## PRINCIPALITY OF ANDORRA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (1andea2022001)

## Source details

**Canonical URL:** [PRINCIPALITY OF ANDORRA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (1andea2022001)](https://www.imf.org/-/media/files/publications/cr/2022/english/1andea2022001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2022/english/1andea2022001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2022/english/1andea2022001.pdf.json)

---

### Executive Board Assessment
- The Andorran economy is recovering strongly from a deep pandemic-related recession.
- Growth surprised on the upside in 2021 and is expected to remain strong in 2022.
- Labor market conditions improved, with unemployment amongst the lowest in Europe.
- Headline inflation accelerated, but less so than in neighboring countries; pressures are expected to recede in the second half of 2023.
- Despite the gradual withdrawal of COVID measures, the policy mix remained supportive in 2021.
- Over the medium term, output is projected to converge to the pre-pandemic trend with limited scarring.
- Risks to the outlook are tilted to the downside, notably related to the war in Ukraine.

### Recent Developments and Outlook
- Real GDP (annual): -11.2 percent (2020); 8.9 percent (2021); projections: 4.5 percent (2022), 2.7 percent (2023), 2.2 percent (2024), 1.6 percent (2025), 1.5 percent (2026), 1.5 percent (2027).
- Nominal GDP (annual): -10.2 percent (2020); 11.2 percent (2021); projections: 8.2 percent (2022), 4.7 percent (2023), 3.7 percent (2024), 3.2 percent (2025), 3.2 percent (2026), 3.3 percent (2027).
- GDP deflator (annual): 1.1 percent (2020); 2.1 percent (2021); projections: 3.5 percent (2022), 1.9 percent (2023), 1.4 percent (2024), 1.6 percent (2025), 1.7 percent (2026), 1.7 percent (2027).
- Inflation (percent, period average): 0.3 percent (2020); 1.7 percent (2021); projections: 3.9 percent (2022), 2.0 percent (2023), 1.3 percent (2024), 1.6 percent (2025), 1.7 percent (2026), 1.7 percent (2027).
- Inflation (percent, end of period): -0.2 percent (2020); 3.3 percent (2021); 2.0 percent (2022); 1.1 percent (2023); 1.5 percent (2024); 1.7 percent (2025–2027).
- Unemployment rate (percent): 2.9 percent (2020); 2.9 percent (2021); projections: 2.0 percent (2022), 1.8 percent (2023), 1.7 percent (2024–2027).
- Real GDP remained 2.2 percent below pre-crisis levels by end-2021 despite an 8.9 percent rebound in 2021.
- Drivers of 2021 recovery: rebound in tourism, retail trade, construction, and professional services; construction boom noted as partly temporary.
- Staff baseline: real GDP growth 4.5 percent in 2022; consumption the main driver; private investment expected to moderate.

### Labor Market, Inflation Dynamics, and Policy Responses
- Employment: "fully recovered from low crisis levels" with heterogeneity across groups; unemployment almost doubled in 2020 and remained above 2019 levels at end-2021 for all groups, especially the young.
- Labor market reliance on seasonal and foreign workers; limited unemployment benefits; inward/outward movements of workers are adjustment mechanisms.
- Real wage growth: "about 2 percent in 2021."
- Headline inflation: "4.9 percent in March 2022" (highest in last 10 years).
- Comparative inflation: "9.8 percent in Spain and 5.1 percent in France in March 2022."
- Electricity tariffs: public provider increased tariffs by "15–25 percent at end-March 2022."
- Core inflation: "2.1 percent in March 2022."
- Government measures in May 2022 to preserve purchasing power:
  - increasing the minimum wage;
  - making public transportation free for all Andorrans;
  - making requirements for housing and education support more flexible;
  - reducing indirect taxes on certain products;
  - reducing the hydrocarbon tax for companies.

### External Sector and Reserves
- Current account (percent of GDP): 14.6 (2020); 15.9 (2021); projections: 16.8 (2022), 17.3 (2023), 17.7 (2024), 18.1 (2025), 18.5 (2026), 19.0 (2027).
- Balance of goods and services (percent of GDP): 4.0 (2020); 5.3 (2021); projections: 6.2 (2022), 6.6 (2023), 7.0 (2024), 7.5 (2025), 7.9 (2026), 8.3 (2027).
- Exports of goods and services (percent of GDP): 63.7 (2020); 66.3 (2021); projections rising to 71.9 (2027).
- Imports of goods and services (percent of GDP): 59.8 (2020); 61.1 (2021); projections rising to 63.6 (2027).
- Primary income, net: 12.0 percent (2019–2027 series shown as 12.0).
- Gross international reserves (mill. euros): 41.9 (2020); 138.1 (2021); projections: 238.1 (2022–2027).
  - Note: increase in reserves in 2021 due to general SDR allocation (SDR 79.1 million to Andorra).
- Annex IV estimate of potential liquidity needs: €244 million, equivalent to 8.7 percent of GDP; baseline reserves held include IMF reserve tranche + SDR holdings 5 percent of GDP and deposit at Bank of Spain 3.7 percent of GDP.

### Fiscal Outlook, Public Debt, and Debt Management
- General government revenue (percent of GDP): 40.4 (2020); 38.9 (2021); projections: 38.3 (2022), 38.9 (2023), 39.1 (2024), 39.2 (2025), 39.3 (2026–2027).
- General government expenditure (percent of GDP): 43.2 (2020); 39.5 (2021); projections: 36.8 (2022), 36.7 (2023), 36.4 (2024), 36.0 (2025), 35.7 (2026), 35.5 (2027).
- Interest (percent of GDP): 0.6 (2020); 0.7 (2021); projections: 0.6 (2022), 0.9 (2023), 0.8 (2024–2027).
- Primary balance (percent of GDP): -2.2 (2020); 0.2 (2021); projections: 2.1 (2022), 3.1 (2023), 3.6 (2024), 4.0 (2025), 4.3 (2026), 4.6 (2027).
- Net lending/borrowing (percent of GDP): -2.8 (2020); -0.5 (2021); projections: 1.5 (2022), 2.2 (2023), 2.7 (2024), 3.2 (2025), 3.5 (2026), 3.8 (2027).
- Public debt (percent of GDP): 46.3 (2020); 48.5 (2021); projections: 44.3 (2022), 42.0 (2023), 39.9 (2024), 38.6 (2025), 37.4 (2026), 36.2 (2027).
  - Sharp increases in 2020–21 partly explained by a pre-financing strategy to cover large amortization due in 2021–22.
- Central government overall deficit in 2021: "1.4 percent of GDP."
- Central government debt peaked at "46.2 percent of GDP by end-year."
- Eurobond issuance in 2021: "€675 million in 2021" (€500 million in April and €175 million in October); program nearly €1.3 billion over 2021–22. Average maturity increased from 2.7 years in 2019 to about 8 years by end-2022.
- Debt service: projected decline from average 16.7 percent of GDP (2011–22) to about 3 percent of GDP (2023–2027) due to longer maturities.
- Debt rule targets: central government fiscal rule target of 40 percent of GDP by 2023.

### Banking Sector and Financial Stability
- Regulatory capital to risk-weighted assets: 22.5 percent (2019); 21.5 percent (2020).
- Nonperforming loans to total gross loans: 7.3 percent (2019); 6.1 percent (2020); 5.2 percent (2021).
- Credit to nonfinancial private sector (percent of GDP): 150.3 (2020); 135.0 (2021).
  - Corporates: 76.8 (2020); 68.7 (2021).
  - Households: 73.5 (2020); 66.3 (2021).
- Credit to public sector (percent of GDP): 6.1 (2020); 2.7 (2021).
- Andorran banks: consolidated assets about 600 percent of GDP in 2021; off-balance-sheet assets under management amounting 23 times Andorra’s GDP.
- Liquidity Coverage Ratio (LCR): 220 percent by end-2021 (above 100 percent EU limit); system LCR over 200 percent in 2021 in Annex data series.
- Nonresident cash and deposits: 148 percent of GDP in 2020.
- Staff liquidity stress test: a liquidity gap of 4.8 percent of GDP could emerge in an extreme adverse scenario.
- Vulnerabilities: private banking model risks, internationalization strategy, overreliance on foreign funding, large off-balance-sheet assets.
- Recommendations for financial sector:
  - Close monitoring after withdrawal of COVID-related support.
  - Strengthen liquidity supervision: enhance monitoring and stress testing of net liquidity outflows, analyze liquidity risks beyond 30-day horizon, include onsite liquidity inspections, accelerate liquidity contingency plans.
  - Strengthen AFA funding and staffing.
  - Enforce limits on related party lending and large exposures; ensure consolidation does not reduce competition.

### Fiscal Policy, Support Withdrawal, and Contingency
- Fiscal COVID-related measures: declined from 9.1 percent of GDP (2020) to 3.6 percent of GDP (2021).
- Soft loans program outstanding: nearly €130 million outstanding loans and €5 million in provisions in the government budget by end-2021.
  - Authorities expect 50 percent of outstanding soft loans will be converted to traditional loans and the rest paid back upon expiration; as of mid-March 2022 almost 25 percent had been converted.
- 2022 budget projected central government deficit: 0.3 percent of GDP.
- Recommendations:
  - Be ready to reinstate support if recovery falters; provide targeted support to sectors still emerging to prevent scarring.
  - Balance consolidation to meet fiscal rule targets with growth-enhancing spending.
  - Use fiscal space for upskilling workforce and boost central government investment (currently below pre-COVID levels).
  - Near-term: reassess project pipeline, advance digital transformation, diversify tourism. Medium-term: expand artificial snowmaking, advance energy transition.

