Lower oil revenues drive public sector reforms and diversification drive in Brunei Darussalam

Government revenues have declined significantly in Brunei Darussalam as a result of the global oil market slowdown, leading authorities to float a number of new policies aimed at rationalising spending. The 2016/17 budget reflects these challenges, with funding cut at nearly every department and a strong emphasis on improving efficiency and productivity. Moves to increase foreign investment and support economic diversification also factored strongly into the government’s spending plans, and non-oil growth is becoming increasingly critical, as evidenced by allocations to education, infrastructure, and research and development. However, additional fiscal and public sector reforms, including subsidy reductions and a curb on public employment, remain critical for the country’s long-term goals.

Falling Revenues

In July 2014 the IMF reported that Brunei Darussalam’s government revenues had exceeded budget projections in recent years. In 2009/10 revenues reached BN$6.39bn ($4.5bn) compared to BN$4bn ($2.8bn) forecast. Actual revenues subsequently soared by 43.5% to reach BN$9.17bn ($6.5bn), nearly double the BN$4.63bn ($3.3bn) projected in 2010/11, and rose again in 2011/12 to a five-year peak of BN$12.94bn ($9.2bn) compared to BN$5.9bn ($4.2bn) expected in the budget. The trend continued in 2012/13 when actual revenues reached BN$11.7bn ($8.3bn) against a prediction of BN$6.28bn ($4.5bn), although the gap between outlook and reality narrowed in 2013/14, with revenues totalling BN$6.78bn ($4.8bn), 17.2% more than the BN$5.79bn ($4.1bn) expected, according to IMF data.

Cost-Cutting

Oil prices began to decline in June 2014 and fell from a high of around $115 per barrel, to less than $30 by January 2016. In the same month authorities in Brunei Darussalam announced that revenues had fallen by 70% between the 2012/13 and 2015/16 fiscal years. The Ministry of Finance (MoF) revealed that the budget deficit was projected to hit $2.28bn in 2015/16, after reaching $1.6bn during the first nine months of the fiscal year.

The situation is not expected to improve over the near term. Government revenues during the 2016/17 fiscal year are forecast to reach just $1.76bn, according to the second finance minister in Brunei Darussalam, Pehin Dato Abd Rahman, a significant decline from the 2012/13 high. The budget deficit is simultaneously expected to rise by 68.4% to hit $3.84bn in the 2016/17 fiscal year. In the lead-up to the government’s most recent budget, the second finance minister told media that the government would be adopting austerity measures to mitigate the impact of falling oil prices. These measures include postponing or cancelling a number of unspecified projects, and potentially outsourcing some public services to improve efficiency and cost-effectiveness.

Spending Cuts

The IMF reported that government spending rose steadily in the years up to 2014 and, much like revenues, consistently outpaced forecasts. Spending stood at BN$6.63bn ($4.7bn) in 2009/10 against the BN$5.66bn ($4bn) forecast, and although it moderated to BN$6.35bn ($4.5bn) in 2010/11, which was still 12.2% more than the BN$5.66bn ($4bn) forecast. Spending rose again to hit BN$7.18bn ($5.1bn) and BN$7.48bn ($5.3bn) in 2011/12 and 2012/13, respectively, against forecasts of BN$5.8bn ($4.1bn) and BN$5.9bn ($4.2bn). To address these differences, the government has since moved to further rationalise costs, with spending now set to fall again after hitting $6.6bn in 2015/16 against a forecast of BN$6.4bn.

Brunei Darussalam’s Legislative Council passed a $5.6bn budget for the 2016/17 fiscal year in March 2016, trimming $100m, or 1.78%, off of the previous year. The budget, which took effect April 1, 2016, did not include any amendments from earlier drafts. The budget’s largest outlays went to the MoF, which was allocated $1.02bn, and the Ministry of Education with $726.65m. The only department which saw a funding increase was the Ministry of Defence (MoD), which was allocated $564m, 4.7% more than in 2015/16. The three biggest cuts in the budget were to the Ministry of Primary Resources and Tourism (MPRT) – which had previously operated as the Ministry of Industry and Primary Resources (MIPR) prior to October 2015 – the Ministry of Development, and the Prime Minister’s Office (PMO). The MPRT’s budget was cut by 30.5% to $57.14m after a number of portfolios under the previous MIPR were shifted to the newly-created Energy and Industry Department of the PMO (EIDPMO). The PMO’s budget, while receiving the third-largest allocation of funds in the new budget, was also cut by 20.8% to $566m from $634m in 2015/16. The Ministry of Development’s budget was cut by $62m, or 21%, to $234m.

Defence Shortfall

Although defence is a priority under the new budget, the MoD’s 4.7% spending increase came after a 25% budget cut in 2015, from BN$719.5m ($511.9m) to BN$537.5m ($382.4m). Brunei Darussalam’s defence budget has hovered around 2.5% of GDP in recent years, according to a March 2016 report in The Diplomat, making it one of the first casualties of the economic slowdown. The moderate increase this fiscal year is therefore unlikely to result in new investments or defence contracts, and as in the rest of the public sector, wages continue to account for the majority of MoD expenditure.

The Diplomat reported that within the $564m defence budget, BN$330m ($234.8m) has been allocated to personnel costs, BN$139m ($98.9m) to recurring expenditure and BN$94m ($66.9m) to special expenditure. Personnel costs have stayed relatively similar to 2015/16 levels, although recurring expenditure fell by 17% this fiscal year. Special expenditure simultaneously rose from BN$32m ($22.8m) to BN$94m ($66.9m), although this followed an 86% cut during the previous fiscal year. This increase was due to new requirements for upgrading defence capabilities, responsibilities which were recently transferred to the MoD from the MoF.

Priority Shift

On unveiling the most recent budget, Pehin Dato Abd Rahman Ibrahim told media that this year’s fiscal spending will emphasise four critical issues – ease of doing business (see analysis), productivity gains, human capital capacity building and improvements to public welfare.

The Sultanate’s 10th National Development Plan 2012-17 was allocated $700m under the new budget – a 30% decrease from the previous year – of which $172m was allocated to the Brunei Research Council in order to improve the implementation of research projects. Combined with the MoE’s relatively large outlay, these measures will further support the Sultanate’s transformation into a knowledge-based economy, as envisioned by the broader Brunei Vision 2035 economic development plan. They will also support the near-term budgetary goal of focusing on improving human resource development.

Infrastructure spending also got a boost, with the Brunei Times reporting that projects that are seen to enhance Brunei Darussalam’s investment climate and improve the ease of doing business were allocated $523.6m during the 2016/17 fiscal year. Although the budget did not specify which projects will receive the majority of this allocation, infrastructure investment will further bolster non-oil growth and the Sultanate’s burgeoning construction sector, which has been buoyed by mega-projects, including the Hengyi refinery and Temburong Bridge (see overview).

Further Reforms Required

While these decisions bode well for long-term growth and national development, the IMF has also suggested a number of fiscal reforms that could further reduce spending and help to balance the budget. According to the IMF, more efficient and effective spending will help to preserve the Sultanate’s resources, while a public sector salary and hiring freeze could further boost government savings, encourage further employment in the private sector and help reduce unemployment, which rose to hit 6.9% in 2014.

The IMF also noted that depressed global oil prices provide the government with the ideal opportunity to reduce costly fuel subsidies. Although these reforms would be unpopular and are therefore unlikely to be rolled out in the near-term, the government is already making progress – the EIDPMO, for example, is planning to revise the country’s current electricity tariff scheme, which offers lower rates to consumers who use more power (see Energy chapter), raising hopes for further positive reforms in the coming years.