## 1andea2021001

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---

### Macroeconomic background and structure of employment
- Banking services and tourism dominate economic activity and employment.
- Consolidated bank assets: over 500 percent of GDP.
- Jobs in finance and real estate: 20 percent of employment.
- Trade and tourism:
  - Account for a fifth of the economy’s gross value added (GVA).
  - Account for 40 percent of employment.
  - With related sectors connected to tourism, the share of tourism could be more than half of the economy.
- Visitors in 2019: 8.2 million people; Spaniards accounted for half of the 8.2 million people visiting Andorra in 2019, followed by the French.
- Annual GDP growth since 2013: averaged 1.5 percent.
- Unemployment rate (2013–2019 average): 3.4 percent.
- Cross-border workers from France and Spain help meet high seasonal labor demand.

### Fiscal position and public sector
- Size of general government (2019): both expenditure and revenue below 40 percent of GDP.
- Refinancing needs: averaged 13 percent of GDP in 2018–19.
- Average maturity of debt: 2½ years by end-2019.
- Fiscal rule in place since 2014 (limits on debt, deficit, current spending and revenue).
- Central government primary surpluses: averaging 0.7 percent of GDP in 2015–2019.
- Interest payments: averaging 0.6 percent of GDP in 2015–2019.
- General government overall balances: positive over the past seven years (central and local governments ran surpluses).
- State-owned enterprises FEDA and Andorra Telecom: profitable; investment strategies mostly financed from retained earnings.
- Social security (first pillar defined contribution pension system): projected depletion of reserves fund by 2038; public consultation announced to enact a new law within a year to restore long-term sustainability.

### Banking sector and external position
- Banking system: four Andorran banks and one Spanish subsidiary; diversified geographically and in income models.
- Share of assets operating in other countries: almost 60 percent of assets operate in 13 other countries.
- Income composition: almost 80 percent of income is based on non-interest income sources.
- Reported bank performance: higher profits than eurozone banks (pre-pandemic).
- Capitalization: has grown over time, partly due to falling private sector loans from domestic deleveraging.
- Nonperforming loans (NPLs): high, partly due to legacy NPLs from a bank undergoing resolution after an AML/CFT breach; projected to increase further as pandemic-related policies expire.
- Domestic private sector credit stock (2019): 136 percent of GDP.
- Banks cited lack of demand from firms as main reason for low credit growth.
- Current account balance (2019): close to 18 percent of GDP, with net exports and net investment income contributing almost equally.
- International investment position: positive net asset position, but fairly high gross other investment liabilities due to banks’ dependence on foreign depositors.

### Impact of the COVID-19 pandemic and public health response
- Andorra managed the health crisis with universal testing and revamped hospital capacity.
- Containment measures reduced tourism and domestic services in early 2020; activity rebounded strongly during summer 2020 when stringency eased.
- Border closures with France and Spain (especially in early 2021) caused significant revenue loss for hotels and ski resorts.
- High prevalence of COVID-19 cases per capita, but low case-fatality rates due to scaled-up hospital capacity and protective equipment.
- Vaccination: About 35 percent of the population have received at least one dose so far [May 12].

### Fiscal and financial policy response to COVID-19
- COVID-19 fiscal measures:
  - Expenditure measures: 2.2 percent of GDP.
  - Revenue measures foregone: 0.4 percent of GDP.
  - Government guarantees available for bank loans to businesses: 9 percent of GDP (€230 million envelope in 2020); 60 percent take-up in 2020.
  - Take-up of guarantees enabled bank credit to firms to increase by about 11½ percent y/y in 2020:Q2.
- Central government balance (2020): -4.3 percent of GDP.
- The COVID-related measures and lower revenues reduced the central government balance to -4.3 percent of GDP in 2020.
- The measures provided about one percentage point boost to GDP growth in 2020, assuming an average multiplier of one across COVID-related spending categories.
- Monetary/macro-financial measures and regulatory actions included moratoria, limits on onsite bank examinations, postponement of stress tests, postponement of capital buffer requirements for systemic risks, recommendation that banks not distribute dividends, and extension of reporting deadlines for audited balance sheets.
- ERTO (temporary employment regulation) benefitted 10,181 workers in May–December 2020.

### Economic outcomes in 2020 and labor market impact
- Quarter-on-quarter Real GDP growth in 2020 (year-on-year change): Q1 = -7.0, Q2 = -24.7, Q3 = -5.6, Q4 = -10.4.
- Inflation moved into negative territory in mid-2020, driven by sharp declines in energy prices and reduced activity in transport and recreation sectors (which account for a third of CPI weight).
- Unemployment rate increased to 3.2 percent in 2020:Q4.
- Employment effects by sector: employment in hospitality and personal services sectors declined by 7.3 percent in 2020.

### Macroeconomic outlook and projections
- Real GDP growth: 5.8 percent in 2021, from an estimated drop of 11.8 percent in 2020.
- Real GDP is projected to remain almost 7   percent below 2019 levels in 2021.
- IMF Baseline Forecasts (selected series, percent) for 2019–2026:
  - Real GDP growth: 2.0, -11.8, 5.8, 4.1, 3.6, 2.8, 1.5, 1.5.
  - Nominal GDP growth: 3.4, -11.9, 6.5, 5.3, 5.0, 4.6, 3.2, 3.2.
  - Consumption: 2.5, -3.5, 4.5, 3.5, 3.2, 3.0, 1.9, 1.9.
  - Private consumption: 1.6, -5.7, 3.4, 2.8, 2.7, 2.6, 1.5, 1.5.
  - Investment: 1.8, -3.9, 0.2, 0.5, 0.5, 0.4, 0.4, 0.4.
  - Exports: 1.1, -6.8, 4.5, 4.0, 3.7, 3.1, 2.3, 2.3.
  - Imports: 2.0, -2.3, 2.8, 2.7, 2.3, 2.0, 1.4, 1.4.
  - CPI inflation (period average): 0.7, 0.3, 0.5, 0.9, 1.3, 1.6, 1.7, 1.7.
  - Unemployment rate: 1.8, 2.9, 3.0, 2.4, 2.0, 1.8, 1.7, 1.7.
  - Central government overall balance (percent of GDP): 0.2, -4.3, -3.3, -1.4, -0.1, 0.5, 0.9, 1.1.
  - Current account balance (percent of GDP): 18.0, 14.2, 15.5, 16.4, 17.3, 18.0, 18.5, 19.1.
- Euro area and Spain benchmarks:
  - Euro Area real GDP growth: 1.3, -6.6, 4.4, 3.8, 1.9, 1.6, 1.4, 1.3 (2019–2026).
  - Spain real GDP growth: 2.0, -11.0, 6.4, 4.7, 2.8, 2.4, 1.4, 1.4 (2019–2026).

### Tourism, competitiveness, and prices
- Tourism expected to recover sooner than in other countries once border mobility is fully restored, because most tourists do not travel to Andorra by air.
- Pent-up demand for tourism and ski vacations is expected to add back to tourism receipts later in 2021.
- A staff-developed index shows Andorra on the lower side among European peers on the relative price of a ski vacation; Andorra fares well in external competitiveness with low relative prices of exportable services and rising export market shares of tourism.
- Ongoing increases in higher minimum wages and plans to create luxury ski-tourism products are not expected to reduce sector competitiveness over the medium-term.

### Banking sector resilience and risks
- Baseline: banks expected to be resilient, supporting credit growth, though they face risks.
- Near-term bank profitability initially expected to fall due to higher loan-loss provisions and lower noninterest earnings through 2021, reducing banks’ ability to grow capital organically.
- Under staff’s baseline, NPLs are expected to grow to about 9 percent of loans due to the pandemic.
- Structural vulnerabilities: reliance on foreign deposit funding, loans to banks’ own shareholders and related parties, and large exposures to the domestic economy.
- Policy recommendation: Andorran Financial Authority (AFA) should carefully assess capital needs given structural risks; IMF technical assistance from MCM will provide detailed bank supervision recommendations.

