA: 13.5 (in percent of GDP). - CA Norm (from model): 18.7 (in percent of GDP). - Adjusted CA Norm: 18.7 (in percent of GDP). - CA Gap: -5.2 (in percent of GDP) by CA model; -1.7 (in percent of GDP) by REER model. - REER Gap (in percent): 4.0. - CA-Actual: 19.6 (in percent of GDP). - Capital flows and risks: - Capital inflows primarily consist of FDI, which have moderated after strong growth since 2017; baseline outlook for FDI is modest, though expansion in downstream sector could raise FDI. - Capital outflows largely reflect domestic banks’ holdings of foreign assets, including excess liquidities placed abroad; large holdings abroad are a risk. - Data on international investment positions are not published. - Reserves and adequacy: - Brunei’s international reserves (excluding gold) in 2022 were estimated at USD 4.8 billion, equivalent to 6.7 months of imports and 40 percent of broad money. - The level of reserves was around 195 percent of the Fund’s composite metric, which exceeds the recommended 100–150 percent adequacy range. - Assessment: Official reserve level remains adequate and in line with sustaining the currency board arrangement with Singapore; additional precautionary liquidity is recommended for coping with adverse terms of trade shocks. ### Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses - External risks: - Intensification of regional conflict(s): Likelihood High; Expected Impact Medium. - Expected impact: Supply-chain disruption increases import prices and inflation; higher energy prices improve fiscal and external balances. - Policy responses: Expand fiscal reserves along with continuous fiscal consolidation; accelerate food production; support vulnerable households through cash transfers while allowing international prices to pass through to domestic consumers. - Monetary policy miscalibration: Likelihood Medium; Expected Impact Medium. - Expected impact: Local prices pushed up; lower-income population most affected. - Policy responses: Frontload envisaged fiscal tightening; provide targeted support; monitor and supervise financial market with timely macroprudential policies. - Systemic financial instability: Likelihood Medium; Expected Impact Medium. - Expected impact: Leveraged economic entities face financing difficulty; increased volatility affects sovereign holding valuations. - Policy responses: Monitor and supervise with macroprudential policies; supply appropriate liquidity for viable businesses and indebted households; manage sovereign assets cautiously. - Abrupt global slowdown or recession: Likelihood Medium; Expected Impact Medium. - Expected impact: Fiscal and external balances negatively affected by lower fuel prices; FDI inflow reduced. - Policy responses: Accelerate export diversification; improve business climate to attract FDI; provide targeted and temporary support to firms and households. - Commodity price volatility: Likelihood Medium; Expected Impact High. - Expected impact: High energy prices improve fiscal and external balances; surging food prices heighten inflation and strain vulnerable households. - Policy responses: Expand fiscal reserves with continuous consolidation; accelerate food production; support needy households. - Deepening geo-economic fragmentation: Likelihood High; Expected Impact Medium. - Expected impact: Supply disruptions and weaker confidence undermine investment; potential commodity price increases. - Policy responses: Build fiscal buffers with consolidation that protects vulnerable groups; increase public investment to promote diversification. - Domestic risks: - Unexpected variations in energy production: Likelihood Medium; Expected Impact High. - Expected impact: Declined (Increased) production lowers (augments) fiscal revenues and exports. - Policy responses: Diversify economy and secure revenue from Non-O&G sector; refrain from procyclical fiscal policy and build additional fiscal reserves; strengthen contingency planning. - Postponement in large FDI projects: Likelihood Medium; Expected Impact Medium. - Expected impact: Delayed projects hinder growth and diversification. - Policy responses: Expand public investment; attract more FDI by improving business environment. - Delays in implementing the fiscal consolidation plan: Likelihood High; Expected Impact High. - Expected impact: Decline in fiscal reserves requiring deeper consolidation later to ensure sustainability. - Policy responses: Adopt revenue and expenditure measures to credibly reduce the fiscal deficit while shifting from broad-based subsidies to targeted social protection; support consolidation by implementing structural reforms to boost growth and diversify the economy. *Source: IMF staff report (Brunei Darussalam).