IMF Concludes 2022 Article IV Consultation with Brunei Darussalam

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation[1]with Brunei Darussalam on a lapse-of-time basis.[2]

After successfully weathering the pandemic in 2020, Brunei was hit by new waves of COVID-19, with case numbers going up significantly and new lockdown measures imposed in H2 2021. Reduced activities in mining and LNG manufacturing, combined with the negative impact of new pandemic variants on domestic services, led to a slowdown in the economy. GDP contracted by 1.6 percent in 2021, led by slowdowns in O&G mining, LNG manufacturing, and downstream activities. Agriculture and some non-O&G manufacturing sectors saw encouraging growth, though the shares of these sectors in total GDP remain small.

For 2022, growth is projected to rebound to 1.2 percent, on the back of easing of mobility constraints and a positive terms of trade shock due to surges in O&G prices. Inflation, while remaining relatively low at 2.2 percent at end 2021, has increased in 2022 and pressures are expected to remain elevated in the short term, owing to supply disruptions and higher food and fuel prices. The economy continues to diversify, with double-digit growth of the food/agriculture sector and a new fertilizer sector commencing production. The risks to the outlook are tilted to the downside, due to potential new COVID-19 variants, increased global uncertainty associated with an escalation of the war in Ukraine, monetary tightening from the US and a larger-than-expected growth slowdown in China. On the upside, higher energy prices would further improve the terms of trade and restore fiscal positions in the short term, while partially contributing to build the buffers needed to ensure stronger intergenerational equity.

Policies should continue to support the recovery in the short term, while promoting economic diversification in the longer term . Targeted fiscal support―leveraging Brunei's ample fiscal reserves with virtually no public debt―remains critical to alleviate the effect of the pandemic on vulnerable businesses and households. At the same time, reforms to improve fiscal sustainability and intergenerational equity should be advanced. Pandemic relief measures to the financial sector should be removed, while monetary policy should be mindful of inflation risks. Measures to foster financial deepening are key to spur private sector development. Economic diversification, beyond oil and gas, should be ramped up through expanding export portfolio and attracting quality FDIs. Policies to develop human capital and MSMEs would help lay the foundation for higher potential growth. Supporting digital and green growth would help to strengthen resilience in the long term.

Brunei has made noticeable efforts in fiscal consolidation and economic diversification, facilitating private sector employment and FDI attraction. Several initiatives to improve fiscal positions have been implemented, such as the fiscal consolidation program aimed at reducing wasteful spending in the medium term, a containment in public employment, and the introduction of new pension scheme to increase employer's contribution rate. The authorities have accelerated their efforts to diversify the economy, including through attracting large FDIs in the oil refinery sector and increasing investments in strategic industries such as agriculture and O&G downstream sectors. Continued efforts in participating in regional economic integration, including the Regional Comprehensive Economic Partnership (RCEP) agreement that came into force this year and the new Indo-Pacific Economic Framework, have been made to provide new market access and investment opportunities for entrepreneurs and industries in Brunei. The authorities are introducing various programs, such as the i-Ready apprenticeship program and SkillsPlus program, to upskill and reskill the workforce and to adapt to the evolving demand of private sector employers. Also, they are implementing various policies to support the development of productive MSMEs, such as facilitating access to financial resources and improving entrepreneurship skill training.

Executive Board Assessment

Executive Directors commended the authorities for adopting policies to cushion the impact of the pandemic as well as for the impressive vaccination rollout. Directors observed that a strong economic recovery is underway, on the back of further lifting of COVID-19 restrictions, investment in large petrochemicals projects, and higher oil and gas prices. Noting that risks to the outlook are tilted to the downside, Directors stressed the need to maintain supportive policies until a private sector led recovery is on a firm path. They also stressed the need for continuous reform efforts to promote economic transformation, foster resilience, and accelerate green, digital, and inclusive growth.

Directors underscored the need to maintain targeted fiscal support for vulnerable businesses and households in the near term, while stepping up fiscal reforms to improve fiscal sustainability and intergenerational equity in the longer term. Directors welcomed the authorities' continuous efforts to strengthen the fiscal position. They noted several initiatives to improve the efficiency of public spending, streamline untargeted subsidy and social spending, rationalize public employment, and mobilize revenue. They also noted that the full implementation of the medium-term fiscal framework would help to stabilize public finances.

Directors noted that monetary liquidity operations should be mindful of inflation risks. Directors welcomed the resilience of the banking sector and authorities' recent efforts to strengthen the AML/CFT regulatory and supervisory framework as well as implement the Basel III framework and upgrade stress testing for improved financial sector stability. Directors concurred that fostering financial deepening is key to spur private sector development.

Directors agreed that the peg to the Singapore dollar remains appropriate, providing a credible nominal anchor for macroeconomic and financial stability, and helping to deepen trade and investment linkages, including with Singapore. They stressed the importance of ongoing diversification to improve fundamentals and ensure a balanced external position over the medium term. They encouraged the authorities to continue to expand the export portfolio, attract quality FDI, improve business environment, invest in human capital, and develop micro, small and medium size enterprises. Directors also highlighted that fostering digital and green growth would create new businesses and job opportunities and enhance economic resilience.

Directors noted the measures taken to improve data management and encouraged the authorities to further improve data compilation and dissemination. They also welcomed the recent close cooperation in Capacity Development (CD) with the IMF, including the authorities' plan to request further CD.