### Pensions, Social Security, and Contingent Liabilities
- Andorran social security fund projected to have annual deficits starting in 2024 and to deplete reserve funds by 2039.
- Social security system projected to accumulate deficits rising to 9 percent of GDP per year by 2040.
- Under the law, deficits are covered by the Fons de Reserva de Jubilació up to previous year gains and by central government for the rest.
- Policy guidance: enact pension reform early with comprehensive measures including increases in contribution rate, conversion factor, and retirement age; consider but do not rely solely on expanding the “second pillar”.

### Structural Reforms, Diversification, and Human Capital
- Potential growth around 1.5 percent; pandemic permanent income loss estimated at "3.2 percent of the pre-crisis potential GDP."
- Structural challenges: geographic accessibility, limited affordable housing, small internal market, concentration in tourism and banking, weak investment, red tape, limited financing, difficulties attracting talent.
- Findings: average days to open a company reduced from 200 to 90 days in 2021.
- Recommendations:
  - Diversify and improve quality of tourism, develop year-round cultural and sport experiences, improve connectivity (flights, potential train connections), leverage new heliport, tram, cable transport, multi-purpose arena.
  - Improve tourism service standards to generate higher revenues.
  - Create favorable environment for high value-added investment: reduce administrative rigidities, improve access to alternative financing, attract and retain talent.
  - Continue digitalization, implement legal framework for entrepreneurship and innovation, ease immigration for digital entrepreneurs and workers.
  - Promote e-sports, fintech, biotechnology; develop innovation ecosystem (labs, sandboxes, special economic zones).
  - Coordinate education, active labor market, and migration policies; expand reskilling/upskilling programs; strengthen Public Employment Service and Center for Lifelong Training.
  - Address affordable housing: create Housing Institute, tax empty properties more heavily, increase social housing stock.

### Climate Resilience, Governance, and AML/CFT
- Climate and energy targets:
  - Increase local energy production from about 20 percent to 33 percent by 2030 and to 50 percent by 2050.
  - Law 21/18 goal: reduce greenhouse gas emissions by 37 percent by 2030.
  - Ski resorts: 65 percent of ski areas equipped for artificial snow; investments in artificial snowmaking and reducing electricity dependence.
- Governance and transparency:
  - Accession to the IMF in October 2020; e-GDDS National Summary Data Page launched May 6, 2022.
  - Recommendations: ratify UNCAC, develop anti-corruption strategy, reform public procurement, publish beneficial ownership information for procurement awardees.
  - Public procurement reform expected to introduce new contracting platform and electronic invoicing; public procurement website launch planned for September 2022.
- AML/CFT:
  - Continue alignment to FATF standards, address virtual asset service provider risks, refine national risk assessment, focus resources on higher risk areas, impose effective sanctions.
  - AFA introduced quarterly reporting for cross-border transactions of supervised entities and subsidiaries.

### External Sector Assessment (Annex I) — Key Findings
- 2021 external position stronger than implied by fundamentals; one of the world’s largest current account surpluses.
- Data limitations: BOP data available from 2017 to 2020 and IMF estimates for 2021; IIP data 2018–2020 only.
- IIP structure (2020, percent of GDP): NIIP 265; Gross Assets 581.6; Debt Assets 178; Gross Liabilities 316.6; Debt Liabilities 38.8.
- Nonresident deposits concentrated in currency and deposits estimated at 148 percent of GDP.
- CA model (2021): CA-Actual 15.9; Adjusted CA 15.8; CA Norm 11.3; Adjusted CA Norm 12.3; CA Gap 3.5 (CA model).
- REER model gave alternative signal (CA gap -2.6) but model limitations noted; complementary evidence (ULC, CPI-based REER, cost-of-ski index) points to competitiveness/REER undervaluation.
- Policy implications: rebalance toward greater investment; increase private and public investment; improve business environment; diversify services and adapt to climate change.

### Debt Sustainability Analysis (Annex III) — Baseline and Stress Tests
- Coverage: general government debt (central, local, social security funds); over 90 percent of public debt owed by central government.
- Legal debt limits: 55 percent of GDP for general government (excluding pension fund) and 40 percent of GDP for central government.
- Historical and projected public debt (percent of GDP): averaged 39.2 (2011–19); 46.3 (2020); 48.5 (2021); 44.3 (2022); 42.0 (2023); 39.9 (2024); 38.6 (2025); 37.4 (2026); 36.2 (2027).
- Eurobond issuance program over 2021–22: €500 million in April 2021 (10-year, 1.25 percent); €175 million in October 2021 (20-year, 1.70 percent); €500 million in February 2022 (5-year, 1.3 percent).
- Baseline: debt projected to decline rapidly starting 2022; central government debt expected to reach 40 percent by 2023.
- Stress tests:
  - One-standard-deviation adverse growth shock for 2022–23: public debt rises to 54.4 percent of GDP in 2024 and declines to 51.7 percent in 2027 (baseline 36.2 percent in 2027).
  - Primary balance shock (deterioration by 2.3 percent of GDP in 2022–24): debt about 2.2 percentage points of GDP higher throughout horizon.
  - Contingent liability scenario (one-time increase in non-interest expenditures = 0.82 percent of banking sector assets, i.e., call on 25 percent of €130 million guarantees): public debt declines only to 47.9 percent of GDP by 2027 (baseline 36.2 percent).
- Policy implications: continue debt management to lengthen maturities and diversify funding; preserve primary surpluses and manage contingent liabilities.

### Reserve Adequacy and Liquidity (Annex IV)
- Available reserve assets: IMF reserve tranche position + SDR holdings ~5 percent of GDP; deposit at Bank of Spain €100 million = 3.7 percent of GDP.
- IMF staff estimate of potential liquidity needs: €244 million = 8.7 percent of GDP (62 percent BOP-related needs; 38 percent fiscal buffer; banks' liquidity gap zero in baseline).
- Recommendation: build international reserves on a precautionary basis given euroization and absence of lender of last resort; maintain fiscal savings to smooth shocks; continued vigilance on banking liquidity.

### Risks, Buffers, and Policy Priorities
- Downside risks: war in Ukraine, higher-than-expected inflation, resurgence of infections, prolonged high energy prices, second-round inflation effects from tight labor markets, lower tourism flows, climate-related risks affecting winter tourism.
- Upside risks: faster health improvements, stronger recovery in neighboring countries and tourism flows, faster drawdown of precautionary savings.
- Buffers: fiscal space and improved public debt management; well-capitalized and highly liquid banks; large current account surplus and growing international reserves; relatively low unemployment.
- Prioritized reforms:
  - Fiscal: rapid but balanced consolidation with growth-enhancing spending; meet fiscal rule target by 2023 while investing to raise potential growth.
  - Pensions: comprehensive reform to address projected deficits.
  - Financial supervision: strengthen liquidity supervision, AFA resourcing, and limits on related party and large exposures.
  - Structural: diversify economy, boost investment, improve human capital, expand affordable housing, ease immigration for high-skilled workers, digitalization, and climate resilience.
  - Governance and data: close data gaps, refine BoP and IIP statistics, ratify UNCAC, develop anti-corruption strategy, advance public procurement reform, publish beneficial ownership information.

*Staff report for the 2022 Article IV consultation (May 25, 2022).*

### 1.5 percent potential. Still, the missed 2020–21 winter season and the sharp contraction in

### PRINCIPALITY OF ANDORRA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION

### Executive Board Assessment
- The Andorran economy is recovering strongly from a deep pandemic-related recession.  
- Growth surprised on the upside in 2021 and is expected to remain strong in 2022.  
- Labor market conditions improved, with unemployment amongst the lowest in Europe.  
- Headline inflation accelerated, but less so than in neighboring countries, and pressures are expected to recede in the second half of 2023.  
- Despite the gradual withdrawal of COVID measures, the policy mix remained supportive in 2021.  
- Over the medium term, output is projected to converge to the pre-pandemic trend with limited scarring.  
- Risks to the outlook are tilted to the downside, notably related to the war in Ukraine.

### Recent Developments and Outlook
- Real GDP: -11.2 percent (2020); 8.9 percent (2021); projections: 4.5 percent (2022), 2.7 percent (2023), 2.2 percent (2024), 1.6 percent (2025), 1.5 percent (2026), 1.5 percent (2027).  
- Nominal GDP: -10.2 percent (2020); 11.2 percent (2021); projections: 8.2 percent (2022), 4.7 percent (2023), 3.7 percent (2024), 3.2 percent (2025), 3.2 percent (2026), 3.3 percent (2027).  
- GDP deflator: 1.1 percent (2020); 2.1 percent (2021); projections: 3.5 percent (2022), 1.9 percent (2023), 1.4 percent (2024), 1.6 percent (2025), 1.7 percent (2026), 1.7 percent (2027).  
- Inflation (percent, p.a.): 0.3 percent (2020); 1.7 percent (2021); projections: 3.9 percent (2022), 2.0 percent (2023), 1.3 percent (2024), 1.6 percent (2025), 1.7 percent (2026), 1.7 percent (2027).  
- Inflation (percent, e.o.p.): -0.2 percent (2020); 3.3 percent (2021); 2.0 percent (2022); 1.1 percent (2023); 1.5 percent (2024); 1.7 percent (2025–2027).  
- Unemployment rate (percent): 2.9 percent (2020); 2.9 percent (2021); projections: 2.0 percent (2022), 1.8 percent (2023), 1.7 percent (2024–2027).  
- Real GDP remained 2.2 percent below pre-crisis levels by end-2021 despite an 8.9 percent rebound in 2021.  
- Recovery drivers in 2021: rebound in tourism, retail trade, construction, and professional services; construction boom noted as partly temporary.