### Risk assessment (near-term skewed downside)
- Downside risks (substantially skewed near-term):
  - Resurgence of the virus: inadequate vaccine supply or new strains could cause protracted lockdowns in 2021, slower recovery, increased firm bankruptcies and unemployment in retail and tourism, and medium-term scarring.
  - Banking stress: lifting of moratoria and expiry of fiscal measures could reveal sizeable loan losses; increased NPLs and reduced capital buffers could make banks reluctant to lend, weakening private domestic demand recovery.
  - Sovereign stress: most debt is short-term and gross financing needs are high in the near-term; increased calls on government guarantees and banking-sector contingent liabilities could raise gross financing needs in 2021 and increase refinancing costs.
- Upside risks:
  - Successful vaccine deployment covering the entire adult population in Andorra and neighbors.
  - Policies leading to a more rapid recovery in the eurozone and Spain that boost tourism demand.

### Fiscal policy stance and recommendations
- Staff supports the fiscal rule as a medium-term anchor but cautions that ambitious consolidation plans could be costly for the recovery.
- Public support should continue until the recovery is firmly established; public investment, at least on maintenance projects, could increase while diversifying funding sources.
- Investing in tourism, electricity, and environmentally-sustainable projects will lift growth and boost private investment while bringing the unemployment rate halfway down to 2019 levels; public debt would remain sustainable in such a higher-public-investment scenario.
- Near-term fiscal measures:
  - Maintain healthcare spending to finance vaccines and tests and COVID Office operations.
  - Keep most support measures to households; roll back firm support measures (particularly ERTO) gradually as the economy recovers.
  - Emergency lifelines for firms should be maintained and rolled back gradually if local transmission is low and activity normalizes.
- Public debt and financing:
  - Gross financing needs of the central government were 18 percent of GDP in 2020.
  - Central government debt increased to 48.4 percent of GDP in 2020, supported by activation of the escape clause embedded in the fiscal rule.
  - Primary fiscal balances projected to turn positive from 2023.
  - The 10-year maturity of the €500 million Eurobond issuances will reduce debt service substantially in the short-to-medium term; combined effects expected to see debt reach the fiscal rule target of 40 percent of GDP by 2024.

### Public investment and scenarios
- Public investment was cut by about 0.4 percentage points of GDP in 2020 and is projected to stall in 2021–2023 in the 2021 budget.
- Staff analysis: a modest increase in public investment—around 1 percent of GDP per year in 2021–23, financed by issuing €100 million extra debt—could raise real GDP level by 3 to 6 percent in the medium-term compared to staff’s baseline.
- Public Investment scenarios:
  - ‘Post-COVID19 (IMF staff)’ baseline and ‘Post-COVID19+Investment’ scenarios (assumes public investment increases by 1 percent of GDP per year in 2021–23, financed by an additional €100 million Eurobond issuance in 2022).
  - Impact assessed using multipliers = 1 and = 2.

### International reserves and liquidity
- Staff assesses reserve needs at about 12 percent of GDP or €334 million in the baseline scenario.
- Available reserve assets with the IMF amount to 2 percent of GDP, equivalent to €62 million; the “shortfall” is €273 million (9.7 percent of 2019 GDP, €273M).
- Banks' liquidity assessment: using LCR-based metric, liquidity buffer exceeds net outflows and there is no liquidity gap as of end-2020.
- Options to accumulate reserves: increase contribution rate to the compensation account under the fiscal rule, save all future fiscal surpluses starting in 2023, or issue debt. Qualifying assets must be under legal and managerial control of central government and invested abroad in highly liquid assets.

### Authorities’ views
- Authorities broadly shared staff’s views on the economic outlook and balance of risks; their forecast for 2021 is more pessimistic than staff’s and may be revised based on Q1 2021 outturns.
- Authorities expect 60–70 percent of the Andorran and regional population (as projected by EU authorities) will be vaccinated by the summer, supporting optimism for a summer rebound in tourism.
- Authorities reiterated commitment to fiscal discipline and to bring debt below fiscal limits while exploring options to build international reserves; they welcome staff’s assessment on boosting public investment but wish to balance implementation pace with medium-term fiscal goals.
- Authorities noted that the public investment multiplier in Andorra could be lower than in peers given the small size and openness of the economy.

### Banking sector performance, NPLs, and supervisory priorities
- Emergency fiscal measures provide substantial support to household incomes and firms’ expenses during the pandemic.
- Borrowers took up moratoria on about 8 percent of GDP worth of loans.
- Firms have accessed credit from banks using loan guarantees from the government.
- Businesses—especially in the tourism sector—are reluctant to borrow more for investment purposes.
- Bank capital has been holding up well so far due to very few loan losses in the pandemic and the presence of insolvency moratoria.
- NPL stock remains high and concentrated in the services sector; legacy loans from Banca Privada d‘Andorra affect ratios.
  - Adjusted NPL ratio (excluding legacy assets): close to 3 percent of gross loans.
- Related party lending:
  - Large exposures to a few clients and a considerable share of loans to “related parties”.
  - Deducting the full amount of related party loans from total capital would reduce the capital-to-asset ratio by almost 3 percentage points (staff illustrative analysis).
  - This adjustment would decrease the projected capital-to-asset ratio of a portion of the banking sector below the 3 percent threshold, exposing a capital ratio gap of about 2 percent of GDP.
- Liquidity:
  - LCR requirement of 100 percent since January 2021; banks have LCR close to 200 percent under regulatory assumptions.
  - Staff liquidity stress test: liquidity gap could go up to 6.8 percent of GDP in an extremely adverse scenario with higher deposit outflows.
- Near-term supervisory actions (AFA):
  - Assess pandemic impact on bank capital; ensure proper loan classification and provisioning; maintain good provisioning practices; extend moratoria only case-by-case; avoid blanket moratoria and regulatory forbearance.
- Medium-term supervisory priorities (AFA):
  - Strengthen rules on related party lending; consider “Pillar II” capital on related party exposures; vigilantly monitor liquidity risks and cross-border flows; deepen understanding of ML risks.

### Governance, AML/CFT, and data transparency
- Government effectiveness indicators compare or exceed regional peers, but Andorra has not ratified the United Nations Convention against Corruption (UNCAC).
- Recommendations:
  - Collect and publish beneficial ownership information for entities awarded contracts (including COVID-related contracts).
  - Strengthen coordination of anti-corruption measures; ratify UNCAC; adopt bills on asset declaration and public access to information.
- AML/CFT:
  - Understanding of ML risks improved since 2018; an update of the national risk assessment is being finalized.
  - UIFAND’s AML/CFT supervision is risk-sensitive but focuses mostly on crimes committed in Andorra; monitoring cross-border flows and cooperation with foreign counterparts should be further developed.
- Data gaps remain in real expenditure components of GDP, international investment position, and financial soundness data for banks and the private sector.
- Prepare an advance release calendar for major macroeconomic statistics and consider participating in the Enhanced General Data Dissemination System (e-GDDS).

### Staff appraisal: fiscal policy, reserves, and longer-term priorities
- Pandemic caused a considerable economic toll; authorities managed the health crisis well (universal testing, expanded hospital capacity, targeted internal restrictions).
- Emergency fiscal measures stabilized real incomes and supported firms.
- Fiscal policy should remain supportive in the near-term and allow for higher public investment in the medium-term.
- The fiscal rule provides a medium-term anchor and allows for a slower consolidation than the authorities’ plans.
- Maintain emergency lifelines while virus-variant uncertainty persists; roll back lifelines gradually as transmission falls and activity normalizes.
- Front-load investments in digital technologies and climate adaptation/mitigation where feasible to support recovery and boost private investment.
- Staff assesses international reserves needs at about 12 percent of GDP; available IMF reserve assets equal 2 percent of GDP at this stage.
- Bank liquidity risks require intense supervision to prevent reserve needs of the government from rising.
- Authorities should develop anti-corruption strategy, ratify UNCAC, establish asset declarations for politically exposed persons, and ensure public access to information in line with UNCAC.
- Continue publishing statistics to international standards and work with the IMF to close statistical gaps.