* ### Appendix III. Status of Staff Advice in 2022 Article IV Consultation ### Appendix III. Status of Staff Advice in 2022 Article IV Consultation ### Fiscal Policy - Staff advice: Continue fiscal support in the near term and resume consolidation for the longer term by preserving growth-enhancing spending, reforming subsidies, containing public wages, promoting corporatization and PPPs, and broadening tax base, while improving public finance management. - Government actions and status: - Unwound the pandemic response and shifted focus to promoting recovery and diversification by scaling up public investment. - Has not announced any major tax measures and has delayed the corporatization efforts announced in the FCP, which is expected to help curtail the wage bill in addition to further diligence in recruitment. - Launched the digitalization of the National Welfare System and revised eligibility criteria of old-age pension recipients while expanding coverage to people with disabilities. - The recent revision of the Old Age Pension and People with Different Abilities Allowance Order Act (Amendment) 2021 tightened eligibility rules for old-age pension, whereby permanent residents with foreign citizenship no longer qualify for the $250 monthly pension. This decreased the number of beneficiaries by three percent to 42,700 from 43,941 due to amended laws. - Launched the Unified Smart Metering System (USMS) that combines water and electricity into a single account. - Undertook the Public Investment Management Assessment (PIMA) as well as the Climate PIMA (C-PIMA) in April 2023. - The new Treasury Accounting and Financial Information System (TAFIS) is expected to be rolled out in FY2024/25. - The Brunei Investment Agency regularly conducts tail stress tests to assess risks from global decarbonization pressures on oil prices and incorporates such assessments into prudent risk management strategies. - Remaining gaps: - More efforts are needed to move from broad based subsidies to a targeted social protection system. ### Financial Sector Policies - Staff advice: Further develop the financial sector while strengthening regulatory, supervision and macroprudential framework to safeguard financial stability; strengthen AML/CFT framework to safeguard financial system integrity. - Government actions and status: - Issuance of I-Bills started in October 2020 to support liquidity management of the financial sector. - Technical assistance (TA) implemented in January-February 2023 to enhance liquidity management and monetary transmission. - Development of a holistic macroprudential framework remains in progress, including a countercyclical capital buffer requirement and a framework to quantify liquidity risks. - TA on bank stress testing took place in April 2022. - A plan to establish a stock exchange is underway. - AML/CFT: - Amendments to the Anti-Terrorism Order and Anti-Terrorism (Terrorist Financing) Regulations completed in 2022 and became effective on 1 November 2022. - Amendments to the Criminal Asset Recovery Order completed in 2023 and became effective on 31 January. - Brunei’s Mutual Evaluation process by the APG commenced, with the on-site visit conducted in November 2022. The Mutual Evaluation Report was adopted in the APG Plenary in July 2023. - The Counter Proliferation Financing Order is being finalized and expected to be adopted in the near term. - TA on liquidity management and macroprudential issues referenced (e.g., Liquidity Management and Forecasting February 2023; Review of Macro Stress Testing April 2022). ### Structural Policies - Staff advice: Diversify the economy and develop the private sector by FDI attraction, business environment improvement, human capital enhancement, and active labor market policies, while accelerating digitalization and climate change responses. - Government actions and status: - FDI and industry developments: - Hengyi Industries Sdn. Bhd. conducting feasibility studies and implementation scope for the Phase 2 project, which will increase production capacity from 8 million metric tons annually to 10 million tons annually. - The project for both phases is expected to provide approximately 3,900 job opportunities. - Brunei Fertilizer Industries (BFI) has produced more than 631 thousand metric tons of urea fertilizer since January 2022. - As of February 2023, BFI has exported 556 thousand metric tons of urea fertilizer with revenue value of US$322 million. - Government, through the Brunei Economic Development Board, is holding discussions with several foreign direct-investment and domestic companies to evaluate and improve several project proposals, including in Oil and Gas and Food and Logistics Downstream Sectors. - Private sector measures: - Launched the first series of salary guidelines (minimum salary scales for selected job positions as per the job levels) for the private sector; guidelines are recommendations and not legally enforceable. - Darussalam Enterprise (DARe) engaged in PPP projects such as Brunei Food Industry Development and the Brunei Innovation Lab; DARe provides entrepreneurial skill training and support to obtain international standard certification. - Budget 2023 confirms a $6.3 million allocation under the Temburong Region Progress