Public Information Notice No. 05/137

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Brunei Darussalam

September 30, 2005

On July 13, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brunei Darussalam.¹

Background

Brunei Darussalam's economy is dominated by the oil and gas sector. Oil and gas account for around 90 percent of total export earnings, over 40 percent of GDP, and about 90 percent of government revenue. The wealth from oil and gas provides Brunei Darussalam's small population with a high standard of living, with GDP per capita estimated at over US$15,000 in 2004. The government plays a dominant role in the economy by providing a wide range of subsidized public services and employing about two-thirds of the local labor force. Under a currency board arrangement, the Brunei dollar is maintained at par with the Singapore dollar.

The economy has continued to register steady, albeit low, growth in recent years. GDP growth is estimated to have slowed to 1¾ percent in 2004 from 3¾ percent in 2003, owing to temporarily lower oil and gas production as production facilities were repaired and upgraded. Non-oil economic activity, however, strengthened, reflecting large oil revenue inflows and increased government spending. Inflation has remained subdued, with consumer prices rising by about 1 percent in 2004. Reflecting higher oil exports and relatively stable imports, the external current account surplus widened substantially to about US$4 billion in 2004, or almost 70 percent of GDP.

The fiscal situation has continued to strengthen. Most of the windfall revenue from recent high oil prices has been saved, resulting in substantial improvements in the fiscal position. The primary budget balance is estimated at a surplus of 16 percent of GDP in FY2004/05, compared with a deficit of 7 percent of GDP in 2002. This year's budget also aims to maintain this stance, with prudent spending plans. Current and capital expenditure would remain largely unchanged in nominal terms, except for additional provisions for wages and salaries for new teachers and nurses.

The financial system has remained generally stable. Credit growth has been moderate, except for consumer lending, while domestic interest rates have remained low. Nonperforming loans have declined gradually, but remain high compared with neighboring countries. Other indicators of financial soundness have been broadly stable.

Looking ahead, favorable oil prices have strengthened the near-term outlook. With oil production expected to increase moderately after repairs and upgrades of production facilities, output growth could increase to about 3 percent in 2005. Inflation should remain low at around 1 percent. The main risk to the outlook stems from the volatility in oil prices, but would be manageable in the near term.

Executive Board Assessment

Executive Directors welcomed the Brunei Darussalam economy's steady growth and strengthened fiscal position, and noted that economic performance had benefited from high oil and gas prices as well as prudent fiscal management in recent years. Inflation continues to be subdued, and the external current account surplus has remained large. Looking ahead, Directors observed that favorable oil prices had strengthened the near-term economic outlook. They noted, however, that little progress had been made in divesting government agencies and that plans to develop the non-oil private sector had yet to bear fruit.

Directors commended the authorities' prudent fiscal policies in recent years. Most of the windfall revenue from high oil prices has been saved, resulting in a substantial improvement in the fiscal position. This year's budget also appropriately aims to maintain this stance in order to create room for expenditure smoothing when energy prices are low. Directors observed that long-term fiscal sustainability, which is achievable with the current fiscal stance, needed to be reassessed periodically in response to changing economic circumstances. They encouraged the authorities to develop a medium- to long-term fiscal strategy, particularly with the aim of reducing oil-related risks to sustainability, and supported technical assistance from the Fund in this area. Directors saw elements of a fiscal strategy as including strengthening non-oil revenues, containing the size of government and the public sector wage bill, and reducing subsidies.

Directors saw scope to enhance fiscal transparency, noting that the limited availability of information continued to hamper fiscal policy analysis. They encouraged the authorities to expand the coverage of fiscal data and to disclose more information on the budget. In this connection, Directors called for a more realistic oil price assumption in the budget, that is less conservative and closer to market projections, and the explicit recognition of the policy of saving windfall revenues. Directors welcomed the authorities' plan to establish well-defined rules for transfers between the government funds for budget management and for savings for future generations.

Directors agreed that the currency board arrangement with Singapore had provided Brunei Darussalam with an effective anchor for price stability. They welcomed the authorities' intention to consider increasing the minimum statutory foreign exchange coverage of currency issued from the current 70 percent to 100 percent, which will strengthen further the credibility of the arrangement. Credibility and confidence would also be boosted by the publication of the audited financial statements of the Brunei Currency and Monetary Board in a timely manner.

Directors recommended the strengthening of financial sector supervision and regulation, supported by significant capacity building. They welcomed the authorities' recent efforts to enhance monitoring of key financial soundness indicators and plans to amend the Banking Act to pave the way for on-site supervision. Also, Directors supported the authorities' recent issuance of guidelines to reduce risks associated with the recent rapid rise in personal loans. They encouraged the authorities to step up efforts to establish a legal basis to enforce key standards and prudential norms, such as capital adequacy and provisioning requirements. To support these initiatives, Directors endorsed the authorities' request for a Financial Sector Assessment Program (FSAP) mission.

To reduce heavy dependence on oil and gas, Directors emphasized the importance of efforts to diversify Brunei Darussalam's economy and provide employment opportunities for its growing labor force. Directors noted that the large differential between public and private sector wages could inhibit the growth of private sector jobs, and they encouraged the authorities to continue to address this issue. Directors welcomed the government's initiatives to attract foreign direct investment, focusing on a few large projects using natural gas, and commended the authorities' intention to ensure that public investment decisions are made on a commercial basis. Directors also welcomed the authorities' intention to maintain an open door policy toward foreign labor. They supported the authorities' strategy to strengthen the education system and improve training in line with private sector requirements to boost the employment of Brunei Darussalam nationals, but noted that higher education could be expanded and provided with more resources.

Directors welcomed the provision of information on the value of Brunei Darussalam's international investment position. They also welcomed Brunei Darussalam's participation in the General Data Dissemination System and the authorities' intention to establish a Brunei Darussalam page in International Financial Statistics. However, Directors expressed concern about the remaining weaknesses in statistics, notably on the external and fiscal sectors, and they encouraged the authorities to continue their efforts—with technical assistance from the Fund—to improve data coverage, quality, and timeliness, in order to ensure effective policy making and implementation.