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff report (1andea2021001), Principality of Andorra — Article IV consultation material.*

### 1. Employment Shares, 2019________________________________________________________________________ 4

### 1. Employment Shares, 2019

### Macroeconomic background and structure of employment
- Banking services and tourism dominate economic activity and employment.
- Consolidated bank assets: over 500 percent of GDP.
- Jobs in finance and real estate: 20 percent of employment.
- Trade and tourism:
  - Account for a fifth of the economy’s gross value added (GVA).
  - Account for 40 percent of employment.
  - With related sectors connected to tourism, the share of tourism could be more than half of the economy.
- Visitors in 2019: 8.2 million people; Spaniards accounted for half of the 8.2 million people visiting Andorra in 2019, followed by the French.
- Annual GDP growth since 2013: averaged 1.5 percent.
- Unemployment rate (2013–2019 average): 3.4 percent.
- Cross-border workers from France and Spain help meet high seasonal labor demand.

### Fiscal position and public sector
- Size of general government (2019): both expenditure and revenue below 40 percent of GDP.
- Refinancing needs: averaged 13 percent of GDP in 2018–19.
- Average maturity of debt: 2½ years by end-2019.
- Fiscal rule in place since 2014 (limits on debt, deficit, current spending and revenue).
- Central government primary surpluses: averaging 0.7 percent of GDP in 2015–2019.
- Interest payments: averaging 0.6 percent of GDP in 2015–2019.
- General government overall balances: positive over the past seven years (central and local governments ran surpluses).
- State-owned enterprises FEDA and Andorra Telecom: profitable with investment strategies mostly financed from retained earnings.
- Social security (first pillar defined contribution pension system): projected depletion of reserves fund by 2038; public consultation announced to enact a new law within a year to restore long-term sustainability.

### Banking sector and external position
- Banking system: four Andorran banks and one Spanish subsidiary; diversified geographically and in income models.
- Share of assets operating in other countries: almost 60 percent of assets operate in 13 other countries.
- Income composition: almost 80 percent of income is based on non-interest income sources.
- Reported bank performance: higher profits than eurozone banks (pre-pandemic).
- Capitalization: has grown over time, partly due to falling private sector loans from domestic deleveraging.
- Nonperforming loans (NPLs): high, partly due to legacy NPLs from a bank undergoing resolution after an AML/CFT breach; projected to increase further as pandemic-related policies expire.
- Domestic private sector credit stock (2019): 136 percent of GDP.
- Banks cited lack of demand from firms as main reason for low credit growth.
- Current account balance (2019): close to 18 percent of GDP, with net exports and net investment income contributing almost equally.
- International investment position: positive net asset position, but fairly high gross other investment liabilities due to banks’ dependence on foreign depositors.

### Impact of the COVID-19 pandemic and public health response
- Andorra managed the health crisis with universal testing and revamped hospital capacity.
- Containment measures reduced tourism and domestic services in early 2020 but activity rebounded strongly during summer 2020 when stringency eased.
- Border closures with France and Spain (especially in early 2021) caused significant revenue loss for hotels and ski resorts.
- High prevalence of COVID-19 cases per capita, but low case-fatality rates due to scaled-up hospital capacity and protective equipment.
- Vaccination: About 35 percent of the population have received at least one dose so far [May 12].

### Fiscal and financial policy response to COVID-19
- COVID-19 fiscal measures:
  - Expenditure measures: 2.2 percent of GDP.
  - Revenue measures foregone: 0.4 percent of GDP.
  - Government guarantees available for bank loans to businesses: 9 percent of GDP (€230 million envelope in 2020); 60 percent take-up in 2020.
  - Take-up of guarantees enabled bank credit to firms to increase by about 11½ percent y/y in 2020:Q2.
- Central government balance (2020): -4.3 percent of GDP.
- The COVID-related measures and lower revenues reduced the central government balance to -4.3 percent of GDP in 2020.
- The measures provided about one percentage point boost to GDP growth in 2020, assuming an average multiplier of one across COVID-related spending categories.
- Monetary/macro-financial measures and regulatory actions included moratoria, limits on onsite bank examinations, postponement of stress tests, postponement of capital buffer requirements for systemic risks, recommendation that banks not distribute dividends, and extension of reporting deadlines for audited balance sheets.
- ERTO (temporary employment regulation) benefitted 10,181 workers in May–December 2020.

### Economic outcomes in 2020 and labor market impact
- Quarter-on-quarter Real GDP growth in 2020 (year-on-year change): Q1 = -7.0, Q2 = -24.7, Q3 = -5.6, Q4 = -10.4.
- Inflation moved into negative territory in mid-2020, driven by sharp declines in energy prices and reduced activity in transport and recreation sectors (which account for a third of CPI weight).
- Unemployment rate increased to 3.2 percent in 2020:Q4.
- Employment effects by sector: employment in hospitality and personal services sectors declined by 7.3 percent in 2020.

*Source: IMF staff report (1andea2021001), Principality of Andorra — Article IV consultation material (canonical source provided).*

### 5.8 percent in 2021, from an estimated drop of 11.8 percent in 2020 (Table 2). Private consumptio

### 1andea2021001 - 5.8 percent in 2021, from an estimated drop of 11.8 percent in 2020 (Table 2). Private consumptio

### Macroeconomic outlook and projections
- Real GDP growth: 5.8 percent in 2021, from an estimated drop of 11.8 percent in 2020 (Table 2).
- Real GDP is projected to remain almost 7   percent below 2019 levels in 2021.
- IMF Baseline Forecasts (selected series, percent):
  - Real GDP growth: 2.0, -11.8, 5.8, 4.1, 3.6, 2.8, 1.5, 1.5 (2019–2026).
  - Nominal GDP growth: 3.4, -11.9, 6.5, 5.3, 5.0, 4.6, 3.2, 3.2 (2019–2026).
  - Consumption: 2.5, -3.5, 4.5, 3.5, 3.2, 3.0, 1.9, 1.9 (2019–2026).
  - Private consumption: 1.6, -5.7, 3.4, 2.8, 2.7, 2.6, 1.5, 1.5 (2019–2026).
  - Investment: 1.8, -3.9, 0.2, 0.5, 0.5, 0.4, 0.4, 0.4 (2019–2026).
  - Exports: 1.1, -6.8, 4.5, 4.0, 3.7, 3.1, 2.3, 2.3 (2019–2026).
  - Imports: 2.0, -2.3, 2.8, 2.7, 2.3, 2.0, 1.4, 1.4 (2019–2026).
  - CPI inflation (period average): 0.7, 0.3, 0.5, 0.9, 1.3, 1.6, 1.7, 1.7 (2019–2026).
  - Unemployment rate: 1.8, 2.9, 3.0, 2.4, 2.0, 1.8, 1.7, 1.7 (2019–2026).
  - Central government overall balance (percent of GDP): 0.2, -4.3, -3.3, -1.4, -0.1, 0.5, 0.9, 1.1 (2019–2026).
  - Current account balance (percent of GDP): 18.0, 14.2, 15.5, 16.4, 17.3, 18.0, 18.5, 19.1 (2019–2026).
- Euro area and Spain benchmarks:
  - Euro Area real GDP growth: 1.3, -6.6, 4.4, 3.8, 1.9, 1.6, 1.4, 1.3 (2019–2026).
  - Spain real GDP growth: 2.0, -11.0, 6.4, 4.7, 2.8, 2.4, 1.4, 1.4 (2019–2026).

### Tourism, competitiveness, and prices
- Tourism expected to recover sooner than in other countries once border mobility is fully restored, because most tourists do not travel to Andorra by air.
- Pent-up demand for tourism and ski vacations is expected to add back to tourism receipts later in 2021.
- A new staff-developed index shows Andorra on the lower side among European peers on the relative price of a ski vacation; Andorra fares well in external competitiveness with low relative prices of exportable services and rising export market shares of tourism.
- Ongoing increases in higher minimum wages and plans to create luxury ski-tourism products are not expected to reduce sector competitiveness over the medium-term.
- Figure 11 (“1-Week Cost of Ski Vacation” Index, 2019) and associated sources: UK Post Office Travel Money Ski Resort Report 2019; US Department of State; and IMF staff estimates.