### External Sector and Reserves
- Current account (percent of GDP): 14.6 (2020); 15.9 (2021); projections: 16.8 (2022), 17.3 (2023), 17.7 (2024), 18.1 (2025), 18.5 (2026), 19.0 (2027).  
- Balance of G&S (percent of GDP): 4.0 (2020); 5.3 (2021); projections: 6.2 (2022), 6.6 (2023), 7.0 (2024), 7.5 (2025), 7.9 (2026), 8.3 (2027).  
- Exports of G&S (percent of GDP): 63.7 (2020); 66.3 (2021); projections rising to 71.9 by 2027.  
- Imports of G&S (percent of GDP): 59.8 (2020); 61.1 (2021); projections rising to 63.6 by 2027.  
- Primary income, net: 12.0 percent (2019–2027 series shown as 12.0).  
- Gross international reserves (mill. euros): 41.9 (2020); 138.1 (2021); projections: 238.1 (2022–2027).  
- Note: The increase in gross international reserves in 2021 is due to the general SDR allocation made in August 2021 (SDR 79.1 million to Andorra).

### Fiscal Outlook and Public Debt
- General government revenue (percent of GDP): 40.4 (2020); 38.9 (2021); projections: 38.3 (2022), 38.9 (2023), 39.1 (2024), 39.2 (2025), 39.3 (2026–2027).  
- General government expenditure (percent of GDP): 43.2 (2020); 39.5 (2021); projections: 36.8 (2022), 36.7 (2023), 36.4 (2024), 36.0 (2025), 35.7 (2026), 35.5 (2027).  
- Interest (percent of GDP): 0.6 (2020); 0.7 (2021); projections: 0.6 (2022), 0.9 (2023), 0.8 (2024–2027).  
- Primary balance (percent of GDP): -2.2 (2020); 0.2 (2021); projections: 2.1 (2022), 3.1 (2023), 3.6 (2024), 4.0 (2025), 4.3 (2026), 4.6 (2027).  
- Net lending/borrowing (percent of GDP): -2.8 (2020); -0.5 (2021); projections: 1.5 (2022), 2.2 (2023), 2.7 (2024), 3.2 (2025), 3.5 (2026), 3.8 (2027).  
- Public debt (percent of GDP): 46.3 (2020); 48.5 (2021); projections: 44.3 (2022), 42.0 (2023), 39.9 (2024), 38.6 (2025), 37.4 (2026), 36.2 (2027).  
- The sharp increases of debt in 2020–21 are partly explained by a pre-financing strategy to cover large amortization due in 2021–22.

### Banking Sector and Financial Stability
- Regulatory capital to risk-weighted assets: 22.5 percent (2019); 21.5 percent (2020).  
- Nonperforming loans to total gross loans: 7.3 percent (2019); 6.1 percent (2020); 5.2 percent (2021).  
- Credit to nonfinancial private sector (level, percent of GDP): 150.3 (2020); 135.0 (2021).  
  - Corporates: 76.8 (2020); 68.7 (2021).  
  - Households: 73.5 (2020); 66.3 (2021).  
- Credit to public sector (level, percent of GDP): 6.1 (2020); 2.7 (2021).  
- Andorran banks are well capitalized and highly liquid, but vulnerabilities include: private banking model risks, internationalization strategy, overreliance on foreign funding, and large off-balance-sheet assets under management.  
- Recommendations: close monitoring, strengthen liquidity supervision, endow AFA with more solid funding and staffing, enforce measures limiting related party lending and large exposures, and ensure consolidation does not reduce competition.

### Key Policy Priorities and Recommendations
- Fiscal policy:
  - Rapid fiscal consolidation should be balanced with growth-enhancing spending.  
  - Fast consolidation will continue in 2022; fiscal discipline and active debt management are projected to meet the fiscal rule target by 2023.  
  - With low potential growth and an investment gap, balance fiscal prudence with investment to boost medium-term growth.
- Pensions and social security:
  - Pension reform is imperative: the social security system will accumulate rising deficits of 9 percent of GDP per year by 2040.  
  - Act early with comprehensive measures, including increases in the contribution rate, the conversion factor, and in the retirement age.
- Structural reforms to raise potential growth:
  - Diversify the economy, reduce red tape and administrative rigidities, improve access to credit, expand affordable housing, ease immigration requirements to attract high-skilled workers, and invest in training to build human capital.  
  - Greening transportation and energy and reducing dependency on imported energy to build climate resilience.
- Governance, data, and AML/CFT:
  - Persevere with improving the governance framework and enhancing transparency.  
  - Continue closing data gaps and strengthening the AML/CFT framework.  
  - Further efforts: refine Balance of Payments data, develop other real, financial, and external sector statistics, ratify the United Nations Convention Against Corruption, develop an anti-corruption strategy, reform public procurement framework, and publish beneficial ownership information.

### Risks and Vulnerabilities
- Downside risks: war in Ukraine, higher-than-expected inflation, resurgence of infection rates.  
- Structural vulnerabilities: dependence on tourism, investment gap across sectors, exposure to natural events and climate-related risks.

*Staff report for the 2022 Article IV consultation (May 25, 2022).*

### 3.      Labor market conditions have improved, and unemployment is amongst the lowest in

### 1andea2022001 - 3.      Labor market conditions have improved, and unemployment is amongst the lowest in

### Labor market conditions and employment
- Employment rate has "fully recovered from low crisis levels", but with heterogeneity across groups.
- Unemployment almost doubled in 2020 from traditionally low levels and "was still above the 2019 level at end-2021 for all population groups, especially among the young."
- The Andorran labor market relies extensively on seasonal and foreign workers and provides limited unemployment benefits; inward and outward movements of workers are an important adjustment mechanism.
- Improvement in labor market associated with tighter conditions due to an unprecedented rise in vacancies.
- Real wage growth was "about 2 percent in 2021."
- Caution: traditional labor market metrics should be interpreted carefully given seasonal/foreign worker reliance and limited unemployment benefits.

### Inflation dynamics and policy responses
- Headline inflation rose to "4.9 percent in March 2022", the highest reading in the last 10 years.
- Price pressures more limited than neighboring countries: "9.8 percent in Spain and 5.1 percent in France in March 2022."
- Long-term contracts with foreign energy suppliers partly mitigated the rise in electricity prices.
- The electricity public provider increased tariffs by "15–25 percent at end-March 2022."
- Core inflation was "2.1 percent in March 2022", described as "slightly above the historical average but still consistent with contained wage growth."
- In May 2022, government measures to preserve households’ purchasing power included:
  - increasing the minimum wage;
  - making public transportation free for all Andorrans;
  - making requirements for housing and education support more flexible;
  - reducing indirect taxes on certain products;
  - reducing the hydrocarbon tax for companies.

### Fiscal stance and public debt (2021)
- Central government overall deficit in 2021: "1.4 percent of GDP."
- Central government debt peaked at "46.2 percent of GDP by end-year."
- As part of pre-financing strategy, authorities issued Eurobonds worth "€675 million in 2021", lengthening maturity and diversifying financing sources.
- Fiscal context: fiscal spending was expanded in 2021, with strong revenue performance—primarily driven by a recovery-induced increase in tax collection—partially compensating higher-than-budgeted emergency support spending.

### Banking sector and credit conditions
- Andorran banks remained resilient with solid capital and liquidity buffers through the pandemic.
- Nonperforming loan (NPL) ratio remained "still high due to legacy reasons", but declined across sectors, particularly wholesale and retail trade.
- High NPL ratio partly due to legacy loans from Banca Privada d‘Andorra (under resolution since 2015); when adjusted for these legacy assets, the NPL ratio is close to the regional average.
- Profitability recovered in 2021 "in line with European peers, but not enough to offset the decline in 2020."
- Domestic bank credit has been trending down; tighter lending conditions may be restricting corporate demand for credit.
- Comparatively, Andorra banks are well capitalized and liquid versus the region, but NPL ratio remains high and profitability only partially recovered.

### External sector and current account
- Current account surplus contracted by "3.4 percentage points of GDP in 2020 to 14.6 percent of GDP," primarily driven by collapse in tourism.
- In 2021, recovery in tourism and limited impact from energy price rises improved the current account to an estimated "15.9 percent of GDP."
- Andorra’s large current account surplus is among the highest in the world but is assessed to be stronger than fundamentals and desirable policies imply—suggesting an imbalance in the savings-investment balance.
- Reliance on tourism and imported energy is a key vulnerability; long-term energy contracts partially mitigate the imported energy risk.

### Outlook, projections, and scarring
- Activity projected to return to pre-crisis levels in the second half of the year (staff baseline).
- High-frequency indicators suggested strong growth in early 2022; number of visitors in January–March 2022 was close to 2019 levels.
- IMF staff baseline projection: real GDP growth "4.5 percent in 2022", supported by tourism recovery.
- Consumption expected to remain main growth driver, supported by normalization of household savings and minimum wage increases planned for 2022.
- Private investment expected to moderate as construction activity moderates and financial conditions tighten.
- High inflation projected to persist in 2022 and the first half of 2023 due to high energy prices and slow resolution of supply bottlenecks, then ease thereafter.
- Over the medium term, output growth should converge to potential of "1.5 percent", in line with the euro area’s medium-term growth.
- Pandemic permanent income loss estimated at "3.2 percent of the pre-crisis potential GDP."
- Scarring effects are expected to be limited with full return to pre-crisis real GDP levels once tourism normalizes.

### Risks and buffers
- Risks are tilted to the downside. Key downside risks include:
  - potentially substantial economic impact in Europe of the war in Ukraine;
  - a prolonged period of high energy prices and global supply disruptions leading to persistently high inflation;
  - second-round inflation effects if labor markets remain tight;
  - lower tourism flows from higher regional inflation and reduced real incomes in neighboring countries;
  - global resurgence of the virus leading to containment measures;
  - climate-related risks given high reliance on winter tourism.
- Upside risks: faster-than-expected improvement in health situation, faster recovery in neighboring countries and tourism flows, faster drawdown of precautionary savings.
- Significant buffers cited:
  - fiscal space and improved public debt management;
  - well-capitalized and highly liquid banks;
  - large current account surplus and growing international reserves;
  - relatively low unemployment.

