The report, released on May 21, said that although oil output was currently down due to maintenance projects, robust growth in the non-oil economy, low inflation and large fiscal and current account surpluses would tide Brunei over until production began to rise in the latter half of 2008.
However, the fund said economic diversification would be Brunei's main challenge in the medium term. With limited opportunities for domestic investment, the IMF suggested the government do more to foster the development of the private sector.
"This will require a reduction of the government's role in the economy and more determined implementation of structural reforms to attract private investment. Key reforms will include developing domestic capital markets, introducing education and training programmes to achieve a more appropriate labour skills mix and improving the business environment," it said.
The IMF praised the government's fiscal responsibility, noting that "energy-related revenue windfalls are being largely saved and invested abroad". Brunei's primary surplus for the financial year 2006-07 totalled 21.5% of gross domestic product (GDP), while the current account surplus for 2006 was 56% of GDP.
Brunei's banking also sector fared well, with a high capital adequacy rate of around 20%, though a substantial level of non-performing loans remained on the books. These mainly resulted from credit losses incurred in the late 1990s following financial problems in the corporate segment. However, the IMF said that the sector's strong adequacy provisions, coupled with the low number of new non-performing loans, meant Brunei's banks were in a good position.
Efforts to strengthen Brunei's regulatory framework, such as boosting anti-money laundering laws and harmonising rules governing Islamic banking and insurance activities were welcome, although the report said more needed to be done to enhance effective surveillance.
"Such a framework should encompass a fiscal goal consistent with long-term sustainability, a fiscal rule to guide fiscal policy, and expenditure and revenue reforms," the report said.
It is clear that the energy sector holds a central role in the sultanate's economy. With oil and gas sales representing 90% of Brunei's exports and 90% of government revenues, as well as 50% of its real GDP, the main short-term risk for Brunei would be a possible global economic downturn resulting in lower energy prices.
Although oil provides a high standard of living for Brunei's people (per capita income is more than $30,000), the IMF said that the country's economy was very much subject to fluctuations in the energy market, with growth having flattened out last year due to lower production.
Shortly after the publication of the report, Brunei's energy minister, Pehin Dato Awang Haji Yahya, also sounded a note of warning over the country's dependence on fossil fuels.
"We are now going into deeper water [with] higher temperatures, higher pressure and uncharted conditions," he told a conference on May 25. "Exploration and development costs are also on the rise. Rig rental and steel prices have gone up on average by 200% or more over the last five years."
There was a positive note, however, the minister said, as high oil prices had allowed for investments into renewable energies such as wind and hydropower, which had previously not been economically feasible.
While Brunei's fossil fuel reserves are expected to last for the next 30 years, the minister said greater investments would be needed in enhanced extraction technology to keep the heart of the sultanate's economy pumping.