### Banking sector resilience and risks
- Baseline: banks expected to be resilient, supporting credit growth, though they face risks.
- Near-term bank profitability initially expected to fall due to higher loan-loss provisions and lower noninterest earnings through 2021, reducing banks’ ability to grow capital organically.
- Under staff’s baseline, NPLs are expected to grow to about 9 percent of loans due to the pandemic.
- Structural vulnerabilities: reliance on foreign deposit funding, loans to banks’ own shareholders and related parties, and large exposures to the domestic economy.
- Policy recommendation: Andorran Financial Authority (AFA) should carefully assess capital needs given structural risks; IMF technical assistance from MCM will provide detailed bank supervision recommendations.

### Risk assessment (near-term skewed downside)
- Downside risks (substantially skewed near-term):
  - Resurgence of the virus: inadequate vaccine supply or new strains could cause protracted lockdowns in 2021, slower recovery, increased firm bankruptcies and unemployment in retail and tourism, and medium-term scarring.
  - Banking stress: lifting of moratoria and expiry of fiscal measures could reveal sizeable loan losses; increased NPLs and reduced capital buffers could make banks reluctant to lend, weakening private domestic demand recovery.
  - Sovereign stress: most debt is short-term and gross financing needs are high in the near-term; increased calls on government guarantees and banking-sector contingent liabilities could raise gross financing needs in 2021 and increase refinancing costs.
- Upside risks:
  - Successful vaccine deployment covering the entire adult population in Andorra and neighbors.
  - Policies leading to a more rapid recovery in the eurozone and Spain that boost tourism demand.

### Fiscal policy stance and recommendations
- Staff supports the fiscal rule as a medium-term anchor but cautions that ambitious consolidation plans could be costly for the recovery.
- Public support should continue until the recovery is firmly established; public investment, at least on maintenance projects, could increase while diversifying funding sources.
- Investing in tourism, electricity, and environmentally-sustainable projects will lift growth and boost private investment while bringing the unemployment rate halfway down to 2019 levels; public debt would remain sustainable in such a higher-public-investment scenario.
- Near-term fiscal measures:
  - Maintain healthcare spending to finance vaccines and tests and COVID Office operations.
  - Keep most support measures to households; roll back firm support measures (particularly ERTO) gradually as the economy recovers.
  - Emergency lifelines for firms should be maintained and rolled back gradually if local transmission is low and activity normalizes.
- Public debt and financing:
  - Gross financing needs of the central government were 18 percent of GDP in 2020.
  - Central government debt increased to 48.4 percent of GDP in 2020, supported by activation of the escape clause embedded in the fiscal rule.
  - Primary fiscal balances projected to turn positive from 2023.
  - The 10-year maturity of the €500 million Eurobond issuances will reduce debt service substantially in the short-to-medium term; combined effects expected to see debt reach the fiscal rule target of 40 percent of GDP by 2024.

### Public investment and scenarios
- Public investment was cut by about 0.4 percentage points of GDP in 2020 and is projected to stall in 2021–2023 in the 2021 budget.
- Staff analysis: a modest increase in public investment—around 1 percent of GDP per year in 2021–23, financed by issuing €100 million extra debt—could raise real GDP level by 3 to 6 percent in the medium-term compared to staff’s baseline.
- Public Investment scenarios (from figures and notes):
  - ‘Post-COVID19 (IMF staff)’ baseline and ‘Post-COVID19+Investment’ scenarios (assumes public investment increases by 1 percent of GDP per year in 2021–23, financed by an additional €100 million Eurobond issuance in 2022).
  - Impact on real GDP and unemployment shown in Figure 14 (Real GDP Path, 2019-2026 index, 2019=100) with multipliers = 1 and = 2.

### International reserves and liquidity
- Staff assesses reserve needs at about 12 percent of GDP or €334 million in the baseline scenario.
- Available reserve assets with the IMF amount to 2 percent of GDP, equivalent to €62 million; the “shortfall” is €273 million (9.7 percent of 2019 GDP, €273M).
- Banks' liquidity assessment: using LCR-based metric, liquidity buffer exceeds net outflows and there is no liquidity gap as of end-2020.
- Options to accumulate reserves: increase contribution rate to the compensation account under the fiscal rule, save all future fiscal surpluses starting in 2023, or issue debt. Qualifying assets must be under legal and managerial control of central government and invested abroad in highly liquid assets.

### Authorities’ views
- Authorities broadly shared staff’s views on the economic outlook and balance of risks; their forecast for 2021 is more pessimistic than staff’s and may be revised based on Q1 2021 outturns.
- Authorities expect 60–70 percent of the Andorran and regional population (as projected by EU authorities) will be vaccinated by the summer, supporting optimism for a summer rebound in tourism.
- Authorities reiterated commitment to fiscal discipline and to bring debt below fiscal limits while exploring options to build international reserves; they welcome staff’s assessment on boosting public investment but wish to balance implementation pace with medium-term fiscal goals.
- Authorities noted that the public investment multiplier in Andorra could be lower than in peers given the small size and openness of the economy.

*Source: IMF staff and Andorran authorities (excerpts from the IMF staff report).*

### 28. The banking sector seems to be weathering the pandemic well, while fiscal and

### The banking sector seems to be weathering the pandemic well, while fiscal and financial sector policies are still in place, amid a lack of credit demand for investment purposes

### Banking sector performance and pandemic support
- Emergency fiscal measures provide substantial support to household incomes and firms’ expenses during the pandemic.
- Borrowers took up moratoria on about 8 percent of GDP worth of loans.
- Firms have accessed credit from banks using loan guarantees from the government to tide over liquidity needs.
- Businesses—especially in the tourism sector—are reluctant to borrow more for investment purposes.
- Bank capital has been holding up well so far due to very few loan losses in the pandemic and the presence of insolvency moratoria.

### Nonperforming loans (NPLs)
- The stock of NPLs remains high and is concentrated in the services sector.
- High NPL ratio is partly due to legacy loans from Banca Privada d‘Andorra (under resolution since 2015 after an AML/CFT breach).
- When adjusted for these legacy assets, the NPL ratio is close to 3 percent of gross loans, and near the regional average.
- Part of the recent increase in NPLs is due to new regulation modifying loan classification.
- The nominal stock of NPLs remains concentrated in services and construction/real estate sectors.
- A market for NPLs does not exist; NPLs usually are resolved by prolonged work-outs.

### Related party lending and capital adequacy
- Andorran banks exhibit large exposures to a few clients and a considerable share of loans to “related parties” such as shareholders.
- Deducting the full amount of related party loans from total capital would reduce the capital-to-asset ratio by almost 3 percentage points (staff illustrative analysis).
- This adjustment would decrease the projected capital-to-asset ratio of a portion of the banking sector below the 3 percent threshold—used in the illustrative analysis as a proxy for the leverage ratio floor—exposing a capital ratio gap of about 2 percent of GDP.

### Liquidity and dependence on foreign funding
- Due to adoption of EU bank liquidity rules, Andorran banks need an LCR of 100 percent since January 2021.
- Andorran banks have an LCR close to 200 percent, assuming liquidity outflows specified in the regulation and consistent with regional crisis scenarios.
- Staff liquidity stress test suggests the banking system’s liquidity gap could go up to 6.8 percent of GDP in an extremely adverse scenario where liquidity outflows of stable and unstable deposits occur at up to thrice the rate assumed in the baseline.
- Continuous vigilance is required given dependence on foreign funding; AFA should monitor banks most exposed to this risk.

### Near-term supervisory actions (AFA)
- Assess the impact of the pandemic on bank capital, recognizing that temporary moratoria on debt service might have made bank balance sheets less transparent.
- Ensure loan classifications and provisioning continue in a proper manner.
- Maintain good provisioning practices given the absence of an NPL resolution market (banks would mostly absorb costs through write-offs).
- If the economic outlook worsens, extend loan moratoria only on a case-by-case basis to eligible clients.
- Avoid blanket moratoria and regulatory forbearance that would reduce bank income prospects and obscure bank balance sheets.

### Medium-term supervisory and structural priorities (AFA)
- Strengthen rules on related party lending to disincentivize banks from such loans.
- Consider additional capital in the form of “Pillar II” on related party exposures of specific banks.
- Continue vigilance on liquidity risks to ensure adequate liquid assets to meet short-term runs from foreign depositors.
- Strengthen monitoring of cross-border flows, including cooperation with foreign counterparts.
- Continue deepening the understanding of money-laundering (ML) risks.

