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### 1. Consumer Price Index — Introduction and Overview
- Inflation trend and key historic values:
  - Inflation in Brunei has trended downward since September 2022, reaching disinflationary territory post-COVID earlier than regional peers.
  - Pre-COVID period (Jan 2011-Feb 2020) headline inflation averaged -0.1 percent annually; regional peers averaged 2.1 percent.
  - As of February 2024, headline inflation stands at -0.5 percent after peaking at 4.5 percent in August 2022 and falling to -0.7 percent in September 2023.
  - Pre- vs. post-COVID averages for Brunei: pre-COVID -0.1 percent; post-COVID 1.6 percent.
  - Pre- vs. post-COVID averages for ASEAN5: pre-COVID 2.5 percent; post-COVID 2.9 percent.
- Broadness and stickiness:
  - Broadness index (share of CPI items rising more than a threshold of 0.34 percent) fell to 32 percent in February 2024 versus 47 percent in February 2020.
  - Food, restaurants and hotels exhibit stickiness in inflation.
  - Inflation expectations remain well anchored.
- Near-term projection:
  - Conservative projection for inflation at 1.3 percent for 2024 due to substantial uncertainty in global supply chain disruption.
- Policy stance implication:
  - Maintaining a stable exchange rate under Brunei’s longstanding currency board arrangement with Singapore is appropriate to anchor inflation expectations.

### 1. Consumer Price Index — Drivers: supply and demand overview
- Supply-side drivers:
  - Global supply chain disruptions (GSCPI) and global commodity prices were major contributors to recent inflation movements.
  - GSCPI reached a decade peak in December 2021; Brunei’s headline inflation peaked in August 2022 (suggesting a lag).
  - GSCPI trough in May 2023; Brunei inflation bottomed in September 2023.
  - Food price increased 5.7 percent y/y in 2022.
  - Transport price: peaked in 2021 at 6.6 percent on average; change in transport price was -2.6 percent in 2023.
- Demand-side drivers:
  - Release of pent-up demand following pandemic restrictions contributed to temporary price pressures, especially for domestic non-tradables and hospitality after reopening in mid-2022.
  - Fiscal and monetary responses to COVID-19 may have increased domestic demand.
- Other factors:
  - Exchange rate appreciation passthrough examined but found statistically non-significant; Brunei’s pegged exchange rate regime likely mutes pass-through.
  - Administrative price controls and generous social assistance measures may have reduced the impact of domestic and global factors (approximately 16.4 percent of CPI items are under price control and social assistance measures).

### 1. Consumer Price Index — Methodology and Data
- Model and specification:
  - Model used: augmented Phillips curve with global variables to capture inflation momentum and global influences.
  - Inflation series modeled as a function of eight elements: inertia (lagged inflation), domestic output gap, global output gap, appreciation of Brunei dollar (NEER), global energy price, global food price, global supply chain pressure (GSCPI), exchange rate USD/SGD.
  - Specified dynamic equation (inflation as y-o-y quarterly headline inflation):
    - ∆logCPI_t = β1 ∆logCPI_{t−1} + β2 DomOutputGap_t + β3 GlobalOutputGap_t + β4 ∆log(USD/BND)_{t−1} + β5 ∆log(GlobalEnergyPrice)_t + β6 ∆log(GlobalFoodPrice)_t + β7 (GlobalSupplyChainPressure)_t + ε_logCPI_t
  - Interpretation of GSCPI: Normalized such that zero equals average; negative values denote standard deviations below average. Higher GSCPI expected to exert upward pressure on headline and core inflation.
- Data and sample:
  - Quarterly estimation sample: 2013Q1 to 2023Q4.
  - Monthly CPI sample used to generate quarterly series: 2012M1 to 2023M12 (y/y changes then quarterly averages).
  - Domestic output gap: HP filter on quarterly GDP series.
  - Global output gap: HP filter on world industrial production index (Baumeister and Hamilton 2019).
  - NEER and USD/SGD: IMF database.
  - Global energy and food prices: IMF commodity prices database.
  - GSCPI: Applied Macroeconomics and Econometrics Center (AMEC).

### 1. Consumer Price Index — Empirical Results and Interpretation
- Main empirical findings:
  - Recent disinflation in Brunei driven mainly by supply factors, notably global supply chain developments measured by GSCPI.
  - Estimated effect: an increase in GSCPI by one standard deviation is associated with a 1.0 percent point increase in headline inflation (statistically significant at the 5 percent level).
  - No statistically significant association found for domestic output gap, global food price, and several other variables in the Brunei estimation.
- Comparative evidence:
  - Binici et al (2023): one standard deviation increase in GSCPI associated with a 0.05 percent point increase in core inflation in Europe (statistically significant at 1 percent); and one percentage point increase in domestic output gap associated with a 0.004 percentage point increase in headline and core inflation in Europe.
- Possible explanations for muted domestic effects in Brunei:
  - Administrative price controls and social assistance measures (16.4 percent of CPI items under such measures).
  - Slower recovery of domestic production capacity and foreign workers.
- SVAR and decomposition evidence:
  - SVAR-based decomposition (past study) indicates supply shocks dominated during pre-, during, and post-pandemic periods, with demand shocks contributing post-reopening.

### 1. Consumer Price Index — Conclusion and Policy Implications
- Inflation outlook and uncertainty:
  - Near-term inflation projection conservatively set at 1.3 percent in 2024 given evolving and uncertain global supply chain disruptions.
  - Projection comparable to AMRO’s latest projection of 1.4 percent.
- Policy implications:
  - Maintain stable exchange rate under the currency board arrangement with Singapore to anchor expectations.
  - Recognize supply-side global developments can rapidly alter inflation trajectories; support cautious near-term policy planning.

