Brunei is bracing itself for higher inflation, while at the same time seeking a way to ease the strain on the state budget from subsidies on some essential products such as food and fuel.
Brunei's consumer price index (CPI) rose by 0.7% in March over the preceding month, pushing price up for the first quarter of the year to 2.3%, according to a report issued by the country's Economic Planning and Development Board on June 20.
While Brunei's inflation rate is one of the lowest in the region, comparing well to Malaysia's 3.8% year-on-year at the end of May, it is nevertheless creeping upwards. Subsidies on basic commodities such as rice are helping to minimise the impact of price rises on consumers, yet they also hide the true extent of inflation, as the cost of many imported foodstuffs are pushing up the index.
In particular, the price of corn oil - used as a cooking staple - shot up by 26.1% in March, with palm oil rising by 7.3%, following a 3.9% increase in February. While the prices of some other food items such as garlic and bean shoots fell in March, the overall picture for consumers is a cause for concern.
Last year, according to the Agriculture Department, Brunei imported just under 11,000 tonnes of fresh food, valued at $9.5m. With local production estimated at just less than 600 tonnes, the sultanate imports nearly 95% of its food needs, which makes it particularly vulnerable to fluctuations in international food prices.
In early June, Malaysia, Brunei's main source of imported foodstuffs, imposed a 40% increase on fuel costs. This price hike is also likely to have a knock-on effect on costs in Brunei. Last year, according to official figures, the state spent $151m in fuel subsidies, more than double the amount for 2004. While prepared to provide price support for locals, the recent increases in prices across the region triggered a sharp rise in the level of fuel smuggling, prompting the government to take.
The government issued an edict, which came into effect on June 19, decreeing that foreign registered vehicles in Brunei will have to pay more than three times the local rate for diesel and double the domestic price for premium grade petrol.
In late May, Brunei's Energy Minister Pehin Dato Awang Haji Yahya said that while the state was committed to keeping petrol prices at 40 cents a litre, the money spent on subsidies could have been allocated to other projects, such as building low-cost housing developments and health centres.
Another matter of concern for Brunei is the rising price of rice. The sultanate only produces 3.15% of its domestic needs for the grain and most of the 31,242 tonnes consumed last year were imported, according to the Agriculture Ministry. To combat this deficiency, the state is providing farmers with financial assistance to encourage more local production. And in mid-May, Brunei committed to continue subsidising rice and sugar claiming it had no plans to raise prices, keeping the upper limit on high quality fragrant rice at $12.50 a kilo and sugar at the same price.
With these measures in place, the Agribusiness Development Division of the Agriculture Department is predicting that 10% of domestic demand will be met by Brunei's farmers by 2013. However, the country will still be dependant on food imports and exposed to shortages and price fluctuations.