### Governance, AML/CFT, and data transparency
- Indicators of government effectiveness (voice and accountability, rule of law, political stability) compare or exceed those in the region, but Andorra has not yet ratified the United Nations Convention against Corruption (UNCAC).
- Authorities are encouraged to collect and publish beneficial ownership information for entities awarded contracts (including COVID-related contracts) to increase transparency and accountability of public spending.
- In the absence of an anti-corruption strategy, strengthen coordination of anti-corruption measures and identify priority areas for action; ratify UNCAC; adopt bills on asset declaration and public access to information.
- AML/CFT: understanding of ML risks in the banking sector has improved since 2018; an update of the national risk assessment is being finalized.
- UIFAND’s AML/CFT supervision is risk-sensitive but focuses mostly on crimes committed in Andorra; monitoring of cross-border flows and cooperation with foreign counterparts should be further developed; allocate resources to higher risk areas to increase AML/CFT effectiveness.
- Data gaps remain in real expenditure components of GDP, international investment position, and financial soundness data for banks and the private sector.
- Prepare an advance release calendar for major macroeconomic statistics and consider participating in the Enhanced General Data Dissemination System (e-GDDS).

### Staff appraisal: fiscal policy, reserves, and longer-term priorities
- The pandemic has taken a considerable economic toll; authorities managed the health crisis well (universal testing, expanded hospital capacity, targeted internal restrictions).
- Emergency fiscal measures stabilized real incomes and supported firms.
- Fiscal policy should remain supportive in the near-term and allow for higher public investment in the medium-term.
- The fiscal rule provides a medium-term anchor and allows for a slower consolidation than the authorities’ plans.
- Maintain emergency lifelines while the risk of renewed lockdowns and virus-variant uncertainty persists; roll back lifelines gradually, reducing coverage and generosity if local transmission is low and activity begins to normalize.
- Some planned investments in digital technologies and climate adaptation/mitigation could be brought forward in 2021 to support the recovery and frontload public investment to boost private investment in tourism-related sectors.
- IMF staff assess international reserves needs to be about 12 percent of GDP, sufficient to cover one month of imports, fiscal revenue fluctuations, and short-term external debt service.
- Currently available liquidity is limited to reserve assets with the IMF worth two percent of GDP at this stage; various options are available to build up the remaining 10 percent of GDP over time.
- Bank liquidity risks need intense supervision to prevent reserve needs of the government from rising.
- Authorities should develop a strategy to increase effectiveness of anti-corruption measures, ratify UNCAC, establish assets declaration for politically exposed persons, and ensure public access to information in line with UNCAC.
- Authorities are progressing on publishing statistics to international standards (produced balance of payments statistics with IMF support) and plan to work with the IMF and participate in e-GDDS to further develop data transparency.

*Source: IMF staff report excerpt on the Principality of Andorra.*

### 46.      It is recommended that the next Article IV consultation take place on the standard 12-

### 1andea2021001 - 46.      It is recommended that the next Article IV consultation take place on the standard 12-

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Macroeconomic outlook and projections (National accounts and prices)
- Real GDP (annual change, percent): 2017: 0.3; 2018: 1.6; 2019: 2.0; 2020: -11.8; 2021: 5.8; 2022: 4.1; 2023: 3.6; 2024: 2.8; 2025: 1.5; 2026: 1.5.
- Nominal GDP (annual change, percent): 2017: 1.5; 2018: 2.6; 2019: 3.4; 2020: -11.9; 2021: 6.5; 2022: 5.3; 2023: 5.0; 2024: 4.6; 2025: 3.2; 2026: 3.2.
- GDP deflator (percent, period average): 2017: 1.1; 2018: 1.0; 2019: 1.4; 2020: -0.1; 2021: 0.6; 2022: 1.1; 2023: 1.4; 2024: 1.7; 2025: 1.7; 2026: 1.7.
- Consumption (annual change, percent): private consumption (selected years) 2019: 1.6; 2020: -5.7; 2021: 3.4; 2022: 2.8; 2023: 2.7; 2024: 2.6; 2025: 1.5; 2026: 1.5.
- Investment (annual change, percent): private investment (contribution-derived residual) 2019: 1.6; 2020: -2.5; 2021: -0.8; 2022: 0.4; 2023: 0.4; 2024: 0.3; 2025: 0.2; 2026: 0.2.
- Net exports of goods and services (contribution to nominal GDP growth, percentage points): 2019: -1.0; 2020: -4.5; 2021: 1.7; 2022: 1.3; 2023: 1.3; 2024: 1.1; 2025: 0.9; 2026: 0.9.
- Inflation (percent, period average): 2017: 2.6; 2018: 1.3; 2019: 0.7; 2020: 0.3; 2021: 0.5; 2022: 0.9; 2023: 1.3; 2024: 1.6; 2025: 1.7; 2026: 1.7.
- Unemployment rate (percent): 2017: 1.7; 2018: 1.5; 2019: 1.8; 2020: 2.9; 2021: 3.0; 2022: 2.4; 2023: 2.0; 2024: 1.8; 2025: 1.7; 2026: 1.7.

### External sector (Balance of payments and reserves)
- Current account (millions of euros): 2021: 455.7; 2022: 504.7; 2023: 549.4; 2024: 585.0; 2025: 621.6.
- Current account (percent of GDP): 2021: 16.4; 2022: 17.3; 2023: 18.0; 2024: 18.5; 2025: 19.1.
- Balance on goods and services (millions of euros): 2021: 187.2; 2022: 221.5; 2023: 258.8; 2024: 292.2; 2025: 319.5; 2026: 347.6.
- Exports of goods and services (percent of GDP): 2017: 76.6; 2018: 75.4; 2019: 74.0; 2020: 76.3; 2021: 75.9; 2022: 75.9; 2023: 75.8; 2024: 75.5; 2025: 75.4; 2026: 75.2.
- Imports of goods and services (percent of GDP): 2017: 62.4; 2018: 64.6; 2019: 64.4; 2020: 70.5; 2021: 68.8; 2022: 68.0; 2023: 67.0; 2024: 65.9; 2025: 65.2; 2026: 64.6.
- Primary income, net (percent of GDP): 2021 onward: 9.7 (repeated annually through projections).
- Secondary income, net (percent of GDP): projections show -1.3 annually.
- Financial account (percent of GDP): 2021: 18.1; 2022: 14.2; 2023: 15.5; 2024: 16.4; 2025: 17.3; 2026: 18.0; subsequent projections include 18.5 and 19.1.
- Gross international reserves (millions of euros): 2021: 0.0; 2022: 61.6; 2023: 61.6; 2024: 61.6; 2025: 61.6; 2026: 61.6.
- Gross international reserves (in months of imports): projections show 0.4 months for 2022 onward.

### Fiscal sector (General government)
- General government revenue (percent of GDP): 2017: 38.0; 2018: 38.5; 2019: 38.0; 2020: 41.1; 2021: 38.4; 2022: 38.6; 2023: 38.7; 2024: 38.8; 2025: 39.0; 2026: 39.1.
- General government expenditure (percent of GDP): 2017: 34.6; 2018: 35.7; 2019: 35.6; 2020: 44.0; 2021: 40.8; 2022: 38.0; 2023: 36.7; 2024: 36.1; 2025: 35.9; 2026: 35.6.
- Primary balance (percent of GDP): 2017: 4.0; 2018: 3.4; 2019: 2.9; 2020: -2.3; 2021: -1.7; 2022: 1.2; 2023: 2.6; 2024: 3.3; 2025: 3.8; 2026: 4.1.
- Net lending/borrowing (overall balance, percent of GDP): 2017: 3.3; 2018: 2.8; 2019: 2.4; 2020: -2.9; 2021: -2.3; 2022: 0.6; 2023: 2.0; 2024: 2.7; 2025: 3.2; 2026: 3.5.
- Public debt (percent of GDP): 2017: 37.8; 2018: 36.3; 2019: 35.4; 2020: 51.5; 2021: 56.7; 2022: 51.9; 2023: 43.0; 2024: 41.0; 2025: 39.5; 2026: 38.1.
- General government revenue (millions): 2017: 1,008.5; 2018: 1,048.6; 2019: 1,071.4; 2020: 1,021.8; 2021: 1,016.9; 2022: 1,075.6; 2023: 1,131.3; 2024: 1,187.5; 2025: 1,231.4; 2026: 1,273.2.
- General government expenditure (millions): 2017: 920.1; 2018: 973.6; 2019: 1,003.2; 2020: 1,093.2; 2021: 1,078.4; 2022: 1,057.8; 2023: 1,071.7; 2024: 1,105.2; 2025: 1,131.5; 2026: 1,160.1.
- Net lending/borrowing (millions): 2017: 88.4; 2018: 75.1; 2019: 68.2; 2020: -71.3; 2021: -61.5; 2022: 17.8; 2023: 59.7; 2024: 82.3; 2025: 99.9; 2026: 113.1.
- Financing: Net incurrence of liabilities (millions) projections include negative net incurrence values in some years and specific new issuances and amortizations split between domestic and external (detailed figures provided in the source tables).

