IMF Wraps Up 2023 Brunei Darussalam Article IV Consultation

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Brunei Darussalam.

Brunei has begun to recover from the pandemic, with COVID-19 restrictions lifted and borders reopened in 2022. However, the recovery has been hindered by reduced Oil and Gas (O&G) sector production, despite rising commodity prices. Real GDP contracted in 2022 due to a decline in O&G production, but this was partly offset by growth in downstream O&G activities and non-O&G sectors. The labor market improved, although gains were primarily in lower-paid jobs. Inflation rose in 2022 to 3.7 percent but has since moderated, with the stable exchange rate helping to mitigate the impact of imported inflation. The fiscal and current account position improved in 2022, 1.6 and 19.6 percent, respectively, driven by higher O&G prices and an expansion of exports from the downstream sector. The banking sector remains stable, liquid, and well capitalized with declining non-performing loans, while domestic lending showed signs of recovery, particularly in the corporate sector.

The recovery is expected to be uneven and uncertainty surrounding the outlook remains high. Growth is forecasted to contract by about 1 percent in 2023 on the back of reduced oil and gas (O&G) production—largely driven by the deferment of infrastructure maintenance in the O&G sector—but the recovery in the non-O&G sector will continue to contribute positively, aiding diversification efforts. Inflation is predicted to moderate to 1.7 percent, with the easing of global supply chain bottlenecks and commodity price normalization. The overall fiscal and external positions are projected to weaken to deficit of around -9 percent of GDP and a surplus of 10.6 percent of GDP respectively in 2023, and through the medium-term. Key challenges going forward include the gradually narrowing fiscal space, the need to shield the economy against O&G sector volatility, global decarbonization pressures, and ensuring intergenerational equity. Risks, such as protracted O&G maintenance activities and a less favorable external environment could impede the recovery, while higher O&G prices could provide an upside.

Executive Board Assessment[2]

Executive Directors noted that a contraction in the oil and gas sector weakened the recovery from the pandemic and the outlook remains subject to substantial downside risks. Against this challenging economic landscape, Directors stressed the need for prudent policies and structural reforms to support the recovery, maintain macroeconomic stability, and promote diversification and climate resilience. Continued capacity development supported by the Fund remains important.

Directors emphasized the importance of fiscal prudence amid substantial uncertainties in oil and gas production and prices and long-term decarbonization pressures. They welcomed the authorities' focus on a growth-friendly fiscal consolidation that protects the vulnerable and raises public investment. Mobilization of non-oil and gas revenues, implementation of targeted subsidies, wage bill rationalization, and improvements in fiscal transparency and risk analysis would be important in this endeavor. A strong and credible medium-term fiscal framework would also be essential.

Directors agreed that Brunei's enduring currency board arrangement with Singapore has ensured macroeconomic and financial sector stability. They encouraged further alignment of policy rates with the Monetary Authority of Singapore and more effective liquidity management.

Directors welcomed that the financial sector remains resilient, with strong capital buffers and abundant liquidity. While systemic risks remained contained, they called for continuous vigilance against tail risks amid tightening global financial conditions. Directors also emphasized the need for greater financial market development and additional enhancements in prudential frameworks and AML/CFT enforcement.

Directors welcomed the authorities' efforts to support Brunei's economic diversification and climate transition goals and urged the authorities to continue pressing ahead with critical policy reforms, given the importance of these goals for Brunei's long-term prosperity. Priorities include human capital development, digitalization, enhancing public investments and PPPs, regional integration and data quality. Despite Brunei's small global emissions share, Directors welcomed the nation's ambitious commitment to achieve a Net Zero Target by 2050. They underscored the urgency of advancing the transition plan and advocated a comprehensive approach for climate objectives and revenue diversification, including incorporating the recommendations from the Climate Public Investment Management Assessment. Considering the implications of carbon pricing for climate mitigation and revenue diversification could also be important.