The International Monetary Fund posted their latest Article IV Consultation report on Brunei Darussalam. You can read it here.
IMF Executive Board Concludes 2016 Article IV Consultation with Brunei Darussalam
September 26, 2016
On September 2, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation 1 with Brunei Darussalam.
Brunei Darussalam has responded to sharply lower oil prices by launching policy reforms to transform its oil and gas-dependent economy. While the country is able to absorb the oil revenue slump for several years by drawing on buffers built over the past decades, the authorities have begun a process of structural reforms to reconfigure the government towards enhanced economic performance, combined with fiscal adjustment to ensure long-term sustainability and intergenerational equity.
Real GDP in 2015 registered a smaller decline than in the preceding two years. Oil production, in particular, has been recovering since the second half of 2015 from protracted disruptions since 2012 related to oil facility maintenance and refurbishment. Activity in the non-oil and gas sector slowed due to fiscal consolidation and lower services linked to the oil and gas sector, but was partially offset by government infrastructure construction projects. Inflation averaged -0.4 percent in 2015, driven by the appreciation of the Singapore dollar to which the Bruneian dollar is pegged, relative to neighboring countries which are major sources of Brunei’s imports. The current account surplus narrowed mainly on lower oil and gas exports, while the fiscal balance turned into a large deficit.
Real GDP is projected to turn positive in 2016 on the back of a recovery in oil production, but growth will remain moderate until 2019. Lower oil prices are projected to keep the fiscal position in deficit for several years. The current account is projected to register small deficits in 2017 and 2018 due to low oil prices and imports associated with the construction of FDI projects. Nevertheless, growth and macroeconomic balances are expected to strengthen markedly from 2019 onwards as new energy downstream facilities come on-stream. Main risks arise from lower-for-longer oil prices that could severely erode the fiscal position, while delays in production from these new facilities could dampen the medium-term outlook. Slow progress in structural reforms could dim prospects for economic diversification.
The Brunei authorities are implementing measures to adjust to lower oil prices, raise productivity, enhance efficiency, and promote economic diversification. Fiscal adjustments began in the latter part of 2015, aiming to better prioritize expenditures toward economic diversification and efficiency. A cabinet reshuffle in October 2015 led to a reconfiguration of ministries and agencies, resulting in an institutional structure that is better synchronized to improve economic performance and government delivery. Newly created agencies would reinforce this, with the Foreign Direct Investment Action and Support Center facilitating a clear and efficient process for FDI in Brunei, and Darussalam Enterprises providing a one-stop venue for wide-ranging support to small and medium enterprises. Ongoing reforms have been reflected in recent improvements in business environment indicators. In addition, Brunei continues to use its participation in recent international trade agreements to widen market access and transform the domestic economy by raising competitiveness and making the business climate more predictable and transparent in order to attract new investment.
Executive Board Assessment 2
Executive Directors noted that, after over a decade of sizable fiscal and external surpluses from high oil prices, Brunei Darussalam’s economy is adjusting to a challenging environment of a prolonged period of low oil prices. While the country has sizable buffers, Directors commended the authorities for using the opportunity provided by the low oil prices to reconfigure policies to support enhanced economic performance, long term fiscal sustainability, and intergenerational equity. Against this backdrop, Directors underscored the importance of continuing to push ahead with fiscal and structural policy reforms to strengthen and diversify the economy.
Directors agreed that the FY2016/17 budget provides an appropriate target for fiscal adjustment, but it needs to be buttressed by tight spending controls, increases in non-oil revenue, and improvements in public financial management. Directors noted that the fiscal policy strategy should be anchored in a multi-year program of structural fiscal reforms to improve the efficiency and composition of public spending, while supporting growth. In this regard, they called for measures to tackle price and wage distortions in order to increase the attractiveness of private sector employment as well as promote growth in the non-energy sector. Directors urged freezing the wage bill and reducing untargeted subsidies, particularly through fuel subsidy reform, accompanied by mitigating measures to protect the vulnerable, where appropriate.
Directors noted the banking system’s strong capitalization and liquidity. At the same time, they observed that an uptick in non-performing loans and shifts in the domestic banking landscape involving the entry and exit of foreign banks, call for close monitoring. In this regard, the exit of the largest foreign bank should be well phased and coordinated to minimize disruptions and preserve financial stability. Directors encouraged the authorities to strengthen bank supervision in response to emerging pressures on asset quality and to further develop domestic financial markets.
Directors considered that the currency board arrangement with the Singapore dollar has served the country well and remains appropriate as it provides a credible nominal anchor.
Directors commended the recent progress in structural reforms, and encouraged the authorities to sustain efforts to improve the ease of doing business, and promote economic diversification and private sector development. They emphasized the importance of developing human capital, enhancing labor productivity, and expanding international trade linkages. Directors concurred that the high standards embedded in Brunei Darussalam’s international trade agreements could broaden market access and help drive reforms to raise competitiveness and productivity. They welcomed the continued efforts to improve statistics and build technical capacity, and encouraged the authorities to undertake a data ROSC.