Brunei outlook stays favorable as IMF urges fiscal consolidation and diversification

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Highlights

Brunei's real GDP grew 1% in 2025, inflation fell 0.3%, and the current account surplus rose to 18.0% of GDP on strong hydrocarbon performance.
For 2026, IMF projects real GDP growth at 2.3%, inflation at 1.3%, and the fiscal deficit narrowing from 18.9% to a lower level as hydrocarbon revenues improve.
IMF urges Brunei to implement fiscal consolidation, boost non-hydrocarbon revenue, strengthen private-sector investment, and address concentrated corporate lending vulnerabilities.

IMF review highlights growth, inflation and budget trends

As reported by IMF, citing the International Monetary Fund, its Executive Board completed the 2026 Article IV Consultation with Brunei Darussalam on September 18, with the authorities consenting to publication of the staff report prepared for the review.

Economic activity recovered modestly in 2025, with real GDP growth reaching 1% as a recovery in upstream oil and gas production offsets continued softness in some non-hydrocarbon sectors. Inflation remains subdued, with prices declining 0.3% in 2025 amid lower global food and commodity prices, while the current account surplus rises to 18.0% of GDP on favorable terms of trade and improvements in the non-oil and gas trade balance.

The fiscal deficit widens to an estimated 18.9% of GDP in FY2025/26, reflecting weaker hydrocarbon revenues and continued elevated spending. Financial conditions ease and the banking sector remains sound, supported by strong capital and liquidity buffers, low nonperforming loans and a recovery in private sector credit growth.

For 2026, real GDP growth is projected at 2.3%, driven mainly by the hydrocarbon sector, while inflation is expected to rise to 1.3% as higher global food and commodity prices pass through to domestic prices. The current account surplus is projected to widen further to 19.5% of GDP, and the fiscal deficit is expected to narrow significantly in FY2026/27 as stronger hydrocarbon revenues and robust nominal GDP growth improve public finances.

Policy pressure centers on fiscal discipline and private-sector expansion

Executive Directors welcome Brunei Darussalam's favorable outlook, citing an expanding hydrocarbon sector, gradual diversification, substantial financial and external buffers, and a stable monetary framework. At the same time, they stress that persistent fiscal deficits and vulnerability to hydrocarbon price volatility require prudent policies and steady reforms to preserve macroeconomic stability and support inclusive growth and employment.

The board calls for a well-calibrated fiscal consolidation strategy backed by a medium-term fiscal framework and a non-hydrocarbon fiscal anchor. It points to better-targeted subsidies, restraint in public wages, protection of priority development spending and vulnerable households, and stronger non-hydrocarbon revenue mobilization as key steps, while urging the authorities to keep to the FY2026/27 budget envelope even if windfall revenues materialize.

Directors also say the external position is substantially stronger than implied by fundamentals and desirable policies, and encourage efforts to boost private domestic demand, especially through stronger private investment. They add that improving the business climate, streamlining permitting and licensing, advancing trade facilitation, supporting MSMEs, aligning skills programs with industry needs, and deepening linkages with foreign direct investment projects will be essential to broaden employment opportunities and reduce reliance on hydrocarbons.

On financial stability, Directors say the currency board arrangement with Singapore continues to anchor macroeconomic and financial stability. They encourage the authorities to phase in the remaining Basel III components, address vulnerabilities tied to concentrated corporate lending and offshore exposures, strengthen the AML/CFT/CPF framework before the next mutual evaluation, and continue improving economic data across national accounts, prices, external sector statistics and fiscal reporting.

In our earlier article on the surge in U.S. Treasury yields above 5%, we examined what pushed the 10-year rate to multi-year highs and why markets started to treat 5% less as a ceiling and more as a waypoint. We also outlined how persistently higher yields can tighten financial conditions by lifting borrowing costs for households and small businesses, while reshaping global capital flows and risk appetite.

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