### Central government (selected indicators)
- Central government revenue (percent of GDP): 2017: 19.6; 2018: 19.6; 2019: 19.5; 2020: 20.6; 2021: 18.8; 2022: 19.2; 2023: 19.3; 2024: 19.4; 2025: 19.5; 2026: 19.6.
- Central government expenditure (percent of GDP): 2017: 19.3; 2018: 19.7; 2019: 19.3; 2020: 24.9; 2021: 22.1; 2022: 20.5; 2023: 19.4; 2024: 18.9; 2025: 18.7; 2026: 18.5.
- Primary balance (percent of GDP): 2017: 0.8; 2018: 0.4; 2019: 0.6; 2020: -3.8; 2021: -2.8; 2022: -0.9; 2023: 0.3; 2024: 1.0; 2025: 1.3; 2026: 1.5.
- Net lending/borrowing (overall balance, percent of GDP): 2017: 0.3; 2018: -0.1; 2019: 0.2; 2020: -4.3; 2021: -3.3; 2022: -1.4; 2023: -0.1; 2024: 0.5; 2025: 0.9; 2026: 1.1.
- Central government public debt (percent of GDP): 2017: 34.3; 2018: 33.2; 2019: 32.7; 2020: 48.4; 2021: 53.8; 2022: 49.1; 2023: 40.4; 2024: 38.4; 2025: 37.1; 2026: 35.7.

### Banking sector and financial soundness indicators (FSIs)
- Regulatory capital to risk-weighted assets: Dec-18: 20.4; Mar-19: 20.4; Jun-19: 20.1; Sep-19: 20.4; Dec-19: 21.8; Mar-20: 20.3; Jun-20: 21.3; Sep-20: 20.9; Dec-20: 21.7.
- Regulatory Tier 1 capital to risk-weighted assets series includes values such as 20.1, 19.8, 20.0, 19.1, 21.0, 19.4, 20.4, 20.0, 20.8.
- Nonperforming loans to total gross loans: Dec-18: 7.1; Mar-19: 7.1; Jun-19: 7.6; Sep-19: 7.0; Dec-19: 7.3; Mar-20: 6.3; Jun-20: 6.5; Sep-20: 5.9; Dec-20: 6.1.
- Nonperforming loans net of provisions to capital: indicators include values such as 21.6, 21.2, 23.4, 23.2, 21.4, 20.7, 19.6, 19.7, 18.4 for selected dates.
- Credit to nonfinancial private sector (percent of GDP): level entries include 147.9, 135.9, 151.4 (selected historical entries).
- Customer deposits to total (noninterbank) loans: Dec-18 through Dec-20 show values such as 146.5, 149.0, 148.2, 149.3, 149.2, 154.7, 152.8, 153.8, 150.7.
- Liquidity coverage ratio (LCR) (period series): e.g., 235.9 (Dec-18), 223.0 (Mar-19), 187.1 (Jun-19).
- Return on assets and return on equity show notable declines at various dates (examples: return on assets values 0.7, 0.2, 0.3, 0.3, 0.7, 0.2, 0.4, 0.5, 0.5; return on equity values 7.1, 2.1, 2.6, 3.3, 6.0, 2.2, 3.3, 4.3, 4.4).

### Social and demographic indicators (selected)
- Population (2019): 77,543.
- Poverty Rate (percent, 2019): 13.
- Per capita income (2019, euros): 36,335.
- Human Development Index Rank (2019): 36 (out of 189).
- Gini Index (2019): 35.
- Life expectancy at birth (2011): 81.9.

### Annex I — Arrangements with the European Union
- Monetary Agreement:
  - Since 2012, Banque de France (BdeF) and Banco de España (BdeE) may issue low-denomination euro coins on Andorra’s behalf.
  - Andorra committed to adopt all EU banking and financial sector directives and regulations within a 10-year horizon and to prevent counterfeiting and address AML/CFT risks.
  - Banking supervisors are eligible for technical assistance from the ECB under the agreement.
  - Andorra adopted Basel III capital rules through the EU’s Capital Requirements Directive (CRD IV) and Regulation (CRR) in 2019, phasing in a proportionate set of rules through 2022.
  - The legal text states the eurosystem will not deal with or accept Andorran securities for eurozone monetary policy purposes.
  - A Joint Committee for the Monetary Agreement meets once a year and comprises representatives from Andorra, the European Commission (EC), the European Central Bank (ECB), BdeF, and BdeE; the Andorran delegation includes Ministries of Finance, Foreign Affairs, and Justice and Interior, AFA, AREB, and UIFAND.
- Association Agreement:
  - Discussions on progressive access to the EU internal market have been ongoing since December 2014, aiming for market access comparable to that enjoyed by European Economic Area Members.
  - The Andorran government views the Association agreement as a priority to diversify the economy and commits to international standards of transparency and exchange of information.
  - The EU and Andorran authorities have agreed on the institutional framework and the free movement of goods.

*Sources: Govern d'Andorra Department of Statistics, Andorran authorities, Eurostat, and IMF staff calculations.*

### Annex II. Fiscal Rule

### Annex II. Fiscal Rule

### Legal framework
- Law 32/2014, and subsequent modifications, introduced a multi-annual budget framework covering the four-year central and local governments’ mandates and is updated every year.
- The Court of Auditors is responsible for controlling compliance with the obligations established by the Law.
- The fiscal framework sets limits to debt, deficit, current spending, and revenue.

### Escape clause and structural fund
- The fiscal framework includes an escape clause, which was activated in 2020 due to the fiscal impact of the COVID-19 pandemic.
- Debt and spending limits associated with the central government can only be exceeded under extraordinary circumstances, comprising natural disasters, serious emergencies, and extraordinary events, including those of economic nature.
- When the escape clause is activated the General Council of the Parliament should approve:
  - (i) an extraordinary budget that exceeds the debt and spending limits established by the Law; and
  - (ii) a plan that sets the path to return to compliance with the debt and spending limits within six years.
- To finance extraordinary expenses, the Law creates a structural fund (‘compte de compensació’) that should be endowed with an amount equivalent to 0.1 percent of the total budgeted expenses of the central and local governments.
- The escape clause does not apply to the local governments, which should always comply with the limits established by the Law. If under exceptional circumstances the budget allocation for the local governments is not enough, the extraordinary need should be covered by the central government.

### Fiscal limits (as specified under the Law)
- Debt
  - General government 1/ 55 percent of nominal GDP
  - Central government 2/ 40 percent of nominal GDP
  - Public or para-public institutions associated with the central government: 50 percent of each institution’s own equity
  - Local government (incl. public and para-public institutions associated with the local government): 200 percent of the average budgeted revenues in the preceding 3 years
- Deficit
  - Overall deficit of the central government 2/ 1 percent of nominal GDP
  - Overall deficit of the local government (incl. public and para-public institutions associated with the local government): No limit, as long as the local government complies with the debt limit
- Current Spending
  - Growth of current primary spending of the general government 1/ 3/: Up to the nominal GDP growth if positive, or zero otherwise; the limit does not apply to the local government if its debt (incl. public and para-public institutions associated with the local government) is below 180 percent of the average budgeted revenue in the preceding three years
- Revenue
  - Direct Taxes: 40 percent of total tax collection (excluding taxes from international trade)

Definitions and notes from the Annex:
- 1/ For the purpose of this annex, the general government includes the central and local governments and excludes the pension fund.
- 2/ The central government, for the purpose of this annex, corresponds to Govern d’Andorra and any public or para-public institutions associated with it.
- 3/ Current primary spending is defined as the sum of wages and salaries, goods and services and current transfers.