### Authorities’ views and policy priorities
- Authorities project real GDP growth "4.4 percent in 2022", broadly in line with staff forecast, and expect a full recovery from the pandemic at end-2022 or early 2023 with limited scarring.
- Authorities shared staff’s view that the war in Ukraine is the main downside risk and noted its indirect effects on Andorra (higher inflation and lower tourism flows).
- Authorities view Andorra’s large current account surplus as structural and stressed the need to diversify the economy to remain competitive.
- Policy discussion emphasis:
  - As health conditions allow, shift priorities toward measures that secure the recovery and invest in longer-term structural goals.
  - With some fiscal space and recent improvements in public debt management, a more gradual fiscal adjustment could support medium-term growth and investment.
  - Maintain a solid and well-monitored financial sector to provide credit for faster potential growth.
  - Address structural vulnerabilities and facilitate diversification and greening of the economy.

*Source: IMF staff report material (1andea2022001).*

### 12.      With the recovery well-entrenched, most support measures have been adequately

### 1andea2022001 - 12.      With the recovery well-entrenched, most support measures have been adequately

### Fiscal support, withdrawal, and contingency
- Findings:
  - Fiscal COVID-related measures declined from 9.1 percent of GDP in 2020 to 3.6 percent of GDP in 2021.
  - By end-2021, only the soft loans program remained in place, with nearly €130 million outstanding loans and €5 million in provisions in the government budget.
  - The authorities expect that 50 percent of the outstanding soft loans will be converted to traditional loans and the rest paid back upon expiration; as of mid-March 2022, almost 25 percent of the outstanding soft loans had already been converted.
- Policy guidance:
  - Authorities should stand ready to reinstate support measures if the recovery falters.
  - If warranted, provide targeted support to sectors still emerging from the pandemic to prevent long-term scarring.

### Fiscal consolidation, growth-enhancing spending, and budget outlook
- Findings:
  - The 2022 budget foresees a projected central government deficit of 0.3 percent of GDP.
  - Debt ratio is set to decline rapidly to pre-pandemic levels after 2022 and to reach the fiscal rule target of 40 percent of GDP by 2023 (Annex III).
  - Introduction of new carbon and tourist taxes expected to contribute to higher revenues.
- Recommendations:
  - Find the right balance between consolidation to meet fiscal rule targets and allowing for growth-enhancing spending.
  - Use available fiscal space for upskilling the workforce to ease labor shortages and support high-value-added sectors.
  - Boost central government investment (currently below pre-COVID levels) to strengthen long-term growth and reduce potential scarring, while noting multipliers may be dampened by high propensity to import.
  - Near-term focus: reassess implementation of existing project pipeline, advance digital transformation, diversify the tourism sector.
  - Medium-term focus: adapt to climate change (e.g., expand artificial snowmaking coverage) and advance energy transition initiatives.

### Debt management and international reserves
- Findings:
  - Debt management strategy shifted to reduce costs and lengthen maturities by tapping international markets.
  - The government issued Eurobonds worth €675 million in 2021—€500 million in April and €175 million in October—with maturities of 10 and 20 years, respectively, as part of a program totaling nearly €1.3 billion over 2021–22.
  - Average maturity of debt increased from 2.7 years in 2019 to about 8 years by end-2022.
  - 2021 IMF SDR allocation increased international reserves to about 5 percent of GDP.
  - An additional €100 million (equivalent to 3.7 percent of GDP) from the debt issued in 2021 were deposited in a euro system reserve management account at the Bank of Spain, bringing reserves up to the IMF staff reference level of 8.7 percent of GDP (Annex IV).
  - Authorities are currently holding all reserves in cash and have appointed a national committee to decide on reserve investment, use, and replenishment; they plan to expand reserves and open additional accounts at central banks in other euro area member countries.
- Recommendations:
  - Continue to diversify Andorra’s debt in both international and domestic markets, focusing on maintaining low gross financing needs.
  - As interest rates rise, remain attentive to changing global financial conditions in debt strategy.

### Pension system sustainability
- Findings:
  - The Andorran social security fund—under the mandatory “first pillar” defined contribution pension system—is projected to have annual deficits starting in 2024 and to deplete its reserve funds by 2039.
  - Public pension expenditure as a share of GDP is expected to see one of the largest increases in the region.
  - The Andorran social security system will accumulate deficits starting in 2024, rising to 9 percent of GDP per year by 2040.
  - Under the law, deficits are covered by the Fons de Reserva de Jubilació up to the amount of its previous year gains on investments and by the central government for the rest.
- Policy guidance:
  - Reforming the pension system should be a priority to ensure sustainability and reduce contingent liabilities.
  - The Andorran Parliament appointed a special commission to elaborate a reform plan before end-2022.
  - Reforms should be comprehensive, including increases in the contribution rate, the conversion factor, and the retirement age.
  - Expanding the “second pillar” pension scheme (currently mandatory only for government employees) is being discussed but should not supplant measures needed to achieve financial sustainability of the “first pillar” scheme.

### Financial sector resilience and supervision
- Findings:
  - Andorran banks: consolidated assets about 600 percent of GDP in 2021; off-balance-sheet assets under management amounting 23 times Andorra’s GDP.
  - Nonresident cash and deposits amounted to 148 percent of GDP in 2020.
  - Liquidity Coverage Ratio (LCR) at 220 percent by end-2021 (above 100 percent EU limit).
  - Staff liquidity stress test: a liquidity gap of 4.8 percent of GDP could emerge in an extreme adverse scenario with higher deposit outflows.
  - Loans under the public guarantee program represent about 3 percent of total loan portfolio.
- Risks and observations:
  - Private banking model and internationalization bring diversification benefits but introduce risks when operating in countries with low regulatory standards, higher cost-to-income ratios, and overreliance on foreign funding.
  - Asset quality could deteriorate after withdrawal of COVID support, particularly in segments where activity remains subdued (e.g., tourism services).
  - Severe adverse scenarios could induce significant declines in capitalization and increases in nonperforming loans.
- Measures taken:
  - AFA encouraged banks to reduce related party exposure to less than 15 percent of capital; two out of three banking groups already in compliance.
  - AFA conducted on-site inspections of related party lending in 2021:Q4 and included related party risk in Pillar 2 capital requirements.
  - Andorra transposed EU regulation limiting large exposures to less than 25 percent of bank capital; AFA reinforced reporting requirements.
- Recommendations:
  - Close monitoring of the banking sector after full withdrawal of COVID-related support.
  - Reinforce supervision of liquidity risk: enhance monitoring and stress testing of net liquidity outflows, analyze liquidity risks for longer horizons beyond the 30-day LCR, include onsite liquidity inspections, and accelerate development and review of liquidity contingency plans by banks.
  - Strengthen AFA more broadly, including more solid funding and staffing.
  - Ensure consolidation process reduces cost-to-income ratio without significantly hindering competition.

### Structural policies for diversification, investment, labor, and housing
- Findings:
  - Structural challenges: difficult geographic accessibility, limited stock of affordable housing, small internal market, concentration in tourism and banking, high correlation with neighboring countries, lackluster investment, red tape, limited financing options, difficulties attracting talent and building human capital.
  - Potential growth has remained weak at around 1.5 percent.
  - Average number of days to open a company reduced from 200 to 90 days in 2021.
- Recommendations:
  - Diversify and improve quality of tourism to mitigate seasonality; develop cultural and sport experiences year-round; improve connectivity (more flights, possibly train connections); leverage new heliport, tram and cable transport, and multi-purpose arena.
  - Improve standard of tourism services to generate higher revenues while remaining competitive (Andorra is among the cheapest ski destinations in Europe).
  - Create a favorable environment for investment in high value-added sectors: reduce administrative rigidities, improve access to alternative financing, attract and retain talent.
  - Continue digitalization of public administration and implement legal framework and incentives for digitalization, entrepreneurship, and innovation (including crowdfunding regulation and eased immigration for digital entrepreneurs and workers).
  - Promote investments in e-sports, fintech, biotechnology; develop innovation ecosystem (innovation labs, sandbox environments, special economic zones); secure financing for digital transformation program.
  - Coordinate education, active labor market, and migration policies to meet increasing demand for higher-skilled workers; expand reskilling and upskilling programs and strengthen institutions (Public Employment Service, Center for Lifelong Training).
  - Address affordable housing: creation of the Housing Institute, tax empty properties more heavily, and increase social housing stock to expand rental housing supply.

*International Monetary Fund — PRINCIPALITY OF ANDORRA (excerpts from chapter/section provided)*

### 28.      Building resilience to climate change is paramount given Andorra’s exposure to

### Building resilience to climate change is paramount given Andorra’s exposure to

### Climate resilience and mitigation
- Tourism sector is particularly exposed to climate change.
- Authorities’ mitigation plan aims to green transportation and energy and reduce dependency on imported energy by diversifying energy production and consumption.
- The plan projects an increase in local production from about 20 percent to 33 percent by 2030 and to 50 percent by 2050.
- The Law 21/18 on the promotion of energy transition and climate change aims to promote energy transition and energy efficiency, with a goal of reducing greenhouse gas emissions by 37 percent by 2030.
- Ski resorts: 65 percent of ski areas equipped for artificial snow; resorts are investing in artificial snowmaking and progressively reducing dependence on electricity for snow production.
- A comprehensive adaptation strategy from the government would usefully complement mitigation efforts; authorities are in the process of developing such a comprehensive climate adaptation strategy.

### Authorities’ views on growth, human capital, and connectivity
- Reform agenda focuses on digitalization, diversification, promotion of innovation, and investment in high value-added sectors.
- New law on entrepreneurship and innovation expected to help attract and retain talent and address “brain drain” through simplified migration procedures and new housing regulations.
- Education authorities plan a framework for vocational and lifelong training to better match evolving skills needs.
- Connectivity: success of the flight connection with Madrid has prompted consideration of new routes with Lisbon, London, and Paris.