*Source: 1. Consumer Price Index (Brunei Darussalam), IMF staff appendix (August 20, 2024).*

### PIH analysis — Framework, assumptions, and fiscal adjustments
- PIH framework and purpose:
  - Framework decides PIH norms that are “sustainable” income flows from net wealth of a country which can be spent each year while keeping wealth (adjusted for inflation and sometimes, population growth) constant, based on the net wealth measured as net financial wealth plus resource wealth (the present value of future O&G revenues).
- Forecast horizon and long-run assumptions:
  - Analysis based on IMF staff forecasts until 2029 and assumptions for the long run (beyond 2029).
  - Key assumptions:
    - Status quo on policy settings.
    - Constant O&G production from 2029 until the depletion of O&G reserves in 2050.
    - 1 percent increasing O&G prices each year.
    - Government’s share in total value of O&G output: 37 percent.
    - Population growth rate: 0.42 percent.
    - Long-term inflation rate: 1 percent.
    - Real interest rate: 2.6 percent.
    - Other long-term macro-fiscal assumptions as used in the analysis.
- Main fiscal findings and consolidation needs:
  - The current baseline differs significantly from the long-term PIH fiscal anchor and the gap needs to be closed with a fiscal adjustment.
  - Immediate attainment of the PIH anchor (a constant annuity in real terms) would require about 20 percentage points of consolidation in non-O&G deficit.
  - A gradual transition scenario (10 percentage points of consolidation over the medium-term) would bring the non-O&G deficit to -17.3 percent of non-O&G GDP in 2029 from -27.3 percent in the baseline forecasts.

### PIH analysis — Net Zero Emissions (NZE) by 2050 scenario
- NZE scenario assumptions:
  - O&G demand decreases 70 percent from current trends by 2050 (assumed over 2030–2050).
  - Prices gradually decline to 25 USD per barrel and 3.8 USD per MBtu from 2030 to 2050 in line with IEA World Energy Outlook 2023.
- Required consolidation:
  - Consolidation required to close the gap between the baseline and the NZE PIH anchor is estimated to be 25.5 percentage points.
- Policy implication:
  - Results elevate the need for urgent action to accelerate fiscal consolidation, to avoid a delayed or disorderly green transition.

*Prepared by Jonghyun Kim and Ritu Basu (APD). Sources: IMF staff estimation; International Energy Agency, World Energy Outlook 2023.*

### Brunei financial sector — Structure, key shares, and cross-border exposure (end-2023)
- Sector composition and shares:
  - Banks represent 82.8 percent of total financial sector assets (98 percent of GDP).
  - The two largest banks (an Islamic domestic bank and another domestic bank) hold 72% of total bank assets.
  - Finance companies hold 8.7 percent of total assets (10 percent of GDP).
  - Insurance/Takaful companies hold 8.4 percent of total assets (10 percent of GDP).
  - Aggregate financial sector assets represent around 118 percent of GDP as of end-2023.
  - Banks invest a significant portion of assets abroad: about 52 percent of GDP or 53 percent of total assets as of end-2023.
- Funding and intermediation:
  - Domestic deposits in banks amounted to 67 percent of total assets in 2022 (this share excludes central government deposits which are 15 percent in 2022).
  - Domestic lending represented only 26 percent of total banking assets in 2022.
  - Loans to foreign borrowers and offshore investments increased to 7 percent and 18 percent of total assets in 2023 from 3 percent and 10 percent in 2019, respectively.
  - Due from banks offshore decreased to 29 percent of total assets in 2023 from 39 percent in 2019.
  - Consequently, 53 percent of banking sector assets as of the end of 2023 were invested abroad.
  - Government deposits, held mainly with commercial banks, heavily influence banks' total assets and liabilities and are managed through adjustments in unremunerated excess reserves at the central bank or balances due from offshore banks.

### Brunei financial sector — Soundness indicators and recent developments (2022–2023)
- Key indicators:
  - Regulatory capital remained strong at around 21 percent in 2023, above the required 10 percent.
  - Gross non-performing loans (NPLs) decreased from 3.3 percent in 2022 to 2.6 percent in 2023.
  - Return on assets (before tax) improved to 2.1 percent in 2023 from 1.3 percent in 2022.
  - Overall domestic credit by banks rose by 3.8 percent year-on-year in 2023, down from 4.9 percent in 2022.
  - Broader credit to households (including finance companies) grew by 5 percent year-on-year at a recent peak.

### Brunei financial sector — Credit composition, concentration, and risks
- Credit and concentration:
  - Foreign lending (offshore loans by banks based in Brunei) surged by 64 percent year-on-year in 2023.
  - Combined credit to domestic and foreign corporates raised the share of credit to the O&G sector to 40 percent in 2022 from 24 percent in 2018, increasing vulnerability to oil price declines.
  - VAR results (Kawase, 2023): NPL growth increases 0.455 percentage point with a lag of three quarters after one percentage point decline in oil price growth.
- Risks:
  - Banks’ large investment portfolio and offshore orientation expose them to heightened interest rate risks and potential liquidity tail risks during extreme stress.
  - Tail risks to banks' offshore portfolio from interest rate rise and liquidity shortages seemed to have decreased somewhat since 2023, but vulnerabilities remain given the large share of offshore investments, deposits to foreign financial institutions, offshore loans, and securities investments.
  - Stress-testing: interest rate and liquidity stress tests are undertaken (methodologies referenced to Kawase, 2023).

### Brunei financial sector — Regulation, macroprudential framework, and reforms
- Implementation status:
  - Risk-based supervision initiated; all three pillars of Basel II implemented.
    - Pillar I requirement effective 15 March 2017: minimum capital adequacy ratio (CAR) of 10 percent for all banks; extended to finance companies in 2022.
    - Pillar II: ICAAP submission on an annual basis since 30 June 2019.
    - Pillar III: enhanced disclosure on risk and capital management since March 2019.
- Macroprudential tools and measures:
  - Total Debt Service Ratio (TDSR): borrowers’ monthly total debt obligation relative to net income should be less than 70 percent.
  - Cap on Unsecured Personal loans: unsecured personal credit facilities restricted to 18 times of the borrowers’ net monthly income.
  - Minimum Cash Balance requirement (reserve requirement) at 6 percent.
  - A cap on loan-to-value ratios was revoked in late 2016.
  - Identified Domestic Systemically Important Banks (D-SIBs) subject to additional measures such as Higher Loss Absorbency (HLA) capital requirements for 2023.
  - Authorities plan to implement Basel III liquidity standards between 2023 and 2024 and other elements of Basel III in phases.
  - Stress tests for financial institutions are conducted at least annually.