### Debt developments and Public Debt Sustainability Assessment (DSA) key findings
- Public debt history and pandemic impact:
  - The general government debt stock averaged 39.2 percent of GDP in 2010–2018.
  - Peak of 42.5 percent of GDP in 2013.
  - Declined to 35.4 percent of GDP in 2019.
  - Rose sharply in 2020 to 51.5 percent of GDP reflecting:
    - deterioration of the primary balance amidst the COVID-19 crisis;
    - accumulation of debt repayments; and
    - part of the authorities’ pre-financing strategy (large but temporary increase in net acquisition of financial assets to be used for future debt service).
- Historical gross financing needs:
  - Average annual gross financing needs of 8.8 percent of GDP in 2010–2019, reflecting short average debt maturity of about three years.
- 2021 financing and reprofiling:
  - Authorities issued Eurobonds worth €500 million in 2021, with a maturity of 10 years, as part of a program totaling €1.2 billion over 2021–22.
  - Such reprofiling increases central government’s debt by 10 percentage points of GDP to 56.7 percent of GDP in 2021 but is expected to lower annual gross financing needs from 2023 onwards.
- Baseline debt trajectory:
  - Public debt is projected to increase further in 2021 due to pre-financing strategy and then decline rapidly afterwards.
  - Under the baseline scenario, gross general government debt is expected to reach 38.1 percent by 2026 and continue declining over the long term.
- DSA judgement:
  - Andorran public debt remains sustainable under the baseline scenario and under a high public investment scenario.
  - However, a negative shock to real GDP growth or a sharp increase in contingent liabilities could slow consolidation and worsen debt dynamics, though debt remains sustainable under such scenarios.

### Baseline assumptions and projections
- Real GDP:
  - Estimated fall of 11.8 percent in 2020.
  - Projected to recover by 5.8 percent in 2021.
  - Projected to remain strong in 2022 and converge to the Euro Area (EA) average by 2026.
- Primary balances and timing:
  - General government primary surpluses starting from 2022.
  - Central government primary surpluses starting from 2023.
- Inflation:
  - Inflation for 2021 is estimated at 0.3 percent, and projected to remain subdued in the short-term, only slowly rising toward EA levels by 2025.
- Sovereign spreads:
  - Sovereign borrowing spreads are assumed to be uniformly 147 bps above German yields for all maturities (in line with the actual yield on privately placed external bonds in April 2021).
- Realism and credibility:
  - Projected adjustment is credible yet sizable; authorities’ track-record of prioritizing fiscal discipline supports credibility.

### Stress tests and alternative scenarios (selected results)
- A shock to real GDP growth scenario:
  - Under this scenario public debt declines only to 51.2 by 2026 (compared to 38.1 under the baseline).
  - Gross debt in percent of revenue declines from 147.4 in 2021 to 131 in 2026, instead of the baseline projection.

### Policy implications and recommended responses (as presented)
- Maintain fiscal sustainability by continuing to adhere to the fiscal rule.
- Carefully manage gross financing needs and project soundness when increasing infrastructure spending.
- Diversify government financing base and reduce gross financing needs.
- Build reserve assets to cushion possible liquidity shortages.
- Ensure the financial sector’s capacity to support the real economy through credit growth and assess bank capital needs and supervision to limit contingent liabilities.
- Continue prioritizing consolidation once temporary COVID-19 measures expire, while allowing space for gradual fiscal buffers and credible consolidation.

*International Monetary Fund — Annex II. Fiscal Rule (extracted content).*

### 97.5 percent under the baseline; and (iii) gross financing needs peak at 27.4 percent of GDP in 2022,

### 1andea2021001 - 97.5 percent under the baseline; and (iii) gross financing needs peak at 27.4 percent of GDP in 2022,

### Stress-test findings and scenario comparisons
- Under baseline, gross financing needs peak at 27.4 percent of GDP in 2022, compared to 23.7 under the baseline scenario.  
- Shocks to the primary balance, the real exchange rate, or the real interest rate do not lead to significant deviations from the baseline.  
- An alternative contingent liability shock would result in higher debt ratios and gross financing needs.

### Contingent liability shock (assumptions and impacts)
- Assumes a one-time increase in non-interest expenditures equivalent to 1 percent of banking sector assets leading to a real GDP growth shock.  
- Represents a call on 25 percent of €135 million worth of outstanding public guarantees provided for bank loans to liquidity-strapped companies as part of the COVID-19 related measures, and additional 2 percent of GDP for the case of an adverse shock in the banking sector.  
- Under this scenario, gross financing needs peak at 30.8 percent of GDP in 2022.  
- This is 7.1 percentage points higher than the baseline, of which 5.1 percentage points of GDP result from the outstanding public guarantees.

### Public investment alternative (assumptions and rationale)
- A modest increase in public investment financed with new debt could support the economic recovery and would not lead to significant increases in public debt.  
- Assuming an increase of around 1 percent of GDP in 2021–2023—financed by issuing €100 million extra long-term debt—would keep debt ratios close to the baseline scenario as the positive impact on GDP growth outweighs the burden of the additional cost.  
- Rationale: If carefully selected, public investment projects could support the economic recovery as the fiscal multiplier of investment and job-creating potential are assumed to be high in the post-pandemic recovery phase; improved infrastructure would positively affect long-term potential growth and strengthen resilience and sustainability.

### Baseline DSA projections and key indicators (selected)
- Nominal gross public debt: 39.2 (2019), 35.4 (2020), 51.5 (2021), 56.7 (2022), 51.9 (2023), 43.0 (2024), 41.0 (2025), 39.5 (2026), 38.1 (projection).  
- Public gross financing needs: 8.6 (2019), 10.1 (2020), 16.8 (2021), 13.5 (2022), 23.7 (2023), 5.3 (2024), -1.5 (2025), -2.0 (2026), -2.4 (cumulative).  
- Real GDP growth (in percent): -0.1 (2019), 2.0 (2020), -11.8 (2021), 5.8 (2022), 4.1 (2023), 3.6 (2024), 2.8 (2025), 1.5 (2026), 1.5 (projection).  
- Inflation (GDP deflator, in percent): 0.5 (2019), 1.4 (2020), -0.1 (2021), 0.6 (2022), 1.1 (2023), 1.4 (2024), 1.7 (2025), 1.7 (2026), 1.7 (projection).  
- Nominal GDP growth (in percent): 0.4 (2019), 3.4 (2020), -11.9 (2021), 6.5 (2022), 5.3 (2023), 5.0 (2024), 4.6 (2025), 3.2 (2026), 3.2 (projection).  
- Effective interest rate (in percent): 2.3 (2019), 1.4 (2020), 1.5 (2021), 1.3 (2022), 1.5 (2023), 2.2 (2024), 2.6 (2025), 2.6 (2026), 2.7 (projection).  
- Change in gross public sector debt (cumulative): 0.6 (2019), -0.9 (2020), 16.1 (2021), 5.2 (2022), -4.8 (2023), -8.8 (2024), -2.1 (2025), -1.4 (2026), -1.4 (cumulative), -13.4 (overall).  
- Primary deficit (contribution): -2.7 (2019), -2.9 (2020), 2.3 (2021), 1.7 (2022), -1.2 (2023), -2.6 (2024), -3.3 (2025), -3.8 (2026), -4.1 (cumulative), -13.3 (overall).  
- Primary (noninterest) revenue and grants: 34.3 (2019), 38.0 (2020), 41.1 (2021), 38.4 (2022), 38.6 (2023), 38.7 (2024), 38.8 (2025), 39.0 (2026), 39.1 (projection), 232.8 (cumulative).  
- Primary (noninterest) expenditure: 31.6 (2019), 35.1 (2020), 43.4 (2021), 40.2 (2022), 37.4 (2023), 36.1 (2024), 35.5 (2025), 35.3 (2026), 35.0 (projection), 219.4 (cumulative).  
- Automatic debt dynamics contribution: 0.7 (2019), -0.7 (2020), 5.3 (2021), -2.5 (2022), -2.0 (2023), -1.4 (2024), -0.8 (2025), -0.2 (2026), -0.2 (projection), -7.1 (cumulative).  
- Real interest rate contribution: 0.7 (2019), 0.0 (2020), 0.6 (2021), 0.3 (2022), 0.2 (2023), 0.4 (2024), 0.3 (2025), 0.4 (2026), 0.4 (projection), 2.0 (cumulative).  
- Real GDP growth contribution: 0.0 (2019), -0.7 (2020), 4.7 (2021), -2.8 (2022), -2.2 (2023), -1.8 (2024), -1.2 (2025), -0.6 (2026), -0.6 (projection), -9.1 (cumulative).  
- Net acquisition of financial assets (negative) / Other identified debt-creating flows: 0.0 (2019), 0.0 (2020), 8.5 (2021), 6.0 (2022), -1.6 (2023), -4.8 (2024), 2.0 (2025), 2.5 (2026), 2.9 (projection), 7.1 (cumulative).  
- Residual, including asset changes: 2.6 (2019), 2.7 (2020), 0.0 (2021), 0.0 (2022), 0.0 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026), 0.0 (projection).

