BRUNEI DARUSSALAM: A new authority

Brunei Darussalam is getting a new monetary authority, a move that will cheer both the business and banking communities, which have long awaited such a development.

His Majesty the Sultan and Yang Di-Pertuan, Haji Hassanal Bolkiah, took the opportunity of his 64th birthday, on July 15, to give a major speech announcing the establishment of the new organisation.

"This body will be responsible for every monetary policy, monitoring of financial institutions and currency trading," His Majesty announced.

While the exact details of its function have yet to be released, the new body, to be called the Monetary Authority of Brunei Darussalam (AMBD by its local acronym), will likely bring together some of the roles currently being played by a number of existing bodies.

These include the Brunei Currency and Monetary Board (BCMB) and the Financial Institutions Division (FID), both of which currently come under the Ministry of Finance (MOF). There is also some speculation that the AMBD might also take on some of the roles, such as lender of last resort, effectively undertaken by the MOF itself at present.

The BCMB was established in 2004 but has a longer pedigree when its predecessor, the Brunei Currency Board, is taken into consideration. That organisation goes back to 1967 – the very beginning of one of the Sultanate's key monetary features – its interchangeability agreement with Singapore.

Under this, Singapore and Brunei dollars are interchangeable at a one-for-one rate, meaning that the change you get from buying something in a shop in Brunei may also include Singapore dollars – and vice-versa.

This arrangement has generally worked well for the Sultanate – its currency has been pegged to a strong global player, with the differences in the two economies often being complementary. This has helped overcome the downside – that Brunei Darussalam is influenced by fluctuations in the Singapore dollar and has no independent monetary policy and ability to set interest rates.

Due to this arrangement, the BCMB has, however, had a more restricted role over the years than a central bank or the Monetary Authority of Singapore. Nowadays, its role is primarily to issue and back up the currency in circulation, usually maintaining a 100%, dollar-for-dollar reserve fund. This liquidity is invested abroad, to keep the fund clear of any volatility in Brunei Darussalam itself, with a particularly focus on low-risk assets. Traditionally, these have been Singaporean securities and a basket of currencies.

The FID, meanwhile, has been responsible for regulating both domestic financial institutions and the international ones registered at the Brunei International Financial Centre. The FID issues licences, enforces financial regulations and laws, supports efforts against financial malpractice and provides links to other international and regional financial regulatory bodies.

The announcement regarding the AMBD by the Sultan was widely welcomed by those involved in the local business and banking sectors. Many hoped that the creation of a unified authority would lend extra transparency to monetary issues and to the regulation of the financial sector. The IMF has also been pushing for such a body to be set up, along with a credit registry and a deposit insurance scheme.

His Majesty the Sultan also placed the news on the AMBD in the context of following international best practice, while also raising the lessons of the global financial crisis and the need for closer monitoring of financial practices. He reminded his audience of Brunei Darussalam's successes in financial prudence, which won recognition for the Sultanate in the World Economic Forum's "Global Competitiveness Report for 2008ᆝ". It placed Brunei Darussalam in the highest category in the world in terms of managing government debt and second out of 134 countries in terms of macroeconomic stability.

The announcement also gave a start date for the AMBD of January 1, 2011. For now, analysts, businesses and bankers are awaiting the exact terms of reference for the new body, with many wondering if its creation also signals a move towards a more independent monetary policy in the Sultanate. The interchangeability agreement has served Brunei Darussalam well over the years, though, with much to be said for its continuation as a way to ensure macroeconomic stability.

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