*Prepared by Shohhei Kawase (OAP) and Ritu Basu (APD). Sources: Brunei Darussalam Central Bank (BDCB) reports; Kawase (2023).*

### Structural reform areas — Methodology and indicator construction
- Reform categories:
  - Structural reform areas categorized into three main categories: trade, market regulation, governance.
- Indicator construction and scaling:
  - Trade indicators include three sub-indicators: trade restriction data from the IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), trade facilitation indicators from the OECD, and trade openness indicators from the World Economic Forum Global Competitiveness Index (WEF-GCI).
  - Market regulation indicators include WEF-GCI sub-indicators and the World Bank Worldwide Governance Indicators (WB-WGI) regulatory quality indicator.
  - Governance gauged using four WB-WGI sub-indicators: government effectiveness, rule of law, control of corruption, and regulatory quality.
  - Each indicator rescaled to range from 0 to 10 (a higher value implying a better performance). Aggregate indicators are the simple average of their sub-indicators.
- Peer groups and performance gap:
  - Performance comparisons versus ASEAN-6 (Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) and GCC (Bahrain, Oman, Kuwait, Saudi Arabia, Qatar). No data available for UAE.
  - Performance gap defined as the difference between Brunei’s score and the best performer in each peer group; a positive number implies a performance gap of Brunei vs. peers.
- Quantitative strategy for estimating reform impacts:
  - Uses local projection method (Jorda (2005)); major reforms defined as episodes where change in the relevant indicator is at least two standard deviations of the distribution.
  - Equations estimated via OLS for each k = 0, ..., 4; sample for empirical analysis: 124 EMDEs over 2000-20.

### Structural reform areas — Trade findings and priority reforms
- Trade facilitation and NTBs:
  - Brunei could benefit from reforms enhancing trade facilitation, reducing non-tariff barriers, and reducing trade restrictions.
  - OECD trade facilitation indicators: Brunei scores below the median of both ASEAN-6 and GCC peer groups.
  - IMF AREAER MATR: Brunei scores well vs. ASEAN-6 peers, but below median of GCC countries.
  - WEF-GCI perceived trade openness: Brunei performs well on perceived trade openness compared to peer groups.
- Specific gaps in trade openness:
  - Minimal gaps for trade tariffs and complexity of tariffs vis-à-vis ASEAN-6 and GCC top performers.
  - Gaps for non-tariff barriers and border clearance efficiency vis-à-vis ASEAN-6 and GCC top performers.
- NTBs composition and impact:
  - NTBs include import quotas, complex customs procedures, national standards and regulations posing trade obstacles, subsidies to local industries, government procurement policies favoring domestic companies, and other measures raising cost of doing business.
  - Reducing NTBs could open trade opportunities, enhance competitiveness, stimulate economic growth, attract foreign investment, and boost exports.
- OECD trade facilitation priority sub-areas:
  - Largest gaps vis-à-vis ASEAN-6 top performers: appeal procedures, involvement of the trade community, governance and impartiality, and documents.
  - Priority measures (OECD Box 1 highlights):
    - Streamline border procedures (increase pre-arrival processing, reduce physical inspections, expand risk management, increase post-clearance audits where currently below 2 percent of trade transactions).
    - Automate border processes (implement pre-arrival processing; ensure automated Customs declaration processing at key posts).
    - Improve information availability (publish documentation online; publish new or adjusted trade-related regulations in advance; enhance Customs website user-friendliness and publication of rulings).
    - Increase involvement of the trade community (notice-and-comment frameworks, public consultation guidelines, publish how comments are handled).
    - Improve appeal procedures (specify decision periods, require motives for administrative decisions, provide for judicial appeal).

### Structural reform areas — Trade restrictions (MATR) and policy options
- MATR composition and performance:
  - MATR derived from IMF AREAER (rescaled 0–10; higher value implies higher degree of economic freedom linked to trade).
  - Five MATR categories: (i) exchange measures, (ii) restrictions to payments, (iii) import restrictions, (iv) export restrictions, (v) payments and proceeds for invisibles and currency repatriation and surrender requirements.
  - Aggregate performance: Brunei performs relatively well compared to GCC peers and in line with ASEAN-6 on trade restrictions overall.
  - Granular gaps: performs well on restrictions to exports and payments compared to peers; scope to improve in import restrictions and payments and proceeds for invisibles.
  - Consistently weaker than peer averages in import restrictions (including tariff and non-tariff restrictions).
- Policy implication:
  - Liberalize restrictions for payments and proceeds for invisibles.

### Structural reform areas — Market regulation and governance findings
- Market regulation:
  - Brunei performs well vs. peers on regulatory quality (WB-WGI and WEF-GCI).
  - Room to reduce regulatory burden, market dominance, and distortive taxes and subsidies.
  - Policy recommendations: review regulatory framework to ensure a level playing field; reform taxes and subsidies that create distortive effects; lower market dominance of large firms, especially GLCs; reduce regulatory burden (business licensing and permits).
- Governance:
  - Governance indicators (2021) show Brunei among top performers in GCC peers and moderately below ASEAN-6 top performers.
  - WB-WGI sub-indicators used: government effectiveness, regulatory quality, control of corruption, rule of law.
  - Assessment: Brunei performs relatively well compared with ASEAN-6 top performers, with moderate gaps; absolute performance on rule of law and control of corruption merits attention.
  - Recommended reforms: enhance transparency and accountability of public administration and the judiciary; promote efficiency in enforcing rules, contracts, and property rights; digitalize and modernize administrative and judicial procedures; promote access to information and lower transaction costs.