Authority (TRPA) for Temburong District development projects to boost investment, support MSMEs through spin-off activities, and create new employment opportunities. - Digital economy: - Coordinated execution of the Digital Economy Masterplan (2025) is crucial for Digital Government, Digital Industry, and Digital Society. - Flagship projects include implementation of the Digital Payment Hub and the Digital Identity Project. ### Climate and Environmental Policies - Staff advice: Implement the Brunei Darussalam National Climate Change Policy (BNCCP) to meet the Nationally Determined Contribution (NDC) target. - Government status and activities: - Government on track to achieve the commitment target under the Paris Agreement to reduce by 20 percent the amount of greenhouse gas emission, against the business-as-usual level of 29.5 MtCO2e, by 2030. - Recent mitigation activities include: - Planting of 42,928 trees. - Reduction in the level of waste disposal through garbage reduction. - Reduction in greenhouse gas emission in the industrial sector. - Increase in renewable energy through construction of solar projects. ### Data Issues and Statistical Capacity - Staff advice: Improve data compilation and reporting. - Government actions and status: - Authorities committed to publishing the National Summary Data Page (NSDP) continuously. - The Brunei Darussalam Central Bank started to release the Business Sentiment Index in November 2021. - Assessment of data adequacy for surveillance: - General: Data provision continues to improve and is broadly adequate for surveillance, but timeliness of quarterly GDP publication and frequency/timeliness of external sector accounts data need improvement. - National accounts: - Quarterly GDP available with a one-period lag. - GDP was rebased to 2010 in 2015; GDP needs rebasing from 2010 to a more recent year. - Coverage extended to include statutory bodies; GDP by Income Approach and Gross National Income and Savings are released. - Price statistics: - Monthly CPI available within six weeks from the end of the reference month. - CPI weights derived using the 2015/16 Household Expenditure Survey and should be updated. - Producer price indices planned but not implemented; unit value indices for imports and exports are produced. - Labor statistics: - DEPS conducts annual Labor Force Survey since 2014; inter-censal update conducted in 2016. - Data on wages are limited; scope to enhance data quality. - Sales statistics: - Quarterly retail sales index and food and beverage index available with a one-period lag. - Government finance statistics (GFS): - Shortcomings in classification and consolidation of major government institutional units; deficiencies include recording taxes net of subsidies and omission of key fiscal flows. - Treasury priority is to ensure GFS cash flow statement for budgetary central government is updated quarterly. - Coverage could be expanded to general government by consolidating budgetary central government, extra-budgetary units, and social security funds. - Government finance statistics are not reported for publication in either the Government Finance Statistics Yearbook or the International Financial Statistics; authorities committed to improving capacity, including participating in IMF training. - Monetary statistics: - Brunei Darussalam Central Bank (BDCB) compiles and reports monthly monetary data using standardized report forms (SRFs); data are comprehensive and timely. - BDCB reports some Financial Access Survey indicators, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - Financial sector surveillance: - BDCB reports quarterly financial soundness indicators (FSIs) to the Fund, comprising all the core (12) and 10 encouraged FSIs for deposit takers. - External sector statistics: - Balance of payments statistics reported to STA in BPM6 format on an annual basis. - Compilation challenges: lack of recommended granularity, embedded transactions in some items, and need for more frequent and timely quarterly reporting. - Compilation of international investment position on BPM6 basis finished but not released. - Starting from 2021, Ministry of Finance and Economy reported data to the Coordinated Direct Investment Survey, covering inward direct investment data back to 2016. ### Recent Economic Developments and Outlook (Authorities' Statement) - Growth and sectoral performance: - Brunei Darussalam’s economy grew by 0.8 percent y-o-y in the first quarter of 2023. - Non-oil and gas (O&G) sector grew by 6.2 percent y-o-y, driven by expansion in services: - Air transport grew by 285.1 percent. - Finance grew by 71.7 percent. - Other transport services grew by 33.1 percent. - O&G sector declined by 5 percent, affected by COVID-19 related deferments in rejuvenation, exploration and development activities; asset rejuvenation activities expected to continue over the next couple of years with positive recovery of overall production expected starting in 2024. - Inflation: - Inflation