Page 1 I. ECONOMIC ENVIRONMENT (1) RECENT ECONOMIC DEVELOPMENTS 1. Brunei Darussalam has one of the highest standards of living amongst its ASEAN partners; estimated per capita income was B$23,627 (some US$13,800) for the year 2000 (Table I.1). The country, situated on the northern end of the island of Borneo, has a total area of 5,765 square kilometres, some 80% of it forested. Brunei's population in 2000 was estimated at around 338,000, of which, it appears, some 40% were expatriate workers. Table I.1 Basic economic and social indicators, 1990-2000 (B$ million and per cent) 1990 1991 1992 1993 1994 1995 1996 1997 1998 a 1999 a 2000 b National income Current GDP (B$ million) GDP per capita (B$ '000) At market prices At constant prices Share in GDP 6,508.6 6,620.5 6,565.1 6,585.1 6,686.2 7,394.2 7,408.6 7,628.1 7,030.5 7,615.3 7,995.5 25,685 25,415 24,515 23,833 23,502 24,980 24,283 24,260 21,760 23,028 23,627 14,227 14,398 13,851 13,493 13,340 13,211 12,951 13,020 12,165 12,180 12,256 Per cent Agriculture 1.8 1.8 1.9 1.9 1.9 1.8 1.9 2.0 2.3 2.1 2.0 Forestry 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.3 Fishing 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 Petroleum and natural gas 49.6 50.4 45.4 41.8 36.0 38.7 36.3 39.2 30.4 35.3 36.9 Manufacturing 2.7 2.9 3.1 3.2 3.2 3.0 3.2 3.3 3.8 3.8 3.9 Electricity 0.9 0.9 1.0 1.0 1.0 1.0 0.8 0.7 0.9 0.8 0.8 Construction 4.3 4.6 4.8 5.1 5.5 5.5 6.6 6.9 7.7 7.0 6.9 Services 38.2 41.0 45.4 48.7 51.9 51.4 52.6 49.2 56.3 52.1 50.6 Financial services Banking 3.4 3.6 3.7 3.9 4.1 4.0 4.8 4.8 5.6 5.3 5.2 Insurance 1.0 1.1 1.1 1.2 1.2 1.2 1.5 1.5 1.7 1.6 1.6 Wholesale trade 1.9 1.9 2.1 2.2 2.3 2.2 2.3 2.4 2.7 2.6 2.7 Retail trade 4.0 4.1 4.3 4.5 4.6 4.4 5.4 5.3 6.0 5.7 5.6 Hotels and restaurants Transport and communication 1.0 1.0 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.3 1.2 3.3 3.6 3.8 4.0 4.2 4.0 4.1 4.5 5.3 5.1 4.9 Real estate 1.0 1.0 1.1 1.1 1.1 1.1 1.2 1.2 1.4 1.3 1.2 Social and personal services Ownership of dwellings Less banking charges 21.8 23.7 27.2 29.6 32.2 32.3 30.9 27.1 30.9 28.0 27.0 0.8 1.0 1.0 1.1 1.1 1.1 1.2 1.2 1.3 1.2 1.2 2.2 2.3 2.4 2.5 2.6 2.5 2.7 2.8 3.1 2.9 2.8 Table I.1 (cont'd)
Page 2 Trade Policy Review Share in employment Agriculture, forestry and fishing Petroleum and gas 1990 1991 1992 1993 1994 1995 1996 1997 1998 a 1999 a 2000 b.. 2.0...... 2.5............ 5.0...... 4.0.......... Manufacturing.. 3.8...... 4.8.......... Electricity and water.. 2.1.................. Construction.. 13.3...... 8.9.......... Services.. 73.7...... 79.8.......... Social indicators (Million) Population 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Urban population Unemployment (%) Birth rate (per 1,000 population) Life expectancy at birth.. 0.2.................... 4.7...... 4.9...... 4.6.. 27.7 27.3 27.2 26.5 25.6 24.8 25.0 23.7 22.9 22.3.. male.. 72.1.......... 74.2 73.8 74.0.. female.. 76.5.......... 75.0 75.8 76.3.. Education (%) Primary/ preparatory 62.5 61.3 61.0 60.6 60.9 60.9 60.7 59.9 59.5 58.4.. Secondary 37.5 38.7 39.0 39.4 39.1 39.1 39.3 40.1 40.5 41.6.. a Provisional (GDP figures only). b Estimated data... Not available. Source: Government of Brunei Darussalam. 2. Brunei's economic prosperity is largely based on its abundant petroleum and natural gas resources, first discovered in the 1920s; the petroleum and natural gas sector currently accounts for around 37% of GDP, although this figure has declined from almost 50% of GDP in 1990. With agriculture and manufacturing playing relatively minor roles in the economy, the importance of services has grown, from a share of 38% to 51% of GDP between 1990 and 2000. Services are also a key source of employment, providing jobs for some 80% of the labour force. 3. Recent economic growth has varied considerably owing mainly to changes in international prices for petroleum, Brunei's main export, the effects of the Asian economic and financial crisis, which has affected the south-east Asian region since 1997, and the collapse of Amedeo, a large development corporation. As a result, real GDP growth, which averaged 2% between 1990 and 1997 (non-oil GDP growth averaged 4.5% during this period), contracted by 4% in 1998; the contraction was largely due to a sharp fall in real growth of the petroleum and natural gas sector by almost 12% in 1998, compared with growth of 5.4% the year before. Higher petroleum prices in 1999 have led to a recovery in the petroleum and gas sector, although non-oil GDP growth remains weaker than in 1990-97, primarily due to a contraction in the construction industry in 1999 (Table I.2). Real GDP growth is expected to be 3% in 2000.
