The FINANCIAL — The Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation with Brunei Darussalam on May 4, and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
Brunei’s oil and gas resources have generated high per-capita incomes despite weak underlying productivity growth. Over the past decade, high energy prices and broadly prudent policies have supported sizable fiscal and current account surpluses, even as public spending has expanded. Brunei is now confronting the dual challenges of significantly lower global oil prices and subdued domestic production due to refurbishment of oil facilities over the coming 3–4 years, according to IMF.
In 2014, GDP contracted by about 1.5 percent, according to IMF estimates, owing to declines in oil production. Meanwhile, the non-energy sector grew 1.9 percent on higher government expenditure. The current account surplus fell to a still sizable 24 percent of GDP amid declines in oil exports and increased imports of capital goods associated with oil facility maintenance. The fiscal surplus narrowed to 2 percent of GDP owing to declining oil revenues. Inflation was zero percent, thanks to the steady appreciation of the Singapore dollar (to which the Brunei dollar is pegged) along with continued price controls on specific consumer goods. Credit increased by 1 percent over the year, and banks remain well-capitalized, profitable, and with declining non-performing loans.
Lower oil production and prices are projected to generate sizeable fiscal and external deficits through 2017. In 2015, real GDP is expected to contract by 0.5 percent, as maintenance of oil facilities continues. Meanwhile the fiscal and current account balances are projected to swing to deficits of around 16 and 10 percent of GDP, respectively. However, growth is expected to recover and macro balances turn positive from 2018 onwards with higher production from refurbished and new facilities coming on stream.
With large savings, Brunei can weather deficits even larger than those currently projected. However without reforms, the economy will remain narrowly based, with low productivity in most sectors, low educational attainments, and rising unemployment. Key policy recommendations include: better prioritizing fiscal expenditures; implementing reforms to diversify the economy and boost private sector growth; and continuing progress on institutional capacity building.
Executive Board Assessment
In concluding the 2015 Article IV consultation with Brunei Darussalam, Executive Directors endorsed staff’s appraisal, as follows:
After over a decade of sizable surpluses from generally prudent policies and high energy prices, Brunei is now facing the dual challenge of an oil price and production shock. Oil production and economic performance are expected to remain lackluster over the next 3–4 years as the refurbishment of oil facilities continues and prices only partially recover. The fiscal and current account balances are expected to fall from sizable surpluses to large deficits.
While Brunei has sufficient reserves to face these challenges, the shift in the global energy market provides an opportunity to revisit and reframe policy priorities. Brunei’s sizable financial assets are more than adequate to absorb these negative shocks and insulate the economy from their impact. Financial savings should be used to finance near-term fiscal and external deficits, while undertaking a multi-year program to higher efficiency in public spending, tackle price and wage distortions, and promote growth in the non-energy economy.
More efficient and effective spending would help preserve resources available to future generations, increase expenditure discipline, and realign incentives in favor of private-sector employment. A public sector wage and hiring freeze would generate fiscal savings and encourage private sector employment. Reducing current and small capital expenditure could encourage expenditure efficiency. Dropping large capital projects in the national development plan that have not been successfully implemented would limit project carryover to the next plan.
Structural fiscal reforms can further strengthen efficiency and ensure that spending supports the non-energy sector. Further progress on PFM reforms is essential, starting with improvements to budget credibility. The authorities should also implement measures to improve the quality of public investment with possible assistance from regional and development partners.
The current oil price slump represents an opportunity to embark on fuel subsidy reform. The authorities should take advantage of the smaller gap between the retail price and the world price to formulate and initiate the implementation of a long-term strategy for fuel subsidy reform, similar to regional peers.
Financial sector architecture has been strengthened but there is scope for further improvement. Staff welcomes the increased use of the Credit Information Bureau, the launch of the national payments and settlements system, and the plan to issue sukuk with longer maturities. Going forward, staff encourages the Authoriti Monetari Brunei Darussalam to undertake further measures to deepen the financial sector in tandem with an appropriate macroprudential toolkit.
The authorities should further relax regulations on interest rate controls and the Asset Maintenance Ratio (AMR), while addressing structural impediments to spur lending. Remaining interest rate controls should be removed in light of their distortionary effects on financial intermediation. The relatively high AMR continues to lead to excessive cash and reserve account holdings. Efforts to spur credit growth to private enterprises should address the lack of available financial data, including through financial education and expansion of audited statements by small and medium enterprises.
Structural reforms aimed at diversifying the economy and boosting private sector employment are encouraged. The authorities’ efforts to improve the business environment are welcome. Improvements to educational quality along with curriculum reforms to bridge the skills gap of graduates can deliver a more integrated labor market and reduce unemployment rates.
Staff welcomes continued efforts to improve statistics and build technical capacity. Progress has been made in data compilation and dissemination although gaps remain due to capacity constraints. Staff welcomes Brunei’s interest in various TA and training organized by the IMF.
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