BRUNEI DARUSSALAM MONETARY POLICY
Brunei Darussalam's monetary system is based on the Currency Board Arrangement, which is underpinned by the Currency Interchangeability Agreement between Brunei Darussalam and Singapore.
The Currency Board Arrangement
Under pegged exchange rate systems, currency boards back up the total amount of currency issued in the economy with an equivalent amount held in reserves of the currency board. In Brunei Darussalam, the local currency is pegged to the Singapore dollar at par. Under the Currency Order, 2004, only BDCB is allowed to issue Brunei notes and coins. Additionally, the Currency Order, 2004, also requires us to back up every note and coin issued. This is to ensure confidence and stability in the Brunei dollars, and hence, eases trade and investment.
As the Singapore dollar anchors the Brunei dollar, Singapore's monetary policy has a direct influence on monetary conditions in Brunei Darussalam. Singapore uses the exchange rate as its monetary policy tool[1]. The longstanding monetary policy framework based on the Currency Interchangeability Agreement, has been beneficial for macroeconomic stability. Indeed, inflation in Brunei Darussalam has also been low and stable, averaging 1.2% over 1981–2018 [2].
The Currency Interchangeability Agreement
The Currency Interchangeability Agreement makes Brunei Darussalam and Singapore a unique case of a currency board.
Under the Currency Interchangeability Agreement, the monetary authorities and licensed banks in both countries are obliged to accept and exchange each other's currencies at par and without charge, into their own currency.
As a result, the Brunei dollar is customary tender in Singapore and the Singapore dollar is customary tender in Brunei Darussalam. Customary tender is different from legal tender. Legal tender is any official medium of payment recognised by law that can be used for payments (and other financial obligations) in that country. Typically, the legal tender is the national currency issued by the country. Meanwhile, it is customary to accept Brunei dollars in Singapore and Singapore dollars in Brunei Darussalam.
This unique arrangement has been mutually beneficial for both Brunei Darussalam and Singapore.
The arrangement removes exchange rate risks between the two countries, which would typically cause uncertainty and become a risk to business operations and investments. It also reduces the cost of doing business between Brunei Darussalam and Singapore, and in turn eases tourism, trade and investments.
Under the Currency Interchangeability Agreement, the authorities agreed to return the customary tender collected through currency repatriation. What currency repatriation means is that BDCB returns the Singapore currency to MAS and likewise, Monetary Authority of Singapore (MAS) returns Brunei currency to BDCB.
[1] For further information on Singapore's monetary policy, please visit the link as follows: https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework
[2] Source: Department of Economic Planning and Statistics, Ministry of Finance and Economy