Page 3 Table I.2 Economic performance, 1990-2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 a 1999 a 2000 b Real GDP growth (% change) 2.7 4.0-1.1 0.5 1.8 3.0 1.0 3.6-4.0 2.5 3.0 Petroleum and gas 2.2 3.1-5.7-2.4-1.0 1.0-0.3 5.4-11.8 3.4 3.2 Non-oil GDP 3.7 5.7 6.5 4.8 5.6 5.7 2.6 1.4 5.7 1.5 2.8 Agriculture and fishing 0.9 1.1 1.6 1.7 0.7 2.2 4.9 2.8 2.4-0.2 2.3 Manufacturing, mining & quarrying 2.0 5.2-5.7-2.2 0.0 1.6 5.3 4.5-12.3 3.8 3.3 Electricity and water 7.7 1.0 3.5 0.3 1.6 3.1-5.3-6.3 6.7-5.3 9.6 Construction 3.3 2.6 1.2 2.7 6.1 8.1 3.0 6.9 3.1-4.0 2.5 Services...................... Transport and communications 4.7-1.6 2.5 3.0 5.5 3.1 4.2 6.4 1.5 1.4 2.4 Social and personal services (incl. Government services) 2.4 9.9 10.1 6.9 6.9 6.2 1.6-2.1 7.1 1.1 2.4 Trade hotels and restaurants 4.5-7.7-0.6-0.6-4.8 0.9-27.7 15.3 9.5 2.0 2.9 Banking and insurance 13.7 0.4 3.2 3.6 6.0 7.1 8.5 7.7 5.3 3.4 2.3 Government services...................... Savings and demand (% of GDP) Gross national savings...................... Gross domestic investment...................... Inflation and exchange rate (% change) GDP deflator 8.4-2.2 0.3-0.2-0.3 7.3-0.9-0.6-4.0 5.7 2.0 CPI (period average) 0.0 1.6 1.3 4.3 2.4 6.0 2.0 1.7-0.4-0.1 1.0 Nominal effective exchange rate b (1995 = 100) Real effective exchange rate b (1995 = 100) Money and credit (B$ million).. 90.7 93.3 94.9 97.5 100.0 103.2 104.6........ 89.2 90.1 92.9 94.6 100.0 102.7 103.6...... Broad money (M3) 4,468 4,669 4,871 5,392 7,472 8,020 7,834 8,116 8,022 8,070 8,941 Credit to public sector...................... Credit to private sector 1,255 1,831 1,927 2,410 3,200 2,562 3,160 5,219 3,776 3,761 4,024 Interest rate (%) Saving rate on deposits below B$100,000........ 1.50 1.25 1.75 1.75 2.00 1.00 1.00 Time deposit rate below B$500,000.. 3.25 2.00 3.25 3.00 2.75 2.75 3.00 3.00 2.25 2.25 Prime rate.. 7.00 6.00 5.75 6.00 6.50 6.50 6.50 6.50 5.50 5.50 Balance of trade and payments (US$ billion) Exports, f.o.b. 2.2 2.5 2.4 2.2 2.2 2.4 2.6 2.7 1.9 2.6 2.9 Imports, f.o.b. 0.9 1.0 1.4 1.8 1.7 2.0 2.4 2.0 1.3 1.3 1.4 Trade balance 1.3 1.4 1.0 0.4 0.5 0.4 0.3 0.7 0.6 1.3 1.4 Services balance -0.3-0.3-0.4-0.2-0.1 0.01-0.01-0.4-0.7-0.6-0.7 Investment, income, net 1.9 2.0 1.9 1.7 2.5 2.5 2.0 2.8 2.5 2.0 2.2 Current transfers, net -0.2-0.1-0.1-0.1 0.0-0.4-0.1-0.2-0.1-0.1-0.1 Current account balance (% of GDP) 75.9 76.8 60.0 47.8 63.7 47.3 54.2 51.7 50.0 58.8 60.8 Balance of payments (% of GDP) -0.02 0.3 10.8 2.2 3.6 0.2 10.7 9.5 1.3 13.3 14.2 a Provisional (GDP figures only). b Preliminary... Not available. Source: Government of Brunei Darussalam; and IMF (1999), Recent Economic Developments, 19 April [Online]. Available at: http://www.imf.org/external/country/brn/index.htm [12 December 2000].