### Structural reform areas — Quantitative analysis of reform impacts and priorities
- Empirical priorities:
  - First-generation reforms (governance, external sector, business regulation) prioritized before second-generation reforms (domestic finance and labor market) can bring larger upfront gains for output and green transition.
- Empirical results:
  - Baseline pooled estimation (124 EMDEs, 2000-20) shows positive output effects from major governance and trade-related reforms.
  - Alternative dataset of Brunei-peers: positive output effects from major governance reforms; effects from trade-related reforms are muted.
  - Effects on net FDI inflows: baseline and alternative estimations show positive effects from major governance reforms; major trade-related reforms show no or negative effects on net FDI inflows, suggesting potential role for trade incentives in attracting FDI.
- Priority policy recommendations (first-generation reforms):
  - Enhance trade facilitation (streamline and digitize border processes; improve appeal procedures; increase involvement of the trade community; improve information availability).
  - Reduce non-tariff barriers and restrictions to imports, as well as restrictions on payments and proceeds for invisibles.
  - Level the playing field through market regulation reforms to reduce regulatory burden, distortive taxes and subsidies, and market dominance (especially by GLCs).
  - Improve quality of regulation and continue governance reforms that enhance transparency, accountability, and efficiency of administrative and judicial procedures.
- Example measures:
  - Rationalize non-tariff barriers such as certification requirements.
  - Reduce export/import documentation processes and improve timeliness of appeal procedures.
  - Reduce regulatory burden for firms (business licensing and permits), reform distortive taxes/subsidies, and lower market dominance of large firms.
  - Digitalize and modernize administrative and judicial procedures to promote private sector–led sustainable growth.

*Source: IMF staff analysis as presented in the chapter on Brunei Darussalam (Structural reform areas: trade, market regulation, governance).*

### Quantitative appendix — Local projections methodology and indicators (reform impact estimation)
- Main findings and policy implications:
  - Economic theory suggests large and significant positive effects of the described reforms on economic growth and foreign direct investment (FDI), supporting Brunei’s long-term objectives for diversification and a private sector–led growth model.
- Indicators and outcomes:
  - Governance indicator: simple average of four WB-WGI sub-indicators: (i) government effectiveness, (ii) regulatory quality, (iii) control of corruption, (iv) rule of law.
  - Trade restrictions indicator: MATR from IMF AREAER (unweighted sum of up to 22 binary variables).
  - Non-tariff barriers indicator: constructed by excluding exports/imports tariffs and taxes from aggregate MATR.
  - Each indicator rescaled to range from 0 to 10 (higher = better).
  - Outcome variables: output (log of GDP based on PPP) and FDI (net FDI inflows as percentage of GDP).
- Estimation strategy and equations:
  - Structural reform (SR) shock defined as change in reform indicators from t = -1 to t = 0.
  - Local projection regressions via OLS for horizons k = 0, ..., 4:
    - Y_{i,t+k} − Y_{i,t−1} = α_i + γ_t + β^k SR_{i,t} + θ X_{i,t} + ε_{i,t}
  - For k = 0: Y_{i,t} − Y_{i,t−1} = α_i + γ_t + β_0 SR_{i,t} + θ X_{i,t} + ε_{i,t}
  - Control variables X include lags of past economic growth and past reforms; α_i and γ_t denote country and year fixed effects.
  - Impulse responses generated to a major reform shock equal to two standard deviations of the distribution of annual changes in the relevant indicator across the sample.
  - Dashed lines in charts denote 90 percent confidence bands calculated from the standard deviation of the estimates for respective β_k.
- Methodological references:
  - Local projection method: Jordà (2005) “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95(1):161–82.
  - Governance indicators: Daniel Kaufmann and Aart Kraay (2023). Worldwide Governance Indicators, 2023 Update.
  - MATR and trade restriction measurement: IMF AREAER and IMF Working Paper on Measurement of Aggregate Trade Restrictions.

*Source: IMF staff appendix on Quantitative Analysis from the Brunei Darussalam country chapter.*

### 1. Consumer Price Index _____________________________________________________________ 4

### 1. Consumer Price Index

### Introduction
- Inflation in Brunei has trended downward since September 2022, reaching disinflationary territory post-COVID earlier than regional peers.
- Key historic and recent values:
  - Pre-COVID period (Jan 2011-Feb 2020) headline inflation averaged -0.1 percent annually; regional peers averaged 2.1 percent.
  - As of February 2024, headline inflation stands at -0.5 percent after peaking at 4.5 percent in August 2022 and falling to -0.7 percent in September 2023.
  - Pre- vs. post-COVID averages for Brunei: pre-COVID -0.1 percent; post-COVID 1.6 percent.
  - Pre- vs. post-COVID averages for ASEAN5: pre-COVID 2.5 percent; post-COVID 2.9 percent.

- Inflation broadness and stickiness:
  - Broadness index (share of CPI items rising more than a threshold of 0.34 percent) fell to 32 percent in February 2024 versus 47 percent in February 2020.
  - Food, restaurants and hotels exhibit stickiness in inflation.
  - Inflation expectations remain well anchored.

- Near-term projection:
  - Conservative projection for inflation at 1.3 percent for 2024 due to substantial uncertainty in global supply chain disruption.

### Drivers: supply and demand overview
- Supply-side drivers:
  - Global supply chain disruptions (GSCPI) and global commodity prices were major contributors to recent inflation movements.
  - GSCPI reached a decade peak in December 2021; Brunei’s headline inflation peaked in August 2022 (suggesting a lag).
  - GSCPI trough in May 2023; Brunei inflation bottomed in September 2023.
  - Food price increased 5.7 percent y/y in 2022.
  - Transport price: peaked in 2021 at 6.6 percent on average; change in transport price was -2.6 percent in 2023.

- Demand-side drivers:
  - Release of pent-up demand following pandemic restrictions contributed to temporary price pressures, especially for domestic non-tradables and hospitality after reopening in mid-2022.
  - Fiscal and monetary responses to COVID-19 may have increased domestic demand.

- Other factors:
  - Exchange rate appreciation passthrough examined but found statistically non-significant; Brunei’s pegged exchange rate regime likely mutes pass-through.
  - Administrative price controls and generous social assistance measures may have reduced the impact of domestic and global factors (approximately 16.4 percent of CPI items are under price control and social assistance measures).