### Governance: transparency, public procurement, and anti-corruption
- Strengthening economic governance is key to boost investor confidence and lower borrowing costs as Andorra integrates into the international financial community.
- Accession to the IMF in October 2020; significant strides made, notably in closing data gaps despite capacity constraints.
- Ratifying the United Nations Convention Against Corruption (UNCAC) and developing a systematized anti-corruption strategy are recommended priorities.
- Public procurement reform expected to be in place in September (legislative approval pending); will introduce a new contracting platform and electronic invoicing for the entire public sector.
- In September 2022 the government will launch a public website with information on procurement contracts made by the public sector.
- Recommendation: publish beneficial ownership information for companies awarded procurement contracts; currently available only for Andorran companies from the Registry of Commerce and disclosed upon justified request. It is recommended that beneficial ownership information is requested directly to bidding companies (including foreigners) and made publicly available.

### AML/CFT framework and financial supervision
- Continued alignment of the AML/CFT framework to FATF standards is necessary, particularly regarding virtual assets.
- Need to better understand threats and vulnerabilities associated with virtual asset services and develop the necessary regulatory framework to ensure adequate supervision.
- Continue refining the national risk assessment (improvements introduced in 2020) and act upon the findings of the 2020 assessment to mitigate risks and make supervision more effective.
- The AFA introduced a new quarterly reporting requirement for cross-border transactions of supervised Andorran entities and their subsidiaries to enhance monitoring of cross-border flows.
- Supervisor should carefully analyze reported data, including on nonresident deposits, and exchange information with counterparts in originating countries to improve understanding of ML/TF risks.
- Resources for AML/CFT supervision should be increasingly focused on higher risk areas, and sanctions for breach of regulatory requirements should be effectively imposed.
- Authorities highlight Andorra’s top position in the Basel Institute of Governance’s AML Index and plan to seek IMF technical assistance to enhance AML/CFT supervision; relevant laws on virtual assets will be passed in line with EU legislative requirements.

### Data transparency and statistical development
- Authorities implemented the Enhanced General Data Dissemination System (e-GDDS) by launching a National Summary Data Page on May 6, 2022.
- Production of an advance release calendar for major macroeconomic statistics would improve transparency.
- Ongoing work to refine Balance of Payments (BoP) and International Investment Position (IIP) statistics; capacity constraints persist and further development of real, financial, and external sector statistics is needed.
- Planned statistical outputs:
  - Monthly value unit index of goods exports and imports expected in 2022:Q3.
  - Quarterly business confidence index expected in 2023.
  - Expenditure and income components of GDP expected in 2024.
  - Extension backwards of quarterly GDP series to start in 2002.
- Authorities are exploring improving frequency of BoP statistics from annual to quarterly.
- IMF stands ready to provide assistance upon request to close remaining data gaps.

### Staff appraisal: macro outlook and fiscal policy
- Economy recovering strongly from a deep pandemic-related recession; growth surprised on the upside in 2021 and is expected to remain strong in 2022.
- Labor market conditions improved, with unemployment amongst the lowest in Europe.
- Headline inflation accelerated, but less so than in neighboring countries; inflationary pressures expected to recede in the second half of 2023.
- Over the medium term, output projected to converge to the pre-pandemic trend with limited scarring; risks to the outlook are tilted to the downside, notably related to the war in Ukraine.
- Fiscal policy:
  - Fast consolidation will continue in 2022.
  - Fiscal discipline and active debt management strategy projected to bring down the public debt ratio to meet the fiscal rule target by 2023.
  - Recommendation to balance rapid fiscal consolidation with growth-enhancing spending given low potential growth and evidence of an investment gap across all sectors.

### Fiscal sustainability, banking sector, and structural reforms
- Pension system: social security system projected to accumulate rising deficits of 9 percent of GDP per year by 2040; imperative to enact pension reform early with a comprehensive set of measures, including increases in the contribution rate, the conversion factor, and the retirement age.
- Banking sector:
  - Andorran banks are well capitalized and highly liquid.
  - Vulnerabilities associated with the private banking model and internationalization strategy include overreliance on foreign funding and large off-balance-sheet assets under management.
  - Need for close monitoring and stronger supervision, including strengthening liquidity supervision and endowing AFA with more solid funding and staffing.
  - Enforce measures to limit risks from related party lending and large exposures; consolidation could improve profitability but should not reduce competition.
- Structural reforms to raise potential growth:
  - Diversify the economy, boost investment, and build human capital.
  - Reduce red tape and administrative rigidities and improve access to credit.
  - Expand supply of affordable housing and ease immigration requirements to attract high-skilled workers.
  - Training to improve human capital.
  - Continue building resilience to climate change, greening transportation and energy, and reducing dependency on imported energy.
  - Current negotiations on an EU Association Agreement have potential to unlock substantial benefits.

### Governance and transparency: continued priorities
- Persist with rapid progress on data gap closure and AML/CFT strengthening to consolidate Andorra’s presence in international markets.
- Further efforts recommended to:
  - Improve quality and comprehensiveness of data, including refining BoP data and developing other real, financial, and external sector statistics.
  - Align anti-corruption framework to international standards, including ratifying UNCAC and developing an anti-corruption strategy.
  - Advance public procurement reform and publish beneficial ownership information.
  - Address capacity issues and seek technical assistance where needed (for example, to construct quarterly GDP and improve IIP statistics).

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

### 41.      It is recommended that the next Article IV consultation with the Principality of

### 1andea2022001 - 41.      It is recommended that the next Article IV consultation with the Principality of

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

### Population and Social Indicators
- Population (2020): 78,015
- Population at risk of poverty (percent, 2020): 13
- Per capita income (2020, euros): 32,444
- Human Development Index Rank (2019): 36 (out of 189)
- Gini Index (2020): 32
- Life expectancy at birth (2020): 82.5

### National Accounts and Prices (selected annual figures and projections)
- Real GDP (2017–2027): 0.3, 1.6, 2.0, -11.2, 8.9, 4.5, 2.7, 2.2, 1.6, 1.5, 1.5
- Nominal GDP (2017–2027): 1.5, 2.6, 3.4, -10.2, 11.2, 8.2, 4.7, 3.7, 3.2, 3.2, 3.3
- GDP deflator (2017–2027): 1.1, 1.0, 1.4, 1.1, 2.1, 3.5, 1.9, 1.4, 1.6, 1.7, 1.7
- Inflation (percent, period average, 2017–2027): 2.6, 1.3, 0.7, 0.3, 1.7, 3.9, 2.0, 1.3, 1.6, 1.7, 1.7
- Inflation (percent, end of period, 2017–2027): 2.4, 0.8, 1.0, -0.2, 3.3, 2.0, 1.1, 1.5, 1.7, 1.7, 1.7
- Unemployment rate (percent, 2017–2027): 1.7, 1.5, 1.8, 2.9, 2.9, 2.0, 1.8, 1.7, 1.7, 1.7, 1.7

### External Sector (percent of GDP unless otherwise indicated)
- Current account (2019–2027, percent of GDP): 18.0, 14.6, 15.9, 16.8, 17.3, 17.7, 18.1, 18.5, 19.0
- Balance on goods and services (2017–2027, percent of GDP): 14.2, 10.9, 9.6, 4.0, 5.3, 6.2, 6.6, 7.0, 7.5, 7.9, 8.3
- Exports of goods and services (2017–2027, percent of GDP): 76.6, 75.4, 74.0, 63.7, 66.3, 66.9, 67.8, 68.9, 70.0, 71.0, 71.9
- Imports of goods and services (2017–2027, percent of GDP): 62.4, 64.6, 64.4, 59.8, 61.1, 60.7, 61.2, 61.9, 62.6, 63.1, 63.6
- Primary income, net (percent of GDP, projections): 9.7, 12.0 (listed repetitively as 12.0 across forecast years)
- Secondary income, net (percent of GDP, projections): -1.3, -1.4, -1.4, -1.4, -1.4, -1.4, -1.4, -1.4, -1.4
- Gross international reserves (millions of euros, projections): 0.0, 41.9, 138.1, 238.1, 238.1, 238.1, 238.1, 238.1, 238.1
  - Note: The increase of gross international reserves in 2021 is due to the general SDR allocation made in August 2021 to all IMF members. The 2021 SDR allocation for Andorra was of SDR 79.1 million.

### Fiscal Sector — General Government (selected levels and percent of GDP)
- Revenue (2017–2027, percent of GDP): 38.0, 38.5, 38.0, 40.4, 38.9, 38.3, 38.9, 39.1, 39.2, 39.3, 39.3
- Expenditure (2017–2027, percent of GDP): 34.6, 35.8, 35.7, 43.2, 39.5, 36.8, 36.7, 36.4, 36.0, 35.7, 35.5
- Interest (percent of GDP, 2017–2027): 0.7, 0.5, 0.5, 0.6, 0.7, 0.6, 0.9, 0.8, 0.8, 0.8, 0.8
- Primary balance (percent of GDP, 2017–2027): 4.0, 3.2, 2.8, -2.2, 0.2, 2.1, 3.1, 3.6, 4.0, 4.3, 4.6
- Net lending/borrowing (overall balance, percent of GDP, 2017–2027): 3.3, 2.7, 2.3, -2.8, -0.5, 1.5, 2.2, 2.7, 3.2, 3.5, 3.8
- Public debt (percent of GDP, 2017–2027): 37.8, 36.3, 35.4, 46.3, 48.5, 44.3, 42.0, 39.9, 38.6, 37.4, 36.2
  - Note: "The sharp increases of debt in 2020-21 are partly explained by a pre-financing strategy to cover large amortization due in 2021-22."