Page 4 Trade Policy Review 4. Brunei's heavy dependence on petroleum and gas, prospects of diminishing reserves, which are expected to be depleted in 20-25 years, and the recent volatility in the international petroleum market, have prompted efforts by the Government to diversify the economy away from this sector. Tax and non-tax incentives are provided for investors in agriculture and a number of manufacturing activities. In the services sector, banking and tourism are being encouraged in particular, with the recent launching of the Brunei International Financial Centre (BIFC), to attract investment, especially by the private sector, and to develop the country's financial services. Brunei has also emphasized the need for privatization of a number of services and industrial activities that are currently carried out by the public sector. Some efforts have been made since the early 1990s, under the Sixth National Development Plan, to privatize public-sector activities, including cellular telecommunications services, poultry production, and an abattoir (Chapter III(4)(iii)(b)). 5. The public sector, nevertheless, remains the largest employer, providing jobs for 94% of the Brunei nationals in the labour force; it is also the largest provider of economic and social services in Brunei. Key activities in the non-oil sector, including construction, services and, to some extent, manufacturing, are also dependent on Government development expenditures and contracts. Increased income from petroleum revenues may also have resulted in a "Dutch disease" situation, with a somewhat appreciating real exchange rate contributing to a crowding out of the non-oil tradeable sector. 1 In addition, the public sector offers more attractive salaries and other benefits than the private sector, such as rent subsidies and low interest loans for the purchase of housing and motor vehicles. 6. Along with diversification, a related concern is unemployment among Bruneians. With population growth averaging around 3% annually, there is concern that real growth has to be accelerated. 2 Official estimates place unemployment at around 4.6% of the labour force in 1999. In order to help absorb the estimated 5,000 persons entering the labour market each year, the Government put in place a policy of "Bruneization" in the Seventh National Development Plan (1996-2000) period, which gives preference to local workers over foreign employees, except in cases where there is no local interest or qualified personnel available. 3 Success with this policy appears to have been achieved mainly in the government and petroleum sectors. The authorities estimate that some 78% of employees in the petroleum sector are Bruneians and that the employment of Bruneians in the banking subsector has increased; however, blue collar employment still appears to be dominated by foreign workers. An Employees Pension Fund was also created in January 1993, requiring mandatory contributions into the Fund by employers for private-sector employees; this has improved the attractiveness of jobs in the private sector. In addition, the Government has pledged to increase expenditure devoted to human resource development during the Seventh Plan period. 7. Despite these efforts, the considerable differential between government and private sector salaries and benefits still appears to discourage Bruneians from seeking employment in the private sector; this is especially true for the small and medium-sized companies, which are being encouraged by the Government through various tax and non-tax incentives but nonetheless find themselves unable to match the salaries offered by the public sector, and large private companies such as Brunei Shell 1 The "Dutch disease" may be the consequence of the crowding out of the non-resource tradeable sector as a result of an increase in wealth from resource-based earnings. This results in an appreciation of the real exchange rate, diverting demand and investment from the tradeable into the non-tradeable sector. 2 For example, a report by the Brunei Darussalam Economic Council pointed out that forecasts of job prospects for school leavers between 1992 and 2001 suggest that up to a quarter may not be able to find employment. (Brunei Darussalam Economic Council, 1999). 3 According to the authorities, there are no official guidelines on Bruneization; instead, the Government recommends that local employers give priority to nationals.