### Methodology
- Model used: augmented Phillips curve with global variables to capture inflation momentum and global influences.
- Inflation series modeled as a function of eight elements:
  - inertia (lagged inflation),
  - domestic output gap,
  - global output gap,
  - appreciation of Brunei dollar (NEER),
  - global energy price,
  - global food price,
  - global supply chain pressure (GSCPI),
  - exchange rate USD/SGD.
- Specified dynamic equation (inflation as y-o-y quarterly headline inflation):
  - ∆logCPI_t = β1 ∆logCPI_{t−1} + β2 DomOutputGap_t + β3 GlobalOutputGap_t + β4 ∆log(USD/BND)_{t−1} + β5 ∆log(GlobalEnergyPrice)_t + β6 ∆log(GlobalFoodPrice)_t + β7 (GlobalSupplyChainPressure)_t + ε_logCPI_t
- Interpretation of GSCPI:
  - Normalized such that zero equals average; negative values denote standard deviations below average.
  - Higher GSCPI (greater disruptions) expected to exert upward pressure on headline and core inflation.

### Data
- Sample period:
  - Quarterly estimation sample: 2013Q1 to 2023Q4.
  - Monthly CPI sample used to generate quarterly series: 2012M1 to 2023M12 (y/y changes then quarterly averages).
- Independent variable construction:
  - Domestic output gap: HP filter on quarterly GDP series.
  - Global output gap: HP filter on world industrial production index (Baumeister and Hamilton 2019).
  - NEER and USD/SGD: IMF database.
  - Global energy and food prices: IMF commodity prices database.
  - GSCPI: Applied Macroeconomics and Econometrics Center (AMEC).

### Results
- Main empirical findings:
  - Recent disinflation in Brunei driven mainly by supply factors, notably global supply chain developments measured by GSCPI.
  - Estimated effect: an increase in GSCPI by one standard deviation is associated with a 1.0 percent point increase in headline inflation (statistically significant at the 5 percent level).
  - No statistically significant association found for domestic output gap, global food price, and several other variables in the Brunei estimation.
  - Comparative evidence: Binici et al (2023) find one standard deviation increase in GSCPI associated with a 0.05 percent point increase in core inflation in Europe (statistically significant at 1 percent); and one percentage point increase in domestic output gap associated with a 0.004 percentage point increase in headline and core inflation in Europe.
  - Possible explanations for muted domestic effects in Brunei: administrative price controls and social assistance measures (16.4 percent of CPI items under such measures), and slower recovery of domestic production capacity and foreign workers.

- Figure-summary points (as reported):
  - Augmented Phillips curve coefficient estimates highlight GSCPI as the prominent statistically significant coefficient.
  - SVAR-based decomposition (past study) indicates supply shocks dominated during pre-, during, and post-pandemic periods, with demand shocks contributing post-reopening.

### Further analysis
- Extended analysis incorporates structural vector autoregression (SVAR) from past study (Brunei AIV 2023):
  - SVAR decompositions show inflation driven by both demand and supply factors, with supply shocks prevailing during pre-pandemic, pandemic, and post-pandemic episodes.
  - Supply shocks ratcheted up inflation alongside pent-up demand shocks after reopening.

### Conclusion and policy implications
- Inflation outlook and uncertainty:
  - Given the evolving and uncertain nature of global supply chain disruptions, the near-term inflation projection is conservatively set at 1.3 percent in 2024.
  - This projection is comparable to AMRO’s latest projection of 1.4 percent.

- Policy stance:
  - Maintaining a stable exchange rate under Brunei’s longstanding currency board arrangement with Singapore is appropriate to anchor inflation expectations.
  - Recognition that supply-side global developments can rapidly alter inflation trajectories supports cautious near-term policy planning.

*Source: 1. Consumer Price Index (Brunei Darussalam), IMF staff appendix (August 20, 2024).*

### 1. The PIH analysis is used for identifying a sustainable fiscal path for resource-rich

### 1. The PIH analysis is used for identifying a sustainable fiscal path for resource-rich countries like Brunei

### PIH framework and purpose
- The framework decides PIH norms that are “sustainable” income flows from net wealth of a country which can be spent each year while keeping wealth (adjusted for inflation and sometimes, population growth) constant, based on the net wealth measured as net financial wealth plus resource wealth (the present value of future O&G revenues).

### Forecast horizon and key long-run assumptions
- Analysis is based on IMF staff forecasts until 2029 and assumptions for the long run (beyond 2029).
- Key assumptions:
  - Status quo on policy settings.
  - Constant O&G production from 2029 until the depletion of O&G reserves in 2050.
  - 1 percent increasing O&G prices each year.
  - Government’s share in total value of O&G output: 37 percent.
  - Population growth rate: 0.42 percent.
  - Long-term inflation rate: 1 percent.
  - Real interest rate: 2.6 percent.
  - Other long-term macro-fiscal assumptions as used in the analysis.

### Main fiscal findings and implied consolidation needs
- The current baseline differs significantly from the long-term PIH fiscal anchor and the gap needs to be closed with a fiscal adjustment.
- Immediate attainment of the PIH anchor (a constant annuity in real terms) would require about 20 percentage points of consolidation in non-O&G deficit.
- A gradual transition scenario (10 percentage points of consolidation over the medium-term) would bring the non-O&G deficit to -17.3 percent of non-O&G GDP in 2029 from -27.3 percent in the baseline forecasts.

### Alternative PIH anchor under Net Zero Emissions (NZE) by 2050 scenario
- NZE scenario assumptions:
  - O&G demand decreases 70 percent from current trends by 2050 (assumed over 2030–2050).
  - Prices gradually decline to 25 USD per barrel and 3.8 USD per MBtu from 2030 to 2050 in line with IEA World Energy Outlook 2023.
- Required consolidation:
  - The required size of consolidation to close the gap between the baseline and the NZE PIH anchor is estimated to be 25.5 percentage points.
- Policy implication:
  - Results elevate the need for urgent action to accelerate fiscal consolidation, to avoid a delayed or disorderly green transition.

*Prepared by Jonghyun Kim and Ritu Basu (APD). Sources: IMF staff estimation; International Energy Agency, World Energy Outlook 2023.*

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### Brunei financial sector: stability, composition, and risks

### Sector structure and key shares (end-2023)
- Banks represent 82.8 percent of total financial sector assets (98 percent of GDP).
- The two largest banks (an Islamic domestic bank and another domestic bank) hold 72% of total bank assets.
- Finance companies hold 8.7 percent of total assets (10 percent of GDP).
- Insurance/Takaful companies hold 8.4 percent of total assets (10 percent of GDP).
- Aggregate financial sector assets represent around 118 percent of GDP as of end-2023.
- Banks invest a significant portion of assets abroad, accounting for about 52 percent of GDP or 53 percent of total assets as of end-2023.