### Central Government (selected items, percent of GDP)
- Central government revenue (2017–2027): 19.6, 19.6, 19.5, 20.2, 20.3, 19.2, 19.4, 19.5, 19.5, 19.6, 19.7
- Central government expenditure (2017–2027): 19.3, 19.7, 19.3, 24.4, 21.7, 19.6, 19.2, 19.1, 18.9, 18.8, 18.7
- Central government primary balance (percent of GDP, 2017–2027): 0.8, 0.4, 0.6, -3.7, -0.7, 0.2, 0.9, 1.0, 1.3, 1.5, 1.6
- Central government net lending/borrowing (overall balance, percent of GDP, 2017–2027): 0.3, -0.1, 0.2, -4.2, -1.4, -0.3, 0.2, 0.4, 0.7, 0.8, 1.0
- Central government public debt (percent of GDP, 2017–2027): 34.3, 33.2, 32.7, 43.7, 46.2, 42.2, 40.0, 38.0, 36.7, 35.6, 34.4

### General Government Operations (levels, millions of euros, selected years and projections)
- Revenue (2017–2027, millions): 1,008.5; 1,048.6; 1,071.4; 1,021.8; 1,096.2; 1,167.3; 1,239.6; 1,290.4; 1,335.2; 1,380.8; 1,428.5
- Expenditure (2017–2027, millions): 920.1; 975.9; 1,007.2; 1,093.2; 1,111.0; 1,122.0; 1,168.0; 1,200.7; 1,226.4; 1,256.9; 1,289.5
- Net lending/borrowing (2017–2027, millions): 88.4; 72.6; 64.2; -71.3; -14.9; 45.3; 71.7; 89.7; 108.8; 123.9; 139.0
- Gross Financing Needs (millions, projections section): values shown as ...454.8 515.9 585.8 0.0 29.2 0.0 56.9 0.0 (mem. item format in table)

### Balance of Payments (levels, millions of euros, selected items)
- Current account (millions, Est. and projections): ......507.6 370.
- Balance of goods and services (millions, 2017–2027 excerpts): 376.7; 296.6; 270.5; 100.5; 148.5; 188.4; 210.1; 232.3; 254.7; 277.4; 301.5
- Imports of goods (millions, selected): 1,242.7; 1,292.6; 1,316.5; 1,070.3; 1,237.4; 1,335.5; 1,414.3; 1,486.7; 1,554.4; 1,622.8; 1,690.1
- Exports of goods (millions, selected): 106.3; 112.3; 116.1; 148.6; 119.0; 127.1; 133.4; 138.0; 142.8; 147.6; 152.4
- Exports of services (millions, selected): 1,928.5; 1,943.7; 1,969.6; 1,464.2; 1,748.6; 1,909.7; 2,027.1; 2,138.6; 2,243.7; 2,350.2; 2,457.8
- Primary income, net (millions, projections): ......274.4 304.5 338.7 366.3 383.4 397.4 410.0 423.2 437.0
- Errors and omissions (millions, 2017–2027): ......-11.8 10.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0

### Memorandum Items
- Nominal GDP (millions, euros, 2017–2027): 2,656; 2,725; 2,818; 2,531; 2,815; 3,045; 3,187; 3,303; 3,408; 3,518; 3,633
- Gross international reserves (millions of euros, projections): ......0.0 41.9 138.1 238.1 238.1 238.1 238.1 238.1 238.1
- Gross international reserves (months of imports, selected): ......0.0 0.3 1.0 1.5 1.5 1.4 1.3 1.3 ...
- Total external debt (millions, euros, partial list): 5,343; 4,977; 5,611; 5,543 (table notes list incomplete series)
- Exchange rate (€/USD, period average): 0.89; 0.85; 0.89; 0.88; 0.85 (table notes: reports €/USD because Andorra is a euroized economy)

### Financial Soundness Indicators (selected levels and trends)
- Regulatory capital to risk-weighted assets (Dec-18 to Dec-21 series): 20.4, 20.1, 20.4, 19.9, 21.8, 20.3, 21.3, 20.9, 22.5, 20.1, 20.3, 21.5
- Nonperforming loans to total gross loans (Dec-18 to Dec-21 series): 7.1, 7.1, 7.6, 7.0, 7.3, 6.3, 6.5, 5.9, 6.1, 6.1, 5.8, 5.2
- Nonperforming loans net of provisions to capital (Dec-18 to Dec-21 series): 21.6, 21.2, 23.4, 23.2, 21.4, 20.7, 19.6, 19.7, 17.7, 17.7, 17.5, 16.7, 16.3
- Liquidity coverage ratio (LCR) (various dates): 205.3; 162.9; 157.3; 160.3; 201.7; 178.2; 193.9; 205.5; 198.7; 189.3; 174.1; 207.7; 220.3
- Customer deposits to total (noninterbank) loans (series): 146.5; 149.0; 148.2; 149.3; 149.3; 154.7; 152.8; 153.8; 150.7; 149.9; 153.0; 158.0; 159.2
- Return on assets (series): 0.7; 0.2; 0.3; 0.3; 0.7; 0.2; 0.4; 0.5; 0.5; 0.1; 0.2; 0.3; 0.5
- Return on equity (series): 7.1; 2.1; 2.6; 2.6; 3.3; 6.0; 2.2; 3.3; 4.3; 4.5; 1.2; 2.1; 3.0; 4.3
- Note: "Data for 2021Q4 are preliminary and unaudited, and subject to revisions."

### Notes, Sources, and Definitions (as presented)
- Sources: Govern d'Andorra Department of Statistics, Andorran authorities, Eurostat, and IMF staff calculations.
- Balance of Payments data availability: only available starting from 2019, except goods and services balance available from 2017. Data for 2021 are an estimate.
- The central government comprises Govern d'Andorra, as well as nonmarket, nonprofit institutional units (central government definition varies between tables).
- Other revenue includes property income, sales of goods and services, voluntary transfers other than grants, and fines, penalties, and forfeits.
- Exchange rate reporting: €/USD because Andorra is a euroized economy.

*Source: IMF staff tables and text as provided in the content unit.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position of Andorra in 2021 was stronger than the level implied by fundamentals and desirable policies.
- Using the EBA-lite methodology, the current account (CA) model suggests Andorra’s external position is stronger than implied by fundamentals.
- Andorra has one of the world’s largest current account surpluses.
- Data limitations warrant caution:
  - Current BOP data available from 2017 to 2020 and estimated by the IMF from 2021 onward.
  - IIP data available only for 2018 to 2020.
  - Judgment applied, guided by other measures of external competitiveness, which corroborate that Andorra is attractive compared to peer countries, especially in services.

### Potential Policy Responses
- Having one of the highest current account surpluses in the world:
  - Shields the economy against balance of payments financing risks.
  - Calls for rebalancing the economy towards greater investment.
- Implication of a CA surplus above fundamentals:
  - Savings-investment gap is larger than desirable.
  - Excess savings and/or low investment can reduce potential growth in the medium term.
- Policy priorities:
  - Increase private and public investment.
  - Improve the business environment to attract investment.
  - Support economic diversification and resilience, notably by:
    - Diversifying and improving the quality of the services sector.
    - Adapting to climate change.
    - Developing the digital sector.

### Foreign Assets and Liabilities: Position and Trajectory
- Background:
  - IIP data only available for 2018 to 2020.
  - Authorities recently received IMF TA and are ready to compile IIP regularly.
  - Andorra’s net asset position is consistent with a large and steady CA surplus and a sizable financial sector.
  - Position strengthened in 2019 and further in 2020.
- Structure (2020, in percent of GDP):
  - NIIP: 265
  - Gross Assets: 581.6
  - Debt Assets: 178
  - Gross Liabilities: 316.6
  - Debt Liabilities: 38.8
- Composition highlights:
  - Net asset position in portfolio investment held mostly in euro area countries.
  - Net liability position in other investment (currency and deposits).
  - FDI assets and liabilities broadly balanced.
  - More than half of total liabilities owed by Andorra concentrated in currency and deposits from non-residents (estimated at 148 percent of GDP).
- Assessment:
  - Large net asset IIP but fairly high gross other investment liabilities due to banking sector dependence on foreign depositors, posing risks.

### Current Account
- Background:
  - CA surplus deteriorated at the onset of COVID but expected to return to pre-pandemic levels by 2025.
  - Tourism exports represent 60 percent of GDP and drive the trade surplus in services; goods show a trade deficit but overall positive balance of goods and services.
  - CA evolution:
    - Pre-COVID CA around 18 percent of GDP.
    - CA declined to 14.6 percent of GDP in 2020 (collapse in tourist arrivals and increased imports of medical supplies).
    - CA estimated at 15.9 percent of GDP in 2021 with resumption in tourism.
    - CA surplus projected to increase to 19.2 percent of GDP by 2027.
- Model assessment and diagnostics (Andorra: Model Estimates for 2021, in percent of GDP):
  - CA-Actual: 15.9
  - Cyclical contributions (from model) (-): 0.7
  - COVID-19 adjustor (+): 1/0.5
  - Additional temporary/statistical factors (+): 0.0
  - Natural disasters and conflicts (-): -0.1
  - Adjusted CA: 15.8
  - CA Norm (from model) 2/: 11.3
  - Adjustments to the norm (+): 1.0
  - Adjusted CA Norm: 12.3
  - CA Gap (CA minus Norm): 3.5 (CA model) and -2.6 (REER model)
  - Relative policy gap: 0.9
  - Elasticity: -0.49
  - REER Gap (in percent): -7.1 (CA model) and 5.2 (REER model)
  - Notes:
    - 2/ Cyclically adjusted, including multilateral consistency adjustments.
    - 1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (0.5 percent of GDP).
- Assessment:
  - CA model suggests external position at 15.8 percent of GDP in 2021 is stronger than fundamentals imply (norm 12.3 percent of GDP).
  - Current account gap estimated at 3.5 percent of GDP.
  - Corresponding REER undervaluation (CA-model interpretation) estimated at 7.1 percent of GDP.
  - Current account relative policy gap estimated at 0.9 percent of GDP, reflecting a looser world average fiscal stance and lower than desirable credit level in Andorra.

