## 1andea2024001

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### Outlook and Risks
- Medium-term growth and inflation forecasts
  - Real GDP growth is forecasted at 1.8 percent in 2024 and at 1.5 percent from 2025 onwards, comparable to average growth in the euro area.
  - Inflation is projected to subside from 4.3 percent in 2024 to 2 percent only by end-2025, in line with price developments in neighboring countries and domestic second-round effects.
- Risk assessment
  - Risks to the outlook are balanced but subject to substantial uncertainty and bottlenecks.
  - Downside risks: slower than expected global growth, more persistent inflation, and tighter for longer monetary policy in the region.
  - Structural and medium-term downside risks: housing affordability issues, labor shortages, and climate change.
  - Upside scenarios: greater than expected regional growth and lower inflation could increase tourist flows and investments; adoption of the EU Association Agreement would open new markets over the medium-term.
- Buffers
  - Solid macroeconomic buffers are noted as serving to mitigate downside risks should they materialize.

### Recent Developments and Macro Performance
- Growth and output
  - Real GDP growth: -11.2 (2020); 8.3 (2021); 9.6 (2022); 2.3 (2023); projections 1.8 (2024) and 1.5 (2025–2028).
  - Real GDP recovered fully to its pre-pandemic level in 2022; estimated growth in 2023 was 2.3 percent driven by the service sector and a record number of visitors.
- Inflation and prices
  - Inflation (percent, period average): 0.1 (2020); 1.7 (2021); 6.2 (2022); 5.6 (2023); projected 4.3 (2024); 2.4 (2025); 2.1 (2026); 1.7 (2027–2028).
  - Inflation (percent, end of period): -0.5 (2020); 3.3 (2021); 7.2 (2022); 4.6 (2023); 3.8 (2024); 2.0 (2025); 1.7 (2026–2028).
  - Headline inflation reached 5.6 percent on average in 2023; core inflation ended at 5.5 percent in December 2023.
- Labor market
  - Unemployment rate (percent): 2.9 (2020); 3.3 (2021); 2.1 (2022); 1.5 (2023–2028 projections).
  - Unemployment declined to 1.2 percent at 2023Q3, or 266 individuals.
  - Labor market characterized by tightness and rising vacancies; workforce increased almost 8 percent over two years due to immigration.
  - Government mandated increases (close to 15 percent cumulatively) in the minimum wage in 2022–23.
- External and reserves
  - Current account (percent of GDP): 15.5 (2020); 14.1 (2021); 17.3 (2022–2023); projected 17.5 (2024) rising gradually to 17.8 (2028).
  - Gross international reserves (millions of euros): 41.9 (2020); 138.1 (2021); 338.4 (2022–2028).
- Fiscal and public debt
  - General government revenue (percent of GDP): 41.3 (2020); 37.9 (2021); 39.7 (2022); 38.8 (2023); 38.5 (2024); trend rising to 39.6 (2028).
  - General government expenditure (percent of GDP): 42.3 (2020); 39.0 (2021); 34.9 (2022); 36.1 (2023); 36.6 (2024); rising to 37.0 (2028).
  - Net lending/borrowing (overall balance, percent of GDP): -1.1 (2020); -1.2 (2021); 4.8 (2022); 2.6 (2023); 1.9 (2024); projected 2.6 (2025) and gradual decline to 2.5 (2028).
  - Public debt (percent of GDP): 46.4 (2020); 48.6 (2021); 39.1 (2022); 36.4 (2023); 34.7 (2024); declining to 30.8 (2028).