### Funding, domestic intermediation, and offshore exposure
- Domestic deposits in banks amounted to 67 percent of total assets in 2022 (this share excludes central government deposits which are 15 percent in 2022).
- Domestic lending represented only 26 percent of total banking assets in 2022.
- Loans to foreign borrowers and offshore investments increased to 7 percent and 18 percent of total assets in 2023 from 3 percent and 10 percent in 2019, respectively.
- Due from banks offshore decreased to 29 percent of total assets in 2023 from 39 percent in 2019.
- Consequently, 53 percent of banking sector assets as of the end of 2023 were invested abroad.
- Government deposits, held mainly with commercial banks, heavily influence banks' total assets and liabilities and are managed through adjustments in unremunerated excess reserves at the central bank or balances due from offshore banks.

### Soundness indicators and recent developments (2022–2023)
- Regulatory capital remained strong at around 21 percent in 2023, above the required 10 percent.
- Gross non-performing loans (NPLs) decreased from 3.3 percent in 2022 to 2.6 percent in 2023.
- Return on assets (before tax) improved to 2.1 percent in 2023 from 1.3 percent in 2022.
- Overall domestic credit by banks rose by 3.8 percent year-on-year in 2023, down from 4.9 percent in 2022.
- Broader credit to households (including finance companies) grew by 5 percent year-on-year at a recent peak.

### Credit composition and sectoral concentration
- Foreign lending (offshore loans by banks based in Brunei) surged by 64 percent year-on-year in 2023.
- Combined credit to domestic and foreign corporates raised the share of credit to the O&G sector to 40 percent in 2022 from 24 percent in 2018, increasing vulnerability to oil price declines.
- Empirical note: VAR results (Kawase, 2023) indicate NPL growth increases 0.455 percentage point with a lag of three quarters after one percentage point decline in oil price growth.

### Risks: interest rate, liquidity, and offshore tail risks
- Banks’ large investment portfolio and offshore orientation expose them to heightened interest rate risks and potential liquidity tail risks during extreme stress.
- Tail risks to banks' offshore portfolio from interest rate rise and liquidity shortages seemed to have decreased somewhat since 2023, but vulnerabilities remain given the large share of offshore investments, deposits to foreign financial institutions, offshore loans, and securities investments.
- Stress-testing: interest rate and liquidity stress tests are undertaken (methodologies referenced to Kawase, 2023).

### Macroprudential policy and regulatory responses
- Risk-based supervision has been initiated and all three pillars of Basel II have been implemented.
  - Pillar I requirement effective 15 March 2017: minimum capital adequacy ratio (CAR) of 10 percent for all banks; extended to finance companies in 2022.
  - Pillar II: ICAAP submission on an annual basis since 30 June 2019.
  - Pillar III: enhanced disclosure on risk and capital management since March 2019.
- Macroprudential tools implemented include:
  - Total Debt Service Ratio (TDSR): borrowers’ monthly total debt obligation relative to net income should be less than 70 percent.
  - Cap on Unsecured Personal loans: unsecured personal credit facilities restricted to 18 times of the borrowers’ net monthly income.
  - Minimum Cash Balance requirement (reserve requirement) at 6 percent.
  - A cap on loan-to-value ratios was revoked in late 2016.
- For 2023, identified Domestic Systemically Important Banks (D-SIBs) have been subjected to additional measures such as Higher Loss Absorbency (HLA) capital requirements.
- Authorities plan to implement Basel III liquidity standards between 2023 and 2024 and other elements of Basel III in phases.
- Stress tests for financial institutions are conducted at least annually.

*Prepared by Shohhei Kawase (OAP) and Ritu Basu (APD). Sources: Brunei Darussalam Central Bank (BDCB) reports; Kawase (2023).*

### 5.      We categorize Brunei’s structural reform areas in three main categories: trade, market

### 5. Structural Reform Areas: Trade, Market Regulation, Governance

### Methodology and Indicators
- Structural reform areas categorized into three main categories: trade, market regulation, governance.
- Trade indicators include three sub-indicators: trade restriction data from the IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), trade facilitation indicators from the OECD, and trade openness indicators from the World Economic Forum Global Competitiveness Index (WEF-GCI).
- Market regulation indicators include sub-indicators from the WEF GCI such as regulatory burden, the extent of market dominance, distortive effects of taxes/subsidies, and the indicator on regulatory quality from the World Bank Worldwide Governance Indicators (WB-WGI).
- Governance is gauged using four WB-WGI sub-indicators: government effectiveness, rule of law, control of corruption, and regulatory quality.
- Each indicator is rescaled to range from 0 to 10 (a higher value implying a better performance). Aggregate indicators are the simple average of their sub-indicators.
- Performance comparisons are made versus two peer groups: ASEAN-6 and the Gulf Cooperation Council (GCC). ASEAN-6 countries include Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam. GCC countries include Bahrain, Oman, Kuwait, Saudi Arabia, and Qatar. No data is available for UAE.
- Performance gap defined as the difference between Brunei’s score and the best performer in each peer group; a positive number implies a performance gap of Brunei vs. peers, a negative gap implies Brunei ahead of its peer.
- Many indicators are perception-based; perceptions may reflect underlying factors that drive structural reform needs.
- Quantitative strategy for estimating reform impacts:
  - Uses local projection method (Jorda (2005)); defines major reforms as episodes where change in the relevant indicator is at least two standard deviations of the distribution (of annual changes across the whole sample).
  - Equations estimated via OLS for each k = 0, ..., 4; estimated coefficients 훽_k used to generate impulse responses.
  - Generic equation: Y_{i,t+k} − Y_{i,t−1} = α_i + γ_t + β_k SR_{i,t} + θ X_{i,t} + ε_{i,t}, where SR denotes structural reform, X includes control variables (lags of past economic growth, past reforms), α_i and γ_t denote country and year fixed effects.
  - Sample for empirical analysis: 124 EMDEs over periods of 2000-20.
  - Note: Figures present responses where t=0 is the year of the shock; dashed lines denote 90 percent confidence bands.