### Real Exchange Rate (REER) and Price Competitiveness
- Data limitations:
  - Existing REER measures do not include services, making the REER model less reliable for Andorra.
  - REER model result that the actual CA in 2021 would be 2.6 percentage points lower than expected is counterintuitive and likely driven by model limitations.
- Complementary price competitiveness evidence:
  - CPI-based REER has been depreciating since 2018 as headline inflation in the euro area remained above Andorra’s level.
  - Unit Labor Costs (ULC) show Andorra’s ULC are about 40 percent of Spain’s in trade and tourism.
  - “1-week Cost of Ski Vacation” index indicates Andorra is a fairly inexpensive destination compared with other European ski destinations, especially in hotel cost comparisons.
  - Export market share (based on tourist arrivals) has increased since 2014.
- Assessment:
  - REER index model suggests Andorra’s external position is weaker than fundamentals imply, yielding a CA gap of -2.6 percent of GDP with an overvaluation of 5.2 percent.
  - However, price competitiveness measures suggest Andorra’s REER is undervalued and contradict the REER index model result.

### Capital and Financial Accounts: Flows and Policy Measures
- Background and flows:
  - 2019: CA surplus strengthened Andorra’s external position via financial account transactions.
    - Andorran households and enterprises repaid loans from banks abroad.
    - Andorran banks purchased debt securities issued by non-residents.
    - These increased Andorra’s net asset IIP.
  - 2020: Financial account declined driven by a decline in net portfolio investment and FDI inflows.
  - Other investment increased slightly from 25.2 to 27.9 percent of GDP between 2019 and 2020 as non-resident deposits remained relatively stable.
- Assessment:
  - Despite a strong external position, Andorra remains subject to balance of payments-related shocks given:
    - Openness of the economy.
    - Large off-balance-sheet assets under management.
    - Large share of non-resident deposits leaving the banking sector subject to liquidity shocks in the event of capital flight.

### FX Intervention and Reserves Level
- Background:
  - 2021 allocation of IMF SDRs increased international reserves to about 5 percent of GDP.
  - An additional €100 million (equivalent to 3.7 percent of GDP) from debt issued in 2021 were deposited in a euro system reserve management account at the Bank of Spain in March 2022, bringing reserves up to the reference level calculated by IMF staff.
  - Andorra’s legal tender is the euro; de jure and de facto exchange rate arrangements classified as “no separate legal tender”.
- Assessment and staff view:
  - Authorities are building international reserves on a precautionary basis.
  - Staff assess that reserves should amount to 8.7 percent of GDP assuming banks have enough high-quality liquid assets to cover liquidity needs (Annex IV).
  - Authorities have already accumulated this amount.
  - Authorities are exploring additional funding sources to continue expanding reserves and negotiating opening additional accounts at central banks of other euro area members.

*Source: Annex I. External Sector Assessment (1andea2022001).*

### Annex III . Debt Sustainability Analysis

### Annex III . Debt Sustainability Analysis

### A. Background and Baseline
- Coverage and fiscal rule:
  - DSA covers the general government debt: central government debt, local government debt, and social security funds.
  - Over 90 percent of the public debt is owed by the central government.
  - Law 32/2014 (and subsequent modifications) sets debt limits at 55 percent of GDP for general government (excluding pension fund) and 40 percent of GDP for the central government. An escape clause was activated in 2020.
- Public debt developments:
  - General government debt stock averaged 39.2 percent of GDP in 2011–19, peaked at 42.5 percent of GDP in 2013, and declined to 35.4 percent of GDP in 2019.
  - Debt rose sharply in 2020 and peaked at 48.5 percent of GDP in 2021, reflecting deterioration of the primary balance and a pre-financing strategy that increased both debt and financial assets for future debt service.
  - Eurobond issuance program totaling nearly €1.3 billion over 2021–22 included:
    - €500 million in April 2021 (10-year maturity, 1.25 percent),
    - €175 million in October 2021 (20-year maturity, 1.70 percent),
    - €500 million in February 2022 (5-year maturity, 1.3 percent).
  - Government plans to issue additional debt in the domestic market by end-2022.
- Financing conditions and maturity profile:
  - Pre-COVID-19 debt had short average maturity: 1.2 years in 2011 and 2.7 years in 2019.
  - Average annual gross financing needs were 13.7 percent of GDP in 2011–19 due to short maturities despite persistent primary surpluses.
  - International issuances in 2021 and 2022 are expected to shift debt composition to almost 90 percent international.
- Baseline debt path and debt service:
  - Debt increased to 48.5 percent of GDP in 2021, then set to decline rapidly starting in 2022, reaching 36.2 percent in 2027.
  - Debt service decline: from an average of 16.7 percent of GDP between 2011–22 to about 3 percent of GDP in 2023–2027 due to lengthening of maturities (averaging about eight years in 2022).
  - General government primary surpluses start from 2021; central government primary surpluses start from 2022.
  - Central government debt is expected to reach 40 percent (the fiscal rule target) by 2023.
- Macro and market assumptions:
  - Real GDP: -11.2 percent in 2020; 8.9 percent in 2021; projected 4.5 percent in 2022; growth reaching potential in medium term.
  - Inflation (GDP deflator): projected 3.9 percent in 2022 before declining in short-term and rising toward euro area levels in medium-term.
  - Sovereign spreads: assumed uniformly 188 bps above German yields for all maturities (in line with February 2022).
- Realism of projections:
  - Projected adjustment and cyclically-adjusted primary balance (CAPB) are below thresholds that would cast doubt on feasibility based on high-debt country experiences.
  - Near-term CAPB adjustment is large but reflects rollback of COVID-19 measures and revenue recovery.
  - Credibility supported by authorities’ track-record prioritizing fiscal discipline.

### B. Shocks and Stress Tests Through the Medium Term
- General outcome:
  - Standard stress tests indicate fiscal and public debt position is solid, with some vulnerability to real GDP and primary balance shocks but no exposure to exchange rate and interest rate shocks (all public debt denominated in euros).
- Growth shock (one-standard-deviation adverse growth shock for 2022–23):
  - Public debt rises to 54.4 percent of GDP in 2024 and declines to 51.7 percent of GDP by 2027 (baseline 36.2 percent of GDP in 2027).
  - Gross debt as percent of revenue increases from 115.7 in 2022 to 139.2 in 2024, then declines to 131.5 (baseline 91.9).
  - Gross financing needs become substantially higher than baseline in years when debt is due.
- Primary balance shock:
  - Assumes deterioration in primary balance by a total of 2.3 percent of GDP in 2022–24, driven by lower revenues and a rise in interest rates.
  - Result: debt about 2.2 percentage points of GDP higher throughout the projection horizon.
- Other shocks:
  - Real exchange rate or real interest rate shocks do not lead to significant deviations from baseline because all public debt is euro-denominated and the pre-financing strategy plus absence of a financing gap limit interest rate vulnerability.
- Alternative contingent liability scenario:
  - One-time increase in non-interest expenditures equivalent to 0.82 percent of banking sector assets, representing a call on 25 percent of €130 million outstanding public guarantees by end-2021.
  - Under this scenario public debt declines only to 47.9 percent of GDP by 2027 (baseline 36.2 percent).
  - Annual gross financing needs are higher throughout the horizon.
  - Considered severe: very few companies have declared bankruptcies and authorities expect not more than 10 percent of outstanding loans will be called.
- Heat-map and risk indicators:
  - Debt level remains well below Advanced Economies threshold of 85 percent of GDP.
  - Gross financing needs are close to the 20 percent of GDP threshold in 2022 under baseline and shock scenarios but do not cross it.
  - Debt-profile risk stems from a still high share of short-term debt in 2021, expected to decline with lengthening maturities.

### C. Key Quantitative Indicators (selected exact figures from projections and historical)
- Debt and financing:
  - General government debt stock: averaged 39.2 percent of GDP in 2011–19.
  - Debt peak: 48.5 percent of GDP in 2021.
  - Projected gross nominal public debt: 39.2 (2011–2019 average), 46.3 (2020), 48.5 (2021), 44.3 (2022), 42.0 (2023), 39.9 (2024), 38.6 (2025), 37.4 (2026), 36.2 (2027).
  - Public gross financing needs: 13.7 (2011–19), 17.9 (2020), 18.3 (2021), 19.2 (2022), -1.4 (2023), 0.9 (2024), -2.7 (2025), -0.7 (2026), 10.4 (2027) — (in percent of GDP as shown in Annex Figure III.3).
  - Effective interest rate (defined as interest payments divided by debt stock): 2.2 (2020), 1.5 (2021), 1.8 (2022), 1.3 (2023), 2.1 (2024), 2.1 (2025), 2.1 (2026), 2.1 (2027).
- Growth and inflation:
  - Real GDP growth: 0.3 (2020), -11.2 (2020 noted earlier), 8.9 (2021), 4.5 (2022), 2.7 (2023), 2.2 (2024), 1.6 (2025), 1.5 (2026), 1.5 (2027) — note historic and projection rows in Annex Figure III.3.
  - Inflation (GDP deflator): 0.6 (2020), 1.1 (2021), 2.1 (2022), 3.5 (2023), 1.9 (2024), 1.4 (2025), 1.6 (2026), 1.7 (2027).
- Sovereign spreads and market perception:
  - EMBIG (bp): 188 (used in projections).
  - 5Y CDS (bp) shown as 75 in Annex Figure III.3.
- Fiscal flows and contributions to debt change (selected):
  - Primary (noninterest) revenue and grants: 35.4 (2011–19), 40.4 (2020), 38.9 (2021), 38.3 (2022), 38.9 (2023), 39.1 (2024), 39.2 (2025), 39.3 (2026), 39.3 (2027), 34.1 (cumulative/other column).
  - Primary (noninterest) expenditure: 32.5 (2011–19), 42.6 (2020), 38.7 (2021), 36.3 (2022), 35.8 (2023), 35.5 (2024), 35.2 (2025), 35.0 (2026), 34.7 (2027), 12.4 (cumulative/other column).
  - Change in gross public sector debt (cumulative projection): 0.0 (2011–2019), 10.9 (2020), 2.2 (2021), -4.2 (2022), -2.3 (2023), -2.1 (2024), -1.3 (2025), -1.2 (2026), -1.2 (2027), -12.4 (cumulative).
  - Identified debt-creating flows and residuals shown in Annex Figure III.3 (include net acquisition of financial assets and other identified flows).
- Alternative scenario assumptions (Annex Figure III.4 underlying assumptions shown exactly):
  - Baseline Real GDP growth series: 4.5, 2.7, 2.2, 1.6, 1.5, 1.5 (for 2022–2027 respectively).
  - Baseline Inflation series: 3.5, 1.9, 1.4, 1.6, 1.7, 1.7 (for 2022–2027).
  - Baseline Primary Balance series: 2.1, 3.1, 3.6, 4.0, 4.3, 4.6 (for 2022–2027).
  - Baseline Effective interest rate series: 1.3, 2.1, 2.1, 2.1, 2.1, 2.1 (for 2022–2027).

