Public Information Notice No. 11/76

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Brunei Darussalam

June 16, 2011

On May 4, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Brunei Darussalam on a lapse˗of˗time basis.²

Background

Brunei’s economy is dominated by the oil and gas sector, which contributes nearly two thirds of the nominal income. Oil and gas exports earned about 95 percent of Brunei’s export revenues, and generated about 90 percent of government revenue. Per capita GDP is one of the highest in the world (estimated at US$32,000 in 2010). The authorities have adopted a prudent fiscal strategy to save oil revenues for future generations, mainly through the General Reserve Fund managed by the Brunei Investment Agency (BIA).

Economic growth rebounded strongly in 2010 after two years of decline, mainly due to the recovery of oil and gas production. Real GDP rose by 5½ percent in the first half of 2010. For the year, GDP growth is estimated at 4 percent. Current account surplus has also rebounded, benefitting from higher world oil prices. Inflation remains contained as a result of the appreciation of the Brunei dollar and continued price controls.

The authorities continued to make rapid progress in financial sector reforms. The establishment of the Autoriti Monetari Brunei Darussalam (AMBD) and the Deposit Protection Scheme, on January 1, 2011, marked the milestones in building strong financial institutions and strengthening financial sector stability. As a result of the prudent credit policies, banks’ excessive exposure to personal, and in particular, credit card, debt has been reduced.

Economic diversification, a major medium-term challenge, is picking up momentum. Government policies increasingly emphasize economic and commercial viability in supporting development spending. Government funds were set up with an explicit purpose of supporting profit-oriented projects through public-private partnerships and joint ventures in non-energy sector development, especially in food, aquaculture, medicine, and telecommunication industries. Five consecutive years of corporate income tax cuts have brought down the tax rate to 22 percent, from 30 percent in 2006.

Economic outlook is highly positive. New oil and gas finds and exploration agreements are expected to extend the life of Brunei’s hydrocarbon reserves. The recent run up in world oil prices will boost fiscal revenues in the near term. In 2011, growth will be supported by both higher oil production and public expenditures. Over the medium term, under the baseline scenario, annual GDP growth is projected to be about 3 percent. Growth will be sustained by new investments in oil and gas explorations and extractions, as well as the implementation of economic diversification projects. Accelerated structural reforms and successful implementation of the various economic diversification initiatives could increase growth further.

Executive Board Assessment

On May 4, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam and considered and endorsed the staff appraisal without a meeting.

Staff commends the authorities for their flexible and prudent fiscal policy. This policy has cushioned Bruneians from the impact of the global economic crisis and stimulated growth in 2010. With the economic recovery firmly in place, fiscal policy has now automatically shifted back into a savings mode. The further reduction in the corporate income tax in 2010 has helped businesses and made Brunei’s corporate tax rates competitive in the region.

Over the longer-term, higher economic growth could come from new hydrocarbon discoveries, but successful implementation of diversification initiatives is the key to long-term sustainability. Government spending, including on payroll, transfers, and subsidies, will continue to support domestic demand. In addition, government spending will continue to restrain the pass through of the global business and commodities price cycle to the domestic economy. At the same time, the government’s ability to accelerate growth through fiscal stimulus spending is likely to have only negligible impact on domestic production. Due to Brunei’s small size and small production base, most of the additional spending would likely spill over into the demand for foreign goods and services. Economic and structural reforms to reduce price distortions are needed to foster private sector development and the identification of viable export products and niche markets.

Fiscal management could be bolstered by the adoption of a multi-year rolling budget, which would introduce a medium-term perspective into the annual budget process. A medium-term budget framework would lay the foundation for broadening the revenue base, undertaking a comprehensive review of expenditures, including subsidies and civil service compensation, strengthening the framework governing extra-budgetary funds, and adopting a long-term fiscal goal, including for the inter-generational allocation of Brunei’s hydrocarbon wealth. These reforms will enhance fiscal sustainability and better prepare Brunei for the eventual depletion of its hydrocarbon resources.

The current exchange rate regime continues to serve Brunei well. The peg to the Singapore dollar has engendered macroeconomic stability and continues to be appropriate. Brunei’s current account surpluses are consistent with the estimated savings-investment norm for countries with exhaustible oil and gas reserves. Accordingly, the real effective exchange rate appears broadly in line with fundamentals.

Substantial progress in financial sector policies and reform are commendable. Staff welcomes the establishment of the AMBD and the Deposit Protection Scheme, and looks forward to the introduction of the Credit Bureau. The AMBD promises to become a full fledged financial sector supervisor and will benefit from cooperation with central banks of other countries. The regulations to reduce consumer lending and link credit card accounts to payroll accounts have contributed to the current trend of household deleveraging and are improving financial discipline. In the longer term, staff expects the authorities to be able to increase reliance on market driven measures to contain credit growth and ensure its prudent and efficient allocation. This will limit the adverse economic impact of quantitative restrictions that needed to be imposed in recent years.

Economic diversification is becoming a matter of necessity. The economic diversification reform agenda could include administrative measures as well as more fundamental structural reforms. In terms of improving the business environment, shortening the average time to start a business could be accomplished by streamlining and consolidating in one place business registration requirements. The “One Single Authority” is a step in the right direction. Opening areas traditionally dominated by the public sector could provide a needed boost to private sector initiatives. Improving access to financing and business advisory services, in particular for start ups and small companies, would increase the number of new companies and their survival chances.

Reducing the attractiveness of public sector employment for school and university graduates would enhance the supply of highly qualified labor to the private sector. Public official support for activities that encourage and develop entrepreneurship, including among women, will help private sector growth. Removing price distortions by allowing prices to move in tandem with international prices could play an important role in ensuring an efficient long-term allocation of investment, and supporting domestic demand for a broader range of goods and services.

Staff welcomes the recent statistical improvements and looks forward to the timely and regular reporting of macroeconomic data to the Fund. More regular and timely data dissemination on the authorities’ website will enhance the analytical usefulness of the data. Staff also looks forward to the regular updating of the GDDS metadata. The planned establishment of a National Statistics Committee will strengthen Brunei’s institutional setting for macroeconomic statistics.