### Trade: Key Findings
- Overall implication: Brunei could benefit from reforms enhancing trade facilitation, reducing non-tariff barriers, and reducing trade restrictions.
- OECD trade facilitation indicators: Brunei scores below the median of both ASEAN-6 and GCC peer groups, indicating room for improvement.
- IMF AREAER 22 sub-indicators (trade restrictions): Brunei scores well vs. ASEAN-6 peers, but below median of GCC countries.
- WEF-GCI perceived trade openness: Brunei performs well on perceived trade openness compared to peer groups.
- Aggregate interpretation: Trade openness is not perceived as a weakness vs. peers, but targeted reforms on trade facilitation and NTBs would be beneficial.

### Trade Openness: Specific Gaps
- Trade openness measured by 4 WEF GCI sub-indicators: prevalence of non-tariff barriers, border clearance efficiency, trade tariffs, complexity of tariffs.
- Structural gaps vs. peer top-performers:
  - Minimal gaps for trade tariffs and complexity of tariffs vis-à-vis ASEAN-6 and GCC top performers.
  - Gaps prevail for non-tariff barriers and border clearance efficiency vis-à-vis ASEAN-6 and GCC top performers.
- Recommendation implication: Enhance trade performance primarily through reducing NTBs and improving border clearance efficiency.

### Non-Tariff Barriers (NTBs)
- NTBs encompass import quotas, complex customs procedures, national standards and regulations posing trade obstacles, subsidies to local industries, government procurement policies favoring domestic companies, and other measures rising cost of doing business.
- Reducing NTBs could open trade opportunities, enhance competitiveness, stimulate economic growth, attract foreign investment, and boost exports.

### Trade Facilitation: OECD Findings and Priority Sub-Areas
- OECD trade facilitation indicators corroborate lower-than-desirable border clearance efficiency.
- Largest gaps vis-à-vis ASEAN-6 top performers are in: appeal procedures, involvement of the trade community, governance and impartiality, and documents. Similar, slightly less pronounced gaps versus GCC top performers.
- Brunei should focus reforms on these four sub-indicators while addressing remaining weaknesses for holistic trade facilitation improvements.
- Box 1: Potential Measures to Improve Trade Facilitation (OECD Trade Facilitation Indicators) — highlighted items include:
  - Streamlining border procedures:
    - Increase share of trade transactions covered by pre-arrival processing.
    - Reduce share of goods undergoing physical inspections through efficient and automated risk management.
    - Increase share of goods benefiting from prior release to final determination and payment of Customs duties, taxes, fees, and charges.
    - Expand risk management systems to other relevant border agencies.
    - Increase post-clearance audits (currently below 2 percent of trade transactions in Brunei Darussalam).
    - Expand benefits and transparency for Authorised Operators; address transparency of qualification criteria and application procedures.
  - Automation of border processes:
    - Implement pre-arrival processing with possibility to lodge documents in advance electronically.
    - Ensure automated processing for Customs declarations full-time at key border posts.
  - Information availability:
    - Make required trade-related documentation easily downloadable online.
    - Publish information on new or adjusted trade-related regulations in advance of entry into force.
    - Improve Customs website user-friendliness; publish decisions and examples of Customs classification, advance rulings, appeal procedures and decisions on Customs matters.
  - Involvement of the trade community:
    - Introduce general notice-and-comment framework procedures for trade and border issues.
    - Introduce guidelines and procedures for public consultation processes.
    - Ensure drafts are available before entry into force and involve trading community at drafting stage.
    - Publish how public comments are dealt with by authorities.
  - Appeal procedures on Customs matters:
    - Specify set periods for decisions on appeals or reviews in laws and regulations.
    - Require information about motives of administration’s decision.
    - Provide for judicial appeal following or independent of administrative appeal of customs decisions.
- Fees and charges: Brunei performs well; no particular recommendations included in this area.

### Trade Restrictions: MATR Findings
- Modified Measure of Aggregate Trade Restrictions (MATR) derived from IMF AREAER (rescaled to range from 0 to 10; a higher value implies a higher degree of economic freedom linked to trade).
- MATR consists of 5 main categories: (i) exchange measures, (ii) restrictions to payments, (iii) import restrictions, (iv) export restrictions, and (v) payments and proceeds for invisibles, currency repatriation and surrender requirements.
- Aggregate performance:
  - Brunei performs relatively well compared to GCC peers and in line with ASEAN-6 on trade restrictions overall.
  - At granular level: performs well on restrictions to exports and payments compared to both peer groups.
  - Scope to improve in import restrictions and payments and proceeds for invisibles.
  - Brunei consistently weaker than peer averages in import restrictions (including tariff and non-tariff restrictions).
  - Potential policy: liberalize restrictions for payments and proceeds for invisibles.

### Market Regulation: Findings and Recommendations
- World Bank WGI and WEF-GCI data:
  - Brunei performs well vs. peers on regulatory quality.
  - Room exists to reduce regulatory burden, market dominance, and distortive taxes and subsidies.
- Policy recommendations:
  - Continue reviewing regulatory framework to ensure level playing field for private sector.
  - Ensure regulations, subsidies, and taxes do not unduly benefit select enterprises (e.g., GLCs).
  - Specific reforms: reduce regulatory burden (business licensing and permits), reform taxes and subsidies that create distortive effects in product markets, lower market dominance of large firms, especially GLCs.
  - Improving quality of regulation contributes to boosting growth.

### Governance: Performance and Reform Options
- Governance indicators (2021) show Brunei among top performers in GCC peers and moderately below ASEAN-6 top performers.
- WB-WGI sub-indicators used: government effectiveness, regulatory quality, control of corruption, rule of law.
- Assessment:
  - Brunei performs relatively well compared with ASEAN-6 top performers, with moderate gaps.
  - Area may not be an immediate priority for first-generation structural reforms, but absolute performance on rule of law and control of corruption merits attention.
- Recommended governance reforms to facilitate private sector–led sustainable growth:
  - Enhance transparency and accountability of public administration and the judiciary.
  - Promote efficiency in enforcing rules, contracts, and property rights.
  - Typical reforms include digitalization and modernization of administrative and judicial procedures, promoting access to information, lowering transaction costs, and reducing potential for corruption.

