IMF Concludes 2009 Article IV Consultation with Brunei Darussalam

by Mike Godfrey, Tax-News.com, Washington

16 June 2009

The IMF has concluded an Article IV consultation with Brunei Darussalam. High oil prices and prudent policies have contributed to significant fiscal and current account surpluses. The past year's fiscal surplus is estimated at close to 30% of GDP and the current account surplus for 2008 at about 51% of GDP. According to the IMF the main longer-term challenges are to expand oil and gas reserves, diversify the production base by boosting private sector activity, and enhance fiscal management.

Brunei is a small, high-income, open economy heavily dependent on finite oil and gas reserves. Per capita GDP is over USD36,000. Oil and gas production constitutes a substantial proportion of GDP, exports, and government revenues. Hydrocarbon receipts support a high standard of living. Output growth fell in 2007 and 2008 due to a decline in oil and gas production. This was partially offset by an acceleration in government and private non-oil sector growth. Output growth is projected to remain weak in the near term, recovering only gradually over the medium term. Over the longer term, growth would depend on hydrocarbon reserves expansion, the recovery of the global economy and oil prices, and success in diversifying the economic base. GDP growth is expected to rise to 1.75% by 2013, assuming that conservative energy production estimates continue to apply.

On the demand side, growth was driven mainly by government spending. For 2008, real GDP growth is estimated to be negative (−1.5%). Inflation has increased recently, but remains low. CPI inflation rose to 2.75% year on year for the period January-November 2008 reflecting high global prices of imported food items. The IMF saw some room to use countercyclical government spending given the substantial fiscal buffer. Government investment spending can be accelerated in 2009/10 by addressing implementation and capacity constraints, building on the recent progress, according to the IMF. Over the long term, continued restraint in budget formulation amidst volatile energy prices remains an appropriate strategy, in the view of the IMF.

Major government projects and a pick up in non-energy sector activity would be key sources of growth state the IMF. Downside risks stem from possible further declines in energy prices as the global economy slides into a recession, in their view. Given much lower hydrocarbon prices in 2009, the fiscal and current account surpluses would fall significantly. In addition, the sharp fall in prices across all asset classes globally is likely to lead to a decline in the market value of the Brunei Government’s investment holdings abroad, warns the IMF.

The domestic financial system has been resilient to the deterioration in global financial markets so far. The progress toward the establishment of the Brunei Darussalam Monetary Authority, the creation of a level regulatory playing field for financial institutions, and the more effective financial sector supervision are all considered welcome developments by the IMF. In particular, the IMF welcomed the issuance of Islamic Banking Order 2008 and Takaful Order 2008, which enhance the regulatory framework for financial institutions.

The IMF Directors made recommendations as follows:

Fiscal management, already prudent, should be strengthened further by placing annual investment spending plans in the context of a medium-term fiscal framework, adopting a long-term fiscal goal, and integrating the various government funds into the budget. Broadening the revenue base would complement these efforts, the IMF highlights. There should be a gradual phasing out of generous government subsidies along with the creation of a more targeted social safety net, in the view of the IMF.

The peg to the Singapore dollar and the associated Currency Interchangeability Agreement continue to be sources of macroeconomic stability but the IMF acknowledged some uncertainty in the assessment that the level of the real exchange rate is broadly appropriate.

The IMF encouraged the maintenance of the reform momentum in the financial sector and would like to see efforts to foster capital market development bear fruit.

Economic diversification and private sector job creation should be accelerated in line with the priorities set out in the strategic development plans, believe the IMF. This should involve greater private sector participation in areas currently dominated by the public sector, reduction in the large gap between public and private sector compensation packages, and removal of structural impediments to create an enabling environment for private sector development, conclude the IMF.

Recommended