Page 5 Petroleum and Brunei International Airlines. The authorities maintain that the gap between public and private sector salaries has been declining owing to a freeze on salaries in the public sector. 8. To address some of these concerns and to help revitalize the economy in the aftermath of the regional crisis and the collapse of the local Amedeo development corporation (ADC), Brunei's largest non-government employer, the Government set up the Brunei Darussalam Economic Council (BDEC) in 1998. The BDEC, which was chaired by the current Minister for Foreign Affairs, found that real GDP growth was not keeping pace with population growth, resulting in rising unemployment especially among the local population. In addition, the Government's chronic budget deficit did not allow sufficient resources to be devoted to investment, a problem compounded by Brunei's weak private sector, which was then facing its worst crisis since 1984. The Council made a number of recommendations, some of which were to be implemented within six months (Box I.1). A year after the BDEC published its recommendations, a number of short-term projects are being implemented. These include: the provision of bank credit to small and medium-sized companies at low rates of interest, with government guarantees; construction of 512 houses for resettlement and related infrastructure; construction of 25 small-scale tourism infrastructure projects; enhancement and expansion of the Internet service provider BruNet; provision of computers for all Government schools; and the provision of hospitality and tourism training for job seekers. The Secretariat of the BDEC has recently been renamed the Economic Planning and Development Department and has been moved to the Prime Minister's Office. 4 Box I.1: Highlights of the Report of the Brunei Darussalam Economic Council The Brunei Darussalam Economic Council (BDEC) was established in September 1998 with the task of examining the economic situation of the country and recommending short- and long-term measures to deal with the regional financial and economic crisis and to revitalize the economy of Brunei. Five working committees were formed to assist the Commission in its task: the Committee on Review of the Current Economic Conditions; the Committee on Diversifying the Oil and Gas Industry; the Committee on Facilitation of Economic Policies, Infrastructure, Finance, Credit, Commerce, Labour etc.; the Committee on Finance and Banking; and the Committee on Promotion of Manufacturing and Services. The findings of the BDEC were that economic conditions in Brunei, which had resulted in declining per capita income, rising unemployment, a continuing budget deficit since 1994, and weak private sector activity, were unsustainable. Recommendations The Council recommended a strategy for recovery and long-term sustainable growth: A. An Action Plan for Recovery was to be implemented within six months. It involved the following three elements: 1. a stimulus package to inject liquidity into the economy and provide financial assistance to local small and medium-sized enterprises (SMEs) so as to avoid the collapse of large sections of the non-oil private sector; 2. an implementation strategy aimed at ensuring that decisions taken are properly implemented (including the appointment of a Senior minister for the economy, an International business advisory Panel, a Public Policy Think-Tank and a Permanent Business Council); and 3. a communications initiative aimed at signalling the Government's resolve to address Brunei's economic problems and restoring private sector and public confidence, with maximum transparency accorded to the government's economic initiatives. Box I.1 (cont'd) 4 Government of Brunei Darussalam, On Line News, 15 February 2001 [Online]. Available at: http://www.brunei.gov.br/hotnews/0201/15/secb_renamed.htm [15 February 2001].
Page 6 Trade Policy Review B. A strategy for Sustainable Growth would be long term, but implementation should begin within one year. Its objectives included: 1. Strengthening government finances through control of expenditure; reduction of the size of the public sector through privatization; broadening and strengthening the tax revenue base, gradual removal of subsidies, and corporatization and privatization of the public sector; and developing mechanisms to meet temporary shortfalls in liquidity, such as government bonds and other financial instruments. 2. Strengthening the private sector by expanding it through privatization and increased foreign investment; encouraging local and foreign private investment through simplification of government policies; developing SMEs by easing their access to financing; encouraging investment in Brunei by reviewing and revising foreign investment restrictions on land ownership; facilitating private-sector liquidity by ensuring prompt government payment; expanding and enhancing the competitiveness of the oil and gas industry; and promoting economic diversification by providing incentives and infrastructure facilities. 3. Strengthening the foundations for sustainable growth by modernizing the legal and regulatory framework; enhancing human resource development and deployment; launching a concerted drive to enhance productivity in the public and private sectors; and establishing a first class communications and information technology infrastructure through public and private investment. Measures to be taken during the first year included streamlining government expenditure and stabilizing and expanding government revenue; launching a privatization plan and investment promotion drive; creating wider participation in the economy; expanding and improving competitiveness in the oil and gas industry; enhancing the capabilities of SMEs; strengthening and modernizing institutions; launching a drive to improve national productivity; enhancing human resources development; and preparing an Economic Blueprint for Brunei. Source: Brunei Darussalam Economic Council (1999). (2) MACROECONOMIC INDICATORS (i) (a) Fiscal balance The State Budget 9. The annual budgetary limit for all government agencies is drawn up by the Ministry of Finance (the fiscal year is the same as the calendar year). Fiscal revenue is derived mainly from petroleum and natural gas; it includes taxes on corporate income as well as royalties derived from petroleum and natural gas companies. In 1999, royalties and dividends from oil and gas were B$455.6 million while corporate taxes from oil and gas companies accounted for some 94.5% of total corporate tax revenue. Brunei has no personal income tax or sales taxes. The corporate income tax rate is 55% for petroleum companies, 50% for natural gas companies, both of which pay taxes on a quarterly basis, and 30% for all other companies that are not exempted from paying taxes under tax exemption schemes. Corporate tax accounted for the largest share of tax revenue in 1999, around 93%. The other major tax is customs duty, which accounted for around 6.8% of tax revenue (1.2% of GDP) in 1999; its share declined from around 13.3% of tax revenue (2.2% of GDP) in 1995. Other minor taxes are estate duty, stamp duty, and building tax (Chart I.1 and Table AI.1). 10. Government revenues are supplemented by transfers, it appears, from the Brunei Investment Agency (BIA); these transfers into the budget apparently accounted for around 21.5% of GDP in 1999, and include the Government's investment income (Chart I.1 and Box I.2).
