On May 19, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Brunei Darussalam.
Oil and gas dominate Brunei’s economy, comprising two-thirds of output and most of exports and government revenues. Accumulated oil wealth and prudent policymaking have provided large fiscal and current account surpluses as well as a high standard of living for nationals, with a per capita GDP of over US$40,000. Given the nonrenewable nature of energy resources and the reliance of non-energy activity on the government sector, the authorities have embarked on a long-term strategy to diversify the economy.
In 2013, real GDP contracted 1.8 percent as the energy sector declined due to longer-than-expected maintenance of hydrocarbon facilities, which had similarly restrained growth in 2012. The nonenergy sector grew at a steady 2.7 percent, driven by public development expenditure and property financing. Continued appreciation of the Singapore dollar, to which the Brunei dollar is pegged, together with administered prices, helped contain CPI inflation to 0.4 percent in 2013. The current account weakened slightly to 31 percent of GDP as oil exports declined, while the primary fiscal balance narrowed slightly to 16½ percent of GDP on increased expenditures. Total credit increased 8 percent over the year, and banks remain well-capitalized, profitable, and with declining nonperforming loan ratios.
Brunei’s economic outlook remains favorable. As the energy sector recovers, GDP growth should rise to 5½ percent in 2014. Over the medium term, acceleration in the nonenergy sector due to infrastructure and downstream petrochemical projects is expected to further support growth between 4─5 percent through the medium term. The current account is expected to remain stable at around 30 percent of GDP and the fiscal balance is expected to stay robust at about 20 percent of GDP. The main risks to the economy stem from energy prices, to which Brunei appears well-cushioned by substantial fiscal buffers.
Looking ahead, key policy priorities include increasing human capital and generating employment opportunities, particularly for the youth, enhancing financial sector depth, and boosting private sector growth.
Executive Directors commended the authorities for the prudent policies that have promoted macroeconomic and social stability. Following the recent contraction, relating to a temporary disruption in energy production, the economy is expected to rebound as production of hydrocarbons recovers. Sizable reserve assets provide a buffer against near-term risks. Directors agreed that, over the longer-term, careful fiscal planning and diversification away from hydrocarbons, while fostering private sector development, are key to employment creation and long-term sustainable growth.
Directors agreed that the current expansionary fiscal stance amid the decline in energy production is appropriate. To ensure long-term sustainability, they encouraged the authorities to formalize a medium-term fiscal policy framework. They also supported continued efforts to improve public financial management and to ensure the quality of public investment. Directors emphasized the need to formulate a long-term strategy for fuel subsidy reform with better-targeted support to improve efficiency and free up resources for long-term development goals.
Directors noted that the banking system is sound and well capitalized and welcomed the steps taken to strengthen the financial sector architecture. They saw scope for further financial sector development and encouraged additional measures in tandem with an appropriate macroprudential toolkit. Directors welcomed the improvements in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime.
Directors noted that the current peg to the Singapore dollar continues to serve the economy well. They welcomed the Monetary Authority’s willingness to reconsider the interest rate controls and encouraged steps to expand lending to the private sector, through better use of credit information, improvements in financial reporting, as well as government support for SME financing.
Directors emphasized that a more conducive business environment and productive labor force will help support successful diversification. Active policies are needed to promote private sector employment and increase incentives to pursue higher education and training.
Directors welcomed recent steps to improve statistical capacity. They encouraged further efforts to address remaining gaps in data compilation and dissemination.