Expanding Through Spending

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Brunei's economy faces a challenging year, with lower international energy prices cutting into state earnings and putting pressure on the government budget as it seeks to cushion the effects of the global financial crisis and maintain its programme of expanding the country's economic base.

Opening the Legislative Council's budgetary session on March 12, Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah said that despite the fall in global oil prices, past surpluses meant that the state could continue to maintain socioeconomic stability, though he added a note of caution.

"The drastic drop in oil prices has prompted us to be wise in our spending, including avoiding wastage," he said. "There is a need to intensify economic activities, the government sector, in particular, whilst not forgetting to chart new measures in order to face competition once the economy recovers."

When tabled on March 16, the 2009-10 budget reflected the Sultan's call for sound fiscal management combined with efforts to strengthen the economy. The budget forecast state revenues of $2.58bn, with total outlays projected at $3.2bn, leaving a deficit of $620m. The revenue figure in particular reflects a sharp turnaround from the previous financial year, when earnings were projected at $3.6bn on the back of high energy prices.

Though income may be down, the budget sees a projected $130m increase in expenditure compared to state outlays in the 2008-09 fiscal year, with much of the extra spending being directed towards supporting the non-energy segment of the economy.

Unveiling the budget before the Legislative Council, the second minister of finance, Pehin Orang Kaya Laila Setia Dato Seri Setia Hj Awg Abdul Rahman Hj Ibrahim, said the main priority for the new budget was to generate sustainable development and economic growth.

With that objective, the budget allocated $440m for the construction of basic public facilities and infrastructure; $77m for the management, operation and implementation of information and communications technology projects; and $115m to fund state agencies to plan and implement programmes to increase the competitiveness of the nation's economy and attract foreign investment.

The minister's speech also cited steps that had been taken to stimulate the economy and strengthen the private sector, in particular through providing additional support to small and medium-sized enterprises (SMEs) over the past year. These included increasing the maximum levels of credit available to SMEs under the state's Enterprise Facilitation Scheme from $968,000 to $3.2m and extending the repayment terms to 10 years from seven years, while also lifting the limit on loans under the Microcredit Scheme to $32,000 from the minimum $19,000, Pehin Dato Hj Abdul Rahman said.

The budget also offered further tax relief for businesses, with corporate tax to be lowered to 23.5% in 2010, the second cut in a year, with the government having already reduced the income tax rate from 30% to 25.5% in mid-2008.

Though the budget will be in the red this year, the Department of Economic Planning and Development has forecast GDP to expand by between 1.2 and 3.1% in 2009. This represents a turnaround from the 1% negative growth estimated by the department or the 0.45% contraction reported by the IMF in a study released in mid-February. The IMF also predicted five years of solid growth, with GDP to increase by 2.8% this year, rising to 3% in 2013.

While laying the groundwork for economic expansion, the budget figures also showed Brunei still has a long way to go before it achieves its goal of a fully diversified economy that has moved away from a dependence on hydrocarbons as its mainstay.

Revenues from non-energy sectors and state services will only cover 19% of overall government expenses, Pehin Dato Hj Abdul Rahman told the Legislative Council's budgetary session.

"From the forecasts, it is clear that government revenues are still reliant on the oil and gas sector, even though prices have drastically dropped recently," the minister said. "If the oil and gas sector is not taken into account, the government's fiscal position will face a deficit of $3.15bn."

Brunei will have to wean itself off dependence on hydrocarbons in the coming years as its reserves of both oil and gas are dwindling. Currently, oil and gas production account for just over 50% of GDP and more than 90% of the country's exports. However, with existing oil fields set to run dry in about 20 years, and Brunei's identified deposits of gas expected to last just 10 years after that, there will come a time when the oil and gas sector will not be taken into account when determining the government's fiscal position.

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