Page 7 Chart I.1 Fiscal position, 1995-2000 (a) Budget balance Per cent of GDP 70 60 Expenditure 50 40 Revenue 30 20 Transfers 10 0-10 -20 Balance (including transfers) -30 Balance (excluding transfers) -40 1995 1996 1997 1998 1999 a 2000 (b) Revenue and expenditure Per cent of GDP 70 60 50 40 30 20 10 0 TR TE TR TE TR TE TR TE TR TE TR TE 1995 1996 1997 1998 1999 2000 a TR = Total revenue: Tax revenue Non-tax revenue TE = Total expenditure: Current expenditure Capital expenditure Investment in public sector enterprises a Source : Preliminary. Data provided by the authorities of Brunei Darussalam.
Page 8 Trade Policy Review Box I.2: Budgetary financing The Government has two separate reserve funds: the Government Consolidated Fund and the Development Fund. The Consolidated Fund includes the Government's tax and non-tax revenues and transfers from the General Reserve Fund (see below), from which the Government's expenditures are paid. The Development Fund is a reserve fund, which allocates resources according to the five-year National Development Plan. The Consolidated Fund provides financing for the Development Fund (contribution to the Development Fund) on an annual basis. In addition, the Government's Trust Fund, which appears to be largely self-financed, provides loans on favourable terms to government and public sector employees; the fund is sometimes replenished by transfers from the Consolidated Fund. The General Reserve Fund is the largest fund and contains the Government's external assets. The Fund is controlled and managed by the Brunei Investment Authority (BIA). Information on this fund, its operation and size is not available, although the BIA's funds appear to include revenue from petroleum and are invested, inter alia, in global equity, and fixed income and property markets. An external audit of the BIA was to be conducted, however, details are not available. Source: Information provided by the authorities. 11. The Government's budgetary expenditure consists of current expenditures, which mainly includes public sector salaries and expenditure, and capital expenditure. Total government budgetary spending as a percentage of GDP, at 57% in 1999, has remained relatively steady since 1995, although it has shown a tendency to increase recently, mainly due to higher capital expenditure in 1998 and 1999 (Table A1.1). In addition, investment in public sector enterprises accounted for around 2.8% of GDP in 1999, falling from around 10% in 1995; an increase in investment in public sector enterprises in 1998 and 1999 appears to be due, in part, to the collapse of Amedeo and its associated companies. 12. With revenue heavily dependent on petroleum and natural gas and a narrow tax base (consisting mainly of corporate taxes levied on oil and gas companies), the overall budget balance, minus transfers from the BIA, has been negative, varying between 11% and 30% of GDP, during the period 1995-99. The balance, including the transfer from the BIA, was positive until 1996, going into deficit in 1997, with the deficit increasing as revenues fell and expenditures continued to rise. Rising petroleum prices, however, have led to an improvement in the budget, which rose from a deficit of 2.1% of GDP in 1999, to an estimated surplus of 18.5% in 2000 (Table A1.1). 13. The Brunei Investment Agency (BIA) plays a key role in investing Brunei's petroleum and gas revenues and in ensuring that the earnings on its investments can, if necessary, contribute to bridging the gap when government expenditures exceed tax revenues, which are largely derived from petroleum and gas revenues and therefore tend to be volatile. The returns on the funds invested by the BIA can also be drawn upon as Brunei's reserves of oil and gas are depleted over the next 20-25 years. It follows that Brunei's fiscal stability and future prosperity both depend heavily on the BIA's efficient and prudent investment of the funds entrusted to it. The operations of the BIA and its management
