Conduct of Monetary Policy
What is Monetary Policy?
Monetary policy is a macroeconomic policy enacted by a country's central bank to affect the money supply or/and interest rates in the country. The goals or objectives of monetary policy vary across countries. Some examples include: to attain full employment; high economic growth; stable price level; or stable exchange rates. Monetary policy instruments may be adjusted from time to time, depending on the performance of the economy and what the central bank wishes to achieve.
What is Brunei Darussalam's Monetary Policy?
Brunei Darussalam's monetary policy regime is based on the Currency Board Arrangement, which is underpinned by the Currency Interchangeability Agreement (CIA) between Brunei Darussalam and Singapore.
The Currency Board Arrangement
A monetary authority pegs its currency to another currency, or the reserve currency, and issues domestic money only in exchange for foreign reserve currency. The local currency is fully convertible into the reserve currency at a fixed rate, and on demand. In Brunei Darussalam, the Brunei dollar is pegged to the Singapore dollar as the reserve currency, at par under the CIA.
A currency board must fully back up the total amount of currency issued in the economy with an equivalent amount held in foreign reserves. This is also stated in the Currency Order, 2004, which requires BDCB to back up every note and coin issued with foreign exchange reserves. This is to ensure confidence and stability in the Brunei dollar, 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. The longstanding monetary policy framework based on the CIA has been beneficial for macroeconomic stability. Indeed, inflation in Brunei Darussalam has also been low and stable, averaging 1.1% over 1981-2019 (Department of Economic, Planning and Statistics, Ministry of Finance and Economy, 2019).
The Currency Interchangeability Agreement
AThe CIA makes Brunei Darussalam and Singapore a unique case of a currency board.
Under the CIA, 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
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 CIA, the authorities agreed to return the customary tender collected through currency repatriation. What currency repatriation means is that BDCB returns the Singapore currency to the Monetary Authority of Singapore (MAS) and likewise, MAS returns the Brunei currency to BDCB.