rose to 3.7 percent in 2022 from 1.7 percent in 2021, mainly due to increased food prices, supply chain disruptions and higher transport cost attributed to higher airfares. - CPI inflation in the first five months of 2023 declined to 0.8% compared to the same period in 2022, mainly due to moderation in food price increases as supply chain disruptions eased. - Risks and policy direction: - Key risks remain largely unchanged, reflecting the continued importance of the oil and gas sector. - Authorities reiterate strong commitment to expedite economic diversification. ### Fund Relations and Key Financial Indicators (As of July 31, 2023) - Membership: Joined October 10, 1995; Article VIII. - General Resources Account: - Quota: 301.30 SDR Millions (100.00 percent of Quota). - Fund holdings of currency (exchange rate): 266.31 SDR Millions (88.39 percent of Quota). - Reserve position in Fund: 35.20 SDR Millions (11.68 percent of Quota). - SDR Department: - Net cumulative allocation: 492.29 SDR Millions (100.00 percent of Allocation). - Holdings: 507.34 SDR Millions (103.06 percent of Allocation). - Other: - Outstanding Purchases and Loans: None. - Latest Financial Arrangements: None. - Projected Obligations to Fund: None. - Implementation of HIPC Initiative: Not applicable. - Safeguards Assessments: Not applicable. - Exchange arrangement: Currency board arrangement, Brunei dollar at par with Singapore dollar. - Article IV Consultation: Brunei is on the 12-month consultation cycle. The Executive Board concluded the 2022 Article IV consultation on September 16, 2022. - FSAP Participation: Not applicable. *Source: Appendix III. Status of Staff Advice in 2022 Article IV Consultation (1brnea2023001).* ### 6. Fiscal prudence continues to underpin the authorities’ fiscal policy and public finance ### 6. Fiscal prudence continues to underpin the authorities’ fiscal policy and public finance ### Fiscal consolidation framework and objectives - The authorities remain committed to deepen implementation of the Fiscal Consolidation Plan (FCP), launched in 2019, which aims to achieve productivity gains, cost savings and revenue generation to durably reduce the medium-term fiscal deficit and strengthen fiscal sustainability. - Initiatives under the FCP include corporatization and privatization, public-private partnership (PPP), a review of fees and charges, revenue diversification and mobilization as well as consolidation of the government’s asset management systems. - The authorities take note of staff’s assessment on the need for further fiscal consolidation of a cumulative 10 percent of non-O&G GDP by FY2028/29 to ensure long-term fiscal sustainability and inter-generational equity, and will carefully consider staff’s fiscal policy advice while protecting essential development spending and vulnerable and marginalized groups. ### Revenue mobilization initiatives - Expanded excise taxes on goods with negative health and environmental externalities, including taxes on tobacco, alcohol, sugary beverages, and plastic containers, intended to discourage consumption and raise revenue for public health and environmental programs. - Strengthened revenue administration through digitalization: - Introduction of a new electronic tax filing system for businesses. - Development of a land tax portal to facilitate payments and reduce tax evasion. - Ongoing consideration of a review of charges and fees and other broad-based taxes. - Appreciation of staff’s analysis on carbon pricing; policy focus on improving the accuracy of emissions data and developing the necessary framework to pilot a domestic Voluntary Carbon Offset. ### Expenditure rationalization and social protection - Subsidy reforms and demand-management measures: - Launch of premium fuel without subsidy. - Implementation of smart meters for water and power. - Exploratory discussions on power and water tariff reforms. - Digitalization of the National Welfare System to target support to those most in need and enable more systematic assessments. - Consolidation of subsidy data across line ministries through the Treasury Accounting and Financial Information System 2.0 project, expected rollout in FY2024/25. - Pension reforms to improve adequacy and sustainability of ‘Skim Persaraan Kebangsaan’: - Eliminating the earnings cap on employer and employee contributions. - Extending benefits to informal workers and the self-employed. - Introducing a lifetime annuity payout option. ### Public investment, fiscal frameworks, and capacity development - Authorities appreciated the Public Investment Management Assessment (PIMA) and Climate PIMA provided in April 2023 and look forward to TA report and reform recommendations to enhance capital investment planning and execution. - Fiscal Forecasting Unit provides medium-term revenue and expenditure forecasts for risk management purposes. - Authorities agree with staff’s recommendations to improve Medium-Term Fiscal Frameworks (MTFFs), establish fiscal rules, and