### Notes on realism and forecast track record
- The shock to real GDP growth assumes that real GDP growth in 2021 and 2022 is lower than in the baseline by one standard deviation; which in turn leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth), and the deterioration in primary balance lead to higher interest rate.  
- Forecast track record charts and realism assessments are presented for Real GDP Growth, Primary Balance, and Inflation (Deflator), with percentile and distributional comparisons referenced to all countries and historical samples.

*Source: IMF staff.*

### Annex Figure V.5. Andorra: Public DSA—Stress Tests

### Annex Figure V.5. Andorra: Public DSA—Stress Tests

### Stress-test scenarios and underlying assumptions
- Scenarios covered:
  - Baseline
  - Primary Balance Shock
  - Real GDP Growth Shock
  - Real Interest Rate Shock
  - Real Exchange Rate Shock
  - Combined Shock
  - Contingent Liability Shock
  - Contingent Liability Shock - Guarantees
- Contingent liability shock assumptions (staff note 1/):
  - One-time increase in non-interest expenditures equivalent to 1.02% of banking sector assets (25% of €135 million outstanding with public guarantees plus 2% of GDP).
  - Standard real GDP shock: real GDP growth is reduced by 1 standard deviation for 2 consecutive years.
  - Revenue-to-GDP ratio remains the same as in the baseline.
  - Level of non-interest expenditures is the same as in the baseline (plus the contingent liability).
  - Deterioration in primary balance leads to higher interest rate.
  - Decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth).
  - The "contingent liability shock - guarantees" assumes the combination of a one-time increase in non-interest expenditures equivalent only to the public guarantees portion and a standard real GDP shock.

### Scenario outcomes — yearly series by scenario (2021–2026)
- Primary Balance Shock:
  - Real GDP growth: 5.8; 4.1; 3.6; 2.8; 1.5; 1.5
  - Inflation: 0.6; 1.1; 1.4; 1.7; 1.7; 1.7
  - Primary balance: -1.7; -0.2; 1.9; 3.0; 3.5; 3.9
  - Effective interest rate: 1.3; 1.5; 2.3; 2.7; 2.7; 2.8

- Real GDP Growth Shock:
  - Real GDP growth: 5.8; -0.6; -1.1; 2.8; 1.5; 1.5
  - Inflation: 0.6; -0.1; 0.2; 1.7; 1.7; 1.7
  - Primary balance: -1.7; -1.0; -1.8; 3.3; 3.8; 4.1
  - Effective interest rate: 1.3; 1.5; 2.4; 2.6; 2.6; 2.7

- Real Interest Rate Shock:
  - Real GDP growth: 5.8; 4.1; 3.6; 2.8; 1.5; 1.5
  - Inflation: 0.6; 1.1; 1.4; 1.7; 1.7; 1.7
  - Primary balance: -1.7; 1.2; 2.6; 3.3; 3.8; 4.1
  - Effective interest rate: 1.3; 1.5; 3.0; 3.5; 3.6; 3.6

- Real Exchange Rate Shock:
  - Real GDP growth: 5.8; 4.1; 3.6; 2.8; 1.5; 1.5
  - Inflation: 0.6; 1.5; 1.4; 1.7; 1.7; 1.7
  - Primary balance: -1.7; 1.2; 2.6; 3.3; 3.8; 4.1
  - Effective interest rate: 1.3; 1.5; 2.2; 2.6; 2.6; 2.7

- Combined Shock:
  - Real GDP growth: 5.8; -0.6; -1.1; 2.8; 1.5; 1.5
  - Inflation: 0.6; -0.1; 0.2; 1.7; 1.7; 1.7
  - Primary balance: -1.7; -1.0; -1.8; 3.0; 3.5; 3.9
  - Effective interest rate: 1.3; 1.5; 3.0; 3.3; 3.4; 3.4

- Contingent Liability Shock:
  - Real GDP growth: 5.8; -0.6; -1.1; 2.8; 1.5; 1.5
  - Inflation: 0.6; -0.1; 0.2; 1.7; 1.7; 1.7
  - Primary balance: -1.7; -4.4; -1.8; 3.3; 3.8; 4.1
  - Effective interest rate: 1.3; 1.6; 2.8; 3.0; 3.0; 3.0

- Contingent Liability Shock - Guarantees:
  - Real GDP growth: 5.8; -0.6; -1.1; 2.8; 1.5; 1.5
  - Inflation: 0.6; -0.1; 0.2; 1.7; 1.7; 1.7
  - Primary balance: -1.7; -2.4; -1.8; 3.3; 3.8; 4.1
  - Effective interest rate: 1.3; 1.5; 2.5; 2.8; 2.8; 2.8

### Key fiscal and financing indicators shown in the Annex figures (time horizon 2021–2026)
- Gross Nominal Public Debt (in percent of GDP): figures are presented for 2021–2026 under baseline and stress scenarios (charts in source).
- Gross Nominal Public Debt (in percent of Revenue): figures are presented for 2021–2026 under baseline and stress scenarios (charts in source).
- Public Gross Financing Needs (in percent of GDP): figures are presented for 2021–2026 under baseline and stress scenarios (charts in source).

### Principal findings and observed vulnerabilities (from the staff report excerpts)
- Andorra experienced a 12% fall in GDP in 2020 due to COVID-19.
- Unemployment increased in 2020 but remained low at 3.0%.
- Recent EUR 500 million 10-year green/sustainable bond issuance temporarily increased public debt while lengthening the maturity profile.
- Staff assessment: public debt remains sustainable even under a higher public investment scenario; public debt limit of 40% of GDP will be reached in 2025 under that scenario (one year later than in baseline).
- Balance of payments: newly published BoP statistics reveal a sizeable current account surplus.

### Policy recommendations and authorities’ commitments
- Strengthen financial sector oversight:
  - AFA banking-sector inspection on COVID-related lending and moratoria to validate correct implementation and reporting.
  - Measures on related-party financing: Pilar II mention and expectation of a 15% related-party-financing-to-own-funds limit.
  - Reporting of detailed cross-border transfer information via Technical Communique (AFA and UIFAND).
  - LCR dashboard to be reported monthly to the Banking Supervision Team and reviewed by AFA’s General Management.
- Continue to meet highest international standards on anti-money laundering and terrorism financing; transposition of the 5th EU Anti-money laundering Directive entering final phase.
- Fiscal prudence and pension reform to control medium-term fiscal risks.
- Build international reserves to 12% of GDP by 2026 (authorities concur with staff methodology and timing).
- Front-load public investment focused on a green, digital and sustainable economy while recognizing potentially subdued multipliers in a small economy.
- Develop IIP statistics and continue receiving Fund technical assistance to close statistical gaps.
- Continue efforts to diversify the economy, finalize Association Agreement with the EU, implement Horizon 2023 digitalization Strategy, and pursue climate goals (carbon neutrality by 2050 and a carbon tax proposal under preparation).

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1andea2021001.pdf_