Page 9 lacks transparency, with the Agency not publishing an annual report and its accountability to the public being unclear. 5 (b) The National Development Plan and other expenditure 14. In addition to annual budgetary expenditure, the Government of Brunei draws up a five-year National Development Plan, which is coordinated and monitored by the Economic Planning and Development Department in the Ministry of Finance. In practice, the Plan is coordinated between a number of different Ministries and Departments before it is finalized. The current National Development Plan, the seventh, runs from 1996 to 2000 and has budgeted development spending of around B$7.95 billion; B$5.7 billion was allocated for the Sixth Plan. Expenditure under the Seventh Plan was concentrated in social services (27.5% of total development spending), public utilities (22%), transport and communications (19.5%), and industry and commerce (12.6%). 6 According to the authorities, the Eighth National Development Plan has, been drawn up and budgeted and will run from 2001 to 2005. 15. Other expenditures are made through the Trust Fund, which is used to provide favourable loans to government employees (Box I.2). (ii) Exchange rate and balance of payments 16. The Brunei dollar is issued by the Brunei Currency Board only against payments in, and at par with, the Singapore dollar. Under a Currency Interchangeability Agreement, signed between the Brunei Currency Board and Singapore's Board of Commissioners of Currency of Singapore in 1967, the Singapore dollar is also legal tender in Brunei and both currencies may be exchanged at par and without any charge. Brunei's Currency Board deals only in Singapore dollars and does not quote rates for other currencies. There are no restrictions on commercial banks dealing in other foreign currencies and no exchange controls are imposed except on gold and jewellery, for which only banks licensed to operate in gold and jewellery may buy and sell gold bars. There are no capital controls, and no distinction is made between accounts held by Brunei nationals and non-nationals. 7 17. The authorities appear to believe that the advantages of pegging the Brunei dollar to the Singapore dollar outweigh its disadvantages. One possibly major disadvantage of the peg is that the resulting steady effective appreciation of the Brunei dollar since 1991 may not only hamper recovery from the Asian crisis but also impede the Government's efforts to diversify the economy. On the other hand, the authorities seemingly consider that maintenance of the peg imparts a high degree of stability to the financial system and the economy as a whole. 18. As with the exchange rate, trends in interest rates closely follow those in Singapore. Brunei's prime interest rates are set each month by the Brunei Bankers' Association, usually within a 0.25-0.5% margin of corresponding rates in Singapore, and act as a benchmark lending rate for commercial banks. The prime rate has declined since 1995, from 6.5% to 5.5% in 2000; with inflation currently at 1%, the real interest rate is one percentage point lower (Table I.2). The 5 Accusations of mismanagement and misappropriation of a reported US$15 billion of government funds by the BIA led to a dismissal of the management of the BIA and a civil suit against the management; a settlement has reportedly been reached and certain funds returned ot the BIA. (Government of Brunei, undated, Press Release [Online]. Available at: http://www.brudirect.com/prince_%20 Jefri's_%20Settlement_Announcement.htm [11 January 2001]). 6 Government of Brunei Darussalam (1997). 7 IMF (2000).
Page 10 Trade Policy Review authorities do not believe that prevailing interest rates in any way impede economic or private sector growth in Brunei. 19. Brunei's petroleum and natural gas reserves have ensured a sizeable surplus on the balance of trade account, despite fluctuations in petroleum prices. Although data on gross savings and investment in the economy are not available, the sizeable gap between savings and investment is reflected in Brunei's current account surplus, which was expected to be just over 60% of GDP in 2000 (Chart I.2 and Table AI.2). While the merchandise trade surplus grew from US$249 million in 1996 to US$1.4 billion in 2000, the deficit on the services balance has continued to grow. Both the trade and current account surpluses have shown increasing trends since 1998, due mainly to improved petroleum prices, but also to lower levels of imports over previous years. Chart I.2 Balance of payments, 1995-2000 US$ million 2,000 Per cent of GDP 70 1,500 1,000 500 0-500 60 50 40 30 20 10-1,000 1995 1996 1997 1998 1999 2000 a 0 Left-hand scale: Merchandise trade balance Services, net Right-hand scale: Current account Overall balance of payments a Source : Provisional. Data provided by the authorities of Brunei Darussalam. 20. The size of the balance-of-payments surplus has fluctuated considerably since 1995, increasing from 0.2% of GDP to 10.7% and 9.5% in 1996 and 1997, before declining sharply to 1.3% in 1998. Higher petroleum prices in 1999 were the main reason for the balance-of-payments surplus rising to 13.3% of GDP in 1999; the surplus is expected to have risen further in 2000, to 14.2% of GDP.