### Quantitative Analysis of Reform Impacts
- First-generation reforms (governance, external sector, business regulation) prioritized before second-generation reforms (domestic finance and labor market) can bring larger upfront gains for output and green transition.
- Empirical results (pooled data for Brunei, ASEAN-6 and GCC; full sample of 124 EMDEs, 2000-20):
  - Baseline estimation shows positive output effects from major governance and trade-related reforms.
  - Alternative dataset of Brunei-peers: positive output effects from major governance reforms; effects from trade-related reforms are muted.
  - Effects on net FDI inflows:
    - Baseline and alternative estimations show positive effects from major governance reforms.
    - Major trade-related reforms show no or negative effects on net FDI inflows, suggesting potential role for trade incentives in attracting FDI.
- Figures indicate responses where t=0 is the year of the shock and Y-axes represent percentage changes of output or net FDI inflows from time t=-1; dashed lines denote 90 percent confidence bands.

### Conclusion and Priority Policy Recommendations
- Brunei has made progress toward diversification and sustainability since 2007 but further structural reforms can significantly upgrade growth potential.
- Aggregate performance: Brunei performs well compared with ASEAN-6 and GCC peers in most areas analyzed, yet targeted reforms in select priority areas can lift long-term growth potential.
- Priority areas for first-generation structural reforms:
  - Enhance trade facilitation (streamline and digitize border processes; improve appeal procedures; increase involvement of the trade community; improve information availability).
  - Reduce non-tariff barriers and restrictions to imports, as well as restrictions on payments and proceeds for invisibles.
  - Level the playing field through market regulation reforms to reduce regulatory burden, distortive taxes and subsidies, and market dominance (especially by GLCs).
  - Improve quality of regulation and continue governance reforms that enhance transparency, accountability, and efficiency of administrative and judicial procedures.
- Example measures:
  - Rationalize non-tariff barriers such as certification requirements.
  - Reduce export/import documentation processes and improve timeliness of appeal procedures.
  - Reduce regulatory burden for firms (business licensing and permits), reform distortive taxes/subsidies, and lower market dominance of large firms.
  - Digitalize and modernize administrative and judicial procedures to promote private sector–led sustainable growth.

*Source: IMF staff analysis as presented in the chapter on Brunei Darussalam (Structural reform areas: trade, market regulation, governance).*

### 19.      Economic theory suggests large and significant positive effects of these reforms on

### 19.      Economic theory suggests large and significant positive effects of these reforms on

### Main findings and policy implications
- Economic theory suggests large and significant positive effects of the described reforms on economic growth and foreign direct investment (FDI), including public private partnerships, supporting Brunei’s long-term economic and developmental objectives.
- A level playing field, efficient and digitalized administrative procedures, and free trade underpin a private sector led growth model that can facilitate transition to a more diversified, sustainable economy less dependent on the oil and gas sector.
- Reforms are expected to promote sustainable macroeconomic stability and provide the basis for an elevated quality-of-life which Brunei’s authorities intend to provide for their citizens.

### Indicators and outcome variables
- Governance indicator: constructed as the simple average of four World Bank Worldwide Governance Indicators sub-indicators:
  - (i) government effectiveness
  - (ii) regulatory quality
  - (iii) control of corruption
  - (iv) rule of law
- Trade restrictions indicator: Measure of Aggregate Trade Restrictions (MATR) from IMF AREAER; MATR is the unweighted sum of up to 22 possible binary variables in IMF’s AREAER.
- Non-tariff barriers indicator: constructed by excluding exports/imports tariffs and taxes from aggregate MATR.
- Each indicator is rescaled to range from 0 to 10 (a higher value implying a better performance).
- Outcome variables:
  - output: the log of GDP based on purchasing power parity
  - FDI: net FDI inflows as percentage of GDP

### Quantitative approach and estimation strategy
- Purpose: assess impacts of governance, trade restriction, and non-tariff barriers indicators on output and FDI.
- Structural reform (SR) shock definition: a change in reform indicators from t = -1 to t = 0.
- Impulse responses are generated to graphically show how much output or FDI would have changed over time before major structural reforms were implemented.
- Major features of the empirical model:
  - Regressions estimated via OLS for each k = 0, ..., 4.
  - Estimated coefficients of interest, 훽_k, are used to generate impulse responses to a major reform shock equal to two standard deviations of the distribution of annual changes in the relevant indicator across the sample used.
  - Control variables X include lags of past economic growth and past reforms.
  - 훼_i and 훾_t denote country fixed effects and year fixed effects respectively.

### Regression specifications (local projections)
- General form for horizon k (k = 0, ..., 4):
  Y_{i,t+k} − Y_{i,t−1} = 훼_i + 훾_t + 훽^k SR_{i,t} + 훳 X_{i,t} + ε_{i,t}
- For k = 0 (point estimate of percentage change from t = -1 to t = 0):
  Y_{i,t} − Y_{i,t−1} = 훼_i + 훾_t + 훽_0 SR_{i,t} + 훳 X_{i,t} + ε_{i,t}   ⋯(1)
- For k = 1 (point estimate of percentage change from t = -1 to t = 1):
  Y_{i,t+1} − Y_{i,t−1} = 훼_i + 훾_t + 훽_1 SR_{i,t} + 훳 X_{i,t} + ε_{i,t}   ⋯(2)
- 훽_2, 훽_3, 훽_4 are estimated analogously to demonstrate estimated percentage changes over time from the year before major reforms were implemented.
- Dashed lines in the charts denote 90 percent confidence bands calculated from the standard deviation of the estimates for respective 훽_k.

### Key methodological references used
- Local projection method: Jordà (2005) “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95(1):161–82.
- Governance indicators: Daniel Kaufmann and Aart Kraay (2023). Worldwide Governance Indicators, 2023 Update.
- MATR and trade restriction measurement: IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) and IMF Working Paper on Measurement of Aggregate Trade Restrictions.

*Source: IMF staff appendix on Quantitative Analysis from the Brunei Darussalam country chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1brnea2024002-print-pdf.pdf_