develop revenue mobilization strategies, and request staff’s capacity development support. ### Monetary framework and monetary operations - Existing currency board arrangement with the peg to Singapore dollar remains appropriate and supports stable inflation. - Authorities take note of staff’s recommendation to improve monetary operations and transmission, including on policy rates setting vis-à-vis the Monetary Authority of Singapore; recommendation discussed in IMF TA on Monetary Operations and Liquidity Management and incorporated into the authorities’ workplan. ### Financial sector soundness and supervision - Banking sector remains liquid and well capitalized despite a challenging macroeconomic environment: - Aggregate capital adequacy ratio (CAR) of 21.3 percent as of Q1 2023. - Gross nonperforming loans (NPL) at 3.2 percent. - CAR is well above the minimum regulatory requirement of 10.0 percent as stipulated in the Banking Order, 2006 and Islamic Banking Order, 2008. - An upward trend was recorded in banking sector profitability in line with the increasing interest/profit rate environment. - Authorities will continue to review regulatory and supervisory frameworks to guard against financial vulnerabilities and support economic activity and financial sector development. - Basel III implementation plans: - Plan to implement Basel III liquidity standards between 2023 and 2024 and other elements of the Basel III framework in phases. - Systemic risk mitigation: - Identified Domestic Systemically Important Banks (D-SIBs) for 2023 subjected to additional policy measures such as Higher Loss Absorbency (HLA) capital requirements. - AML/CFT strengthening: - Two laws amended in 2022: the Anti-Terrorism Order and Anti-Terrorism (Terrorist Financing) Regulations, and the Criminal Asset Recovery Order. - BDCB introduced oversight provisions for virtual assets through amendments to Notice on Requirements for Payment Systems and issuance of new Guidelines on Offering Trading of Security Tokens, aligned with FATF Recommendation 15 as determined by the Asia Pacific Group on Money Laundering (APG) Mutual Evaluation. ### Capital markets and financial sector development - Measures implemented to develop secondary markets for government sukuks and I-bills, enable issuance of corporate bonds/sukuks, and establish a stock exchange. - Regulatory enhancements issued to clarify requirements for Islamic investment business activities, including updates to the Notice on Licensing Examination and Guideline on Conducting the Regulated Activity of Giving or Offering Investment Advice. ### Economic diversification, digital transformation, and MSME support - Continued commitment to accelerate economic diversification to support resilient and sustainable medium-term growth, focusing on five priority sectors: Downstream O&G; Food; ICT; Tourism; and Services. - Contribution of priority sectors to GDP increased from 46.9 percent in 2010 to 55.9 percent in 2022. - Anticipated further non-O&G momentum from additional O&G downstream activities, such as Petrochemical Intermediate & Derivative products (PID) and Hengyi phase 2. - Digital Economy Masterplan 2025 and Smart Nation ambition with flagship projects including Digital Identity and Digital Payment Hub, expansion of broadband affordability and reach, development of a 5G network, and a national data center. - Support for MSMEs through initiatives to facilitate digitalization, access to financing, and access to global markets. ### Labor policy and minimum wage - New minimum wage policy to be introduced in phases beginning from July 12, 2023, starting with (i) banking and finance; and (ii) ICT industries: - Minimum wage for full-time workers in these sectors set at BND500 per month. - Part-time workers will earn at least BND2.62 per hour. - Authorities will monitor the impact of the minimum wage reforms and adjust as needed, in close collaboration with employers. ### Climate policy and commitments - Implementation of ten (10) key strategies in the Brunei Darussalam National Climate Change Policy (BNCCP). - Brunei National Climate Change Council oversees delivery of NDC commitments and the ambition of moving towards Net Zero by 2050. - Brunei communicated its NDC in 2020 with a commitment to reduce total national greenhouse gas (GHG) emissions by 20 per cent relative to Business-As-Usual levels by 2030. - Intensified efforts on energy transition, forest preservation, and facilitation of climate mitigation and adaptation. - Mandatory Reporting Directive launched in April 2023 to enhance transparency of emissions reporting. - Development of a National Climate Change Adaptation Plan is underway. - Brunei will host the ASEAN Centre for Climate Change (ACCC) as a regional climate research hub and strategic coordinator. *Source: IMF chapter "6. Fiscal prudence continues to underpin the authorities’ fiscal policy and public finance"* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1brnea2023001.pdf_