Page 11 (3) DEVELOPMENTS IN TRADE (i) (a) Composition of trade Trade in goods 21. Brunei's merchandise exports were valued at US$2.3 billion in 1998, slightly higher than in 1993. Imports were valued at US$1.6 billion, down from US$1.8 billion in 1993 (Chart I.3 and Table AI.3). The most significant change in the structure of exports is the increasing diversification away from mining, which includes petroleum and natural gas, to clothing and other manufactures. In 1998, mining and petroleum accounted for almost 89% of exports compared with almost 100% in 1993. Clothing accounts for a major share of non-mining and petroleum exports, 4.4% in 1998, up from 0.3% in 1993. Brunei's exports of machinery and transport equipment have grown to almost 5% of merchandise exports. 22. Imports are dominated by manufactured goods, although their share fell from 88% to 80% between 1993 and 1998 (Chart I.3 and Table AI.4). The major manufactured imports in 1998 were transport equipment, non-electrical machinery, textiles and clothing, and other semi-manufactured goods. At almost 17%, agriculture accounts for an increasing share of imports; the majority consists of food imports, which grew from 9.5% of total merchandise imports to 16.5% during this period. (b) Trade in services 23. Disaggregated data on trade in services are not available. However, balance-of-payments data indicate that the net services deficit has been growing rapidly since 1997, primarily due to an increase in payments for services imports, which grew from B$787 million (US$555.2 million) in 1995 to almost B$1.6 billion (US$930 million) in 1998; services payments were expected to be B$1.4 billion (US$0.8 billion) in 2000. In comparison, receipts for services exports declined sharply from B$797 million (US$562.2 million) in 1995 to an expected B$338 million (US$196.0 million) in 2000. A breakdown of the data by major service subsector is not available, making it difficult to determine in which sectors the decline has primarily occurred. (ii) (a) Direction of trade Trade in goods 24. Brunei's exports are mainly destined for the east Asian region. However, the share of trading partners outside this region increased from 1.2% to 11.7% between 1993 and 1998 (Chart I.4 and Table AI.5). Japan remains Brunei's largest trading partner, although its share in exports fell from 63.3% to 53.1%. Exports, mainly of natural gas, have also increased significantly to the Democratic People's Republic of Korea, which accounted for almost 18% of exports in 1998. 8 Countries outside the east Asian region whose shares have increased are the United States (9.1% in 1998) and the European Union (2.0% in 1998). 8 Data on merchandise trade used in Chapter I are based on the UNSD, Comtrade database (SITC Rev.3). The data used in this chapter differ considerably from those provided by the authorities for the petroleum and natural gas sector (Chapter IV(3)).
Page 12 Trade Policy Review Chart I.3 Product composition of merchandise trade, 1993 and 1998 Per cent 1993 1998 (a) Exports Natural gas, liquefied 45.3 Natural gas, liquefied 52.6 Clothing 0.3 Other mining 3.5 Mining 99.7 Crude petroleum 50.9 Other 0.5 Other manuf. 1.5 Machinery & transport equipment 4.9 Clothing 4.4 Other mining 2.4 Mining 88.7 Crude petroleum 33.7 Total: US$2.1 billion Total: US$2.3 billion (b) Imports Iron & Chemicals steel 4.4 3.4 Mining 1.8 Other agri 0.4 Food 9.5 Other 0.3 Other manuf. 13.9 Textiles & clothing 3.1 Manufactures 88.0 Transport equipment Other semimanufactures 13.6 Total: US$1.8 billion Non-electrical machinery 13.7 Office machines & telecom. equip. 4.6 Other electrical machines 5.9 Other agriculture 0.4 Other 0.5 Other manuf. 10.7 Food 16.5 Textiles & clothing 7.1 Transport equip. 14.6 Mining 2.6 Iron & steel 6.1 Manufactures 79.9 Other electrical machines 5.1 Chemicals 6.1 Total: US$1.6 billion Other semimanufactures 16.7 Non-electrical machinery 8.2 Office machines & telecom. equip. 5.3 Source : UNSD, Comtrade database (SITC Rev.3).
Page 13 Chart I.4 Direction of merchandise trade, 1993 and 1998 Per cent 1993 1998 (a) Exports Japan 63.3 EU(15) 2.0 United States 9.1 Japan 53.1 Other 1.2 Philippines 2.3 Korea, Rep. of 11.6 Chinese Taipei 3.0 East Asia 98.8 Thailand 10.3 Singapore 8.3 Other 0.6 Other East Asia 1.4 Korea, Dem. People's Rep. of 17.9 Chinese Taipei 1.9 East Asia 88.3 Thailand 6.1 Singapore 7.9 Total: US$2.1 billion Total: US$2.3 billion (b) Imports United States 25.1 Other 0.7 EU15 27.1 United States 15.0 EU15 15.2 Singapore 22.7 Oceania 2.9 Other East Asia 6.4 Indonesia 3.0 Japan 9.4 East Asia 44.2 Malaysia 8.3 Singapore 17.1 Other 2.9 Oceania 4.1 Other East Asia 4.8 Indonesia 3.4 East Asia 62.8 Hong Kong, China 4.3 Thailand 4.3 Japan 6.4 Malaysia 16.9 Total: US$1.8 billion Total: US$1.6 billion Source : UNSD, Comtrade database (SITC Rev.3).