### D. Policy Implications and Recommendations (implicit in analysis)
- Maintain and continue to implement improved debt management strategy:
  - Continue to diversify debt across international and domestic markets.
  - Maintain focus on lengthening maturities to lower annual gross financing needs.
- Prioritize fiscal consolidation while considering growth-enhancing uses of fiscal space:
  - Given growth is a key driver of lower debt ratios, consider using fiscal space to increase investment and other growth-enhancing spending beyond baseline levels to strengthen long-term growth and reduce potential scarring.
- Preserve low gross financing needs and manage contingent liabilities:
  - Monitor and limit calls on public guarantees; contingent liability shocks (e.g., call on 25 percent of €130 million guarantees) materially raise debt and financing needs.
- Preserve credibility of consolidation by sustaining primary surpluses and the medium-term fiscal framework.

*Source: IMF staff (Annex III . Debt Sustainability Analysis).*

### Annex Figure III.5. Andorra: Public Debt Sustainability Analysis—Stress Tests

### Annex Figure III.5. Andorra: Public Debt Sustainability Analysis—Stress Tests

### Stress test scenarios and baseline assumptions
- Scenarios shown: Baseline; Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock.  
- Baseline underlying annual macro assumptions (2022–2027):
  - Real GDP growth: 4.5, 2.7, 2.2, 1.6, 1.5, 1.5
  - Inflation: 3.5, 1.9, 1.4, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 2.0, 2.4, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.0, 2.1, 2.1, 2.1
- Primary Balance Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, 2.7, 2.2, 1.6, 1.5, 1.5
  - Inflation: 3.5, 1.9, 1.4, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 2.0, 2.4, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.0, 2.1, 2.1, 2.1
- Real GDP Growth Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, -2.8, -3.3, 1.6, 1.5, 1.5
  - Inflation: 3.5, 0.5, 0.0, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 0.6, -1.7, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.0, 2.2, 2.2, 2.0
- Real Interest Rate Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, 2.7, 2.2, 1.6, 1.5, 1.5
  - Inflation: 3.5, 1.9, 1.4, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 3.1, 3.6, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.1, 2.3, 2.3, 2.4
- Real Exchange Rate Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, 2.7, 2.2, 1.6, 1.5, 1.5
  - Inflation: 3.5, 2.3, 1.4, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 3.1, 3.6, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.1, 2.1, 2.1, 2.1
- Combined Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, -2.8, -3.3, 1.6, 1.5, 1.5
  - Inflation: 3.5, 0.5, 0.0, 1.6, 1.7, 1.7
  - Primary balance: 2.1, 0.6, -1.7, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.1, 2.6, 2.6, 2.7
- Contingent Liability Shock assumptions (2022–2027):
  - Real GDP growth: 4.5, -2.8, -3.3, 1.6, 1.5, 1.5
  - Inflation: 3.5, 0.5, 0.0, 1.6, 1.7, 1.7
  - Primary balance: 2.1, -0.7, 3.6, 4.0, 4.3, 4.6
  - Effective interest rate: 1.3, 2.1, 2.0, 2.0, 2.0, 2.0

### Macro-fiscal stress-test outputs and indicators (figures referenced)
- Gross Nominal Public Debt and Public Gross Financing Needs are shown across 2022–2027 under baseline and stress scenarios (figures reported in percent of GDP and percent of Revenue in source figures).
- Public Gross Financing Needs are charted for 2022–2027 (in percent of GDP) under baseline and Additional Stress Tests.
- The stress-test figures provide time paths for Gross Nominal Public Debt (in percent of GDP) and Gross Nominal Public Debt (in percent of Revenue) across scenarios (explicit numeric series are presented in the source charts).

### Annex IV — Estimate of Gross International Reserve Needs: key findings
- Andorra’s available reserve assets:
  - IMF reserve tranche position + SDR holdings: 5 percent of GDP
  - Deposit of €100 million at the Bank of Spain: equivalent to 3.7 percent of GDP
- IMF staff estimate of government’s potential liquidity needs: €244 million, equivalent to 8.7 percent of GDP.
- Breakdown of potential liquidity needs (baseline, banks assumed to have sufficient HQLA):
  - Around 62 percent correspond to BOP-related needs.
  - The fiscal buffer accounts for the remaining 38 percent.
  - The banks’ liquidity gap is zero in the baseline (system LCR was over 200 percent in 2021).
- Key balance-sheet and external exposure metrics:
  - Banking sector assets: 590 percent of GDP in 2021.
  - Other investment (currency and deposits) liabilities of banks: estimated at 148 percent of GDP in 2020.
  - Andorra’s government had no short-term external debt as of end-2021 (short-term external public debt = none).
- Rationale and components of the “potential liquidity needs” metric:
  - Components included: (i) government’s BoP-related needs (1 month of imports of goods and services and short-term external public debt), (ii) a fiscal buffer (proxied by one month of total public spending), and (iii) the banks’ liquidity gap (based on Basel III LCR).
  - The BoP-related needs include 1 month of imports because the government is ultimately responsible for providing necessity goods to its population.
  - The fiscal buffer proxy follows IMF (2013) analysis: one month of total public spending.
  - Banks’ liquidity gap assessment uses the LCR over a 30-day stress period; the baseline assumes outflow assumptions consistent with the LCR regulation.
- Observations on reserve adequacy:
  - The amount implied by the potential liquidity needs metric in the baseline is consistent with levels of international reserves observed in some euroized economies.
  - The government does not currently have a liquidity gap but could have one if banks face a liquidity gap in a stress scenario.

### Annex IV — Figure highlights (end-2021 values shown in source figure)
- Liquidity availability components (end-2021):
  - IMF SDR holdings + reserve tranche position: 5.4 (€151M)
  - Deposit at Bank of Spain: 3.7 (€103M)
  - Additional liquidity item shown: 5.0 (€142M)
- Liquidity needs components (end-2021, percent of GDP):
  - Fiscal buffer (1 month total government spending)
  - 1-month imports
  - Government external short-term liabilities
  - Banks' liquidity gap (zero in baseline)
- Comparative IIP: Reserve Assets, 2020 (Percent of 2021 GDP) places Andorra (AND) at the end-2021 position shown in the figure (note: figure lists many economies for comparison; Andorra’s value is shown as of end-2021).

### Policy implications and recommendations (from annex text and authorities’ response)
- Reserve and fiscal policy:
  - Given euroization and absence of a lender of last resort, authorities should consider building international reserves on a precautionary basis to cushion liquidity shocks.
  - Government may wish to maintain additional fiscal savings to smooth unexpected fluctuations in revenue or spending when financing may become more difficult or costly.
- Financial sector:
  - Continued vigilance on liquidity risks is warranted to ensure adequate liquid assets to meet short-term runs from foreign depositors.
  - The LCR requirement was adopted in phases, reaching 100 percent starting January 2021; the system LCR was over 200 percent in 2021.
- Recent policy actions noted in authorities’ responses:
  - Fiscal COVID-related measures declined from 9.1 percent of GDP in 2020 to 3.6 percent of GDP in 2021; by end-2021 only the soft loans program remained.
  - The government issued Eurobonds worth €675 million in 2021—€500 million in April and €175 million in October—maturities 10 and 20 years respectively, as part of a program totaling nearly €1.3 billion over 2021–22; average debt maturity increased from 2.7 years in 2019 to about 8 years by end-2022.
  - The 2021 allocation of IMF SDRs increased international reserves to about 5 percent of GDP; an additional €100 million from the debt issued in 2021 was deposited at the Bank of Spain, bringing reserves up to the IMF staff reference level of 8.7 percent of GDP.

### Methodological notes (as presented)
- The banks’ liquidity gap is defined as the difference between the banks' liquidity buffer and the net liquidity outflows in a 30-day stress period under a more adverse scenario.
- Net outflows are calculated by subtracting haircut-adjusted liquidity inflows from gross liquidity outflows; gross outflows correspond to the available stock of funding sources multiplied by their corresponding outflow rates in a 30-day stress period.
- The baseline scenario assumes eligibility of liquid assets for the buffer, haircuts on 30-day inflows, and 30-day outflow rates consistent with the LCR regulation; in this scenario the liquidity buffer exceeds net outflows and there is no liquidity gap.

*Source: IMF staff.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1andea2022001.pdf_