Page 14 Trade Policy Review 25. Imports also originate mainly in east Asia, whose share increased from 44.2% to 62.8% during the period, mainly at the expense of the United States and the European Union whose shares declined from 25.1% to 15.0% and from 27.1% to 15.2%, respectively. In east Asia, Singapore continues to be the largest source of imports, increasing its share from 17.1% in 1993 to 22.7%, followed by Malaysia, from 8.3% to 16.9%. 26. Since 1993, imports from other ASEAN countries have grown rapidly, from 30% of total merchandise imports, to almost 48% in 1998 (Table AI.6). This suggests that the lowering of trade barriers within the ASEAN region through the ASEAN Free-Trade Agreement (AFTA) may have led to significant trade diversion. Trade with APEC countries also expanded during this period, although to a lesser extent. (b) Trade in services 27. Data on the direction of trade in services are not available. (4) DEVELOPMENTS IN FOREIGN DIRECT INVESTMENT 28. Data on foreign direct investment inflows are not available. Data reported in the balance of payments indicate that net foreign investment increased from around B$297 million (US$209.5 million) in 1995 to B$323 million (US$229 million) in 1996 before declining in 1997 and 1998 (Chart I.5). A recovery since 1999 shows that net FDI is back to pre-crisis levels, accounting for around 4.4% of GDP in 2000, slightly higher than the share in 1995 (around 4%). Chart I.5 Net foreign investment, 1995-2000 US$ million 230 225 220 215 210 205 200 195 Foreign investment (left-hand scale) Foreign investment/gdp (right-hand scale) Per cent of GDP 4.8 190 3.8 1995 1996 1997 a 1998 a 1999 b 2000 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4.0 3.9 a b Based on estimated GDP. Based on estimates for foreign investment and for GDP. Source: Data provided by the authorities of Brunei Darussalam. 29. Data by major foreign investor are not available.
Page 15 (5) OUTLOOK 30. While Brunei experienced relatively steady economic growth during the 1990s, a combination of external and internal factors in 1997 and 1998 had a negative impact on the economy. These factors include a considerable decline in international prices of petroleum, Brunei's major export, the Asian economic crisis, which hit the region in 1997, and the collapse of a major domestic company, Amedeo, in 1998. The overall impact of these factors was not as severe as expected, mainly because transfers from the BIA were more than sufficient to cushion the effects. Nevertheless, in the longer run, the Government recognizes a need for diversification away from petroleum and energy-based industries, and of the Government's revenue base, not only to protect the economy from such shocks in the future but also to anticipate the eventual depletion of oil and gas reserves. 31. To date, Brunei's diversification policies seem to have met with little success. The implementation of the privatization plan, which has been ongoing since the early 1990s, appears to have been slow; there is concern about the effect of privatization on government revenue, prices, and the influence of foreign companies in the economy. 9 In addition to privatization, investment by the private sector is encouraged through various incentives, although the dominance of the Government in the economy has made it hard for the private sector to compete for resources. Budgetary and longterm development expenditures by the Government are also dependent to a large extent on petroleum and gas revenues, which generate most of the tax revenues. Although transfers from the BIA have been used, when necessary, to offset declining petroleum revenues, the narrowness of the existing tax base suggests the need for comprehensive tax reform, a point raised by the BDEC. 10 32. In order to attract private, especially foreign, investment to diversify the economy, the Government has put in place a system of tax and non-tax incentives. However, guidelines on sectors that require a certain amount of local participation, as well as on foreign investment procedures, remain unclear and thus create scope for discretion in government decision making. More generally, confidence in the economy, which was undermined by the regional economic crisis and the collapse of Amedeo, would benefit from greater public disclosure of the assets and activities of state-owned companies, and from stricter rules on their governance. Confidence in the economy could be further fostered by ensuring that WTO Agreements and related obligations are incorporated into domestic legislation. This would greatly enhance the transparency of Brunei's trade and investment regime and curtail the scope for administrative discretion. 9 The Seventh Plan for example argues that the "restructuring and readjustment of the department prior to privatization may involve Government expenditure. The involvement of foreign counterparts in the running of the company may result in some social discomfort. There is also a possibility of reduced employment opportunities for the locals. Being operated on a profit motive, prices of some of the products and services provided by the private organization can be much higher compared to the prices offered by the Government, especially when the former has monopoly power." (Government of Brunei Darussalam, 1997). 10 Brunei Darussalam Economic Council (1999).