### Financial Sector and Supervision
- Banking sector health and metrics
  - Regulatory capital to risk-weighted assets: 22.5 (2020); 21.5 (2021); 19.5 (2022); 20.2 (2023Q3).
  - Nonperforming loans to total gross loans: 6.1 (2020); 5.2 (2021); 3.3 (2022); 3.5 (2023Q3).
  - Credit to nonfinancial private sector (percent of GDP): 150.3 (2020); 135.2 (2021); 116.6 (2022); 102.7 (2023).
- Profitability, capitalization, liquidity (selected)
  - Annualized ROA: 0.5 (2021); 0.6 (2022); 0.8 percent in 2023Q3.
  - Tier 1 capital ratio: 19.4 percent at 2023Q3.
  - LCR: around 200 percent at 2023Q3.
  - Bank consolidated assets: 5.5 times GDP at end-2022.
  - Off-balance sheet assets under management: 20 times GDP at end-2022.
  - Nonresident deposits: about 109 percent of GDP in 2022.
  - Banks’ operating income decomposition (end-of-2022): Net Interest Income 27%; Net Fees and Commissions Income 56%; Others 17%.
- Supervisory priorities and risks
  - Banking system remains profitable, well-capitalized, and liquid.
  - Directors emphasized continued monitoring given the large size of banks and their international exposure; large banks constitute a systemic risk and require close supervision.
  - Commended introduction of the lender of last resort facility; encouraged strengthening the resolution framework.
  - Ensuring the Andorran Financial Authority is autonomous and fully resourced is key.
  - Law 36/2022 established a Lender of Last Resort (LOLR) facility in December 2022.

### Fiscal Performance, Debt Management, and Reserves
- Fiscal consolidation and revenues
  - Primary surplus of 3.6 percent of GDP in 2022; public debt down to 37.1 percent of GDP—below the 40 percent fiscal rule.
  - Estimated primary balance surplus of 0.9 percent of GDP and overall surplus of 0.4 percent of GDP in 2023.
  - Revenue diversification measures introduced in 2022: tourist and carbon taxes; law on the effective tax rate (minimum effective tax rate of 3 percent on the current year profits, to be applied from 2024); 10 percent capital gains tax on resold properties.
- Debt issuance and reserves
  - Issued €1.2 billion in Eurobonds in 2022.
  - Authorities added funds from debt issuance to the 2021 allocation of IMF Special Drawing Rights (SDRs) to bring reserves up to 10 percent of GDP.
  - Average maturity of debt increased from 2.7 years in 2019 to about 8 years by end-2022.
  - Central government debt ceiling of 40 percent of GDP and an overall deficit limit of 1 percent.
  - Government expected to continue running primary balance surpluses of about 1 percent of GDP over the medium term, resulting in a reduction of debt to about 30 percent of GDP by 2027.
  - 2024 budget projects an increase in public investment in affordable housing and infrastructure.

### External Sector and Competitiveness
- Current account and trade
  - Current account balance rose to 17.3 percent of GDP in 2022.
  - Net exports and net primary income on average contribute almost equally to the large current account surplus.
  - Trade surplus in services (driven primarily by tourism) larger than trade deficit in goods.
  - Number of visitors reached a record 9.2 million during January to October of 2023, a 13 percent increase from the same period in 2022.
- External position assessment and REER
  - Staff assesses the external position to be substantially stronger than the level implied by fundamentals and desirable policies—suggesting an imbalance in the savings-investment balance.
  - CA model: actual CA 17.3 percent of GDP; CA Norm 12.6 percent of GDP; CA Gap 5.1 percent of GDP.
  - REER undervaluation indicators: CA-model implied REER undervaluation -11.4 percent; REER index model undervaluation -8.8 percent.
  - CPI-based REER depreciated by 13 percent between end-2020 and November 2023.
  - Unit Labor Costs about 42 percent of Spain’s in trade and tourism.
- Foreign assets and liabilities (IIP) and liquidity risks
  - IIP position peaked at 390.9 percent of GDP in 2021 and declined to 339.9 percent of GDP in 2022.
  - 2022 NIIP: 339.9 percent of GDP. Gross Assets: 577.3; Gross Liabilities: 237.4. Debt Assets: 218.2; Debt Liabilities: 32.2 (all in percent of GDP).
  - More than half of total liabilities owed by Andorra were concentrated in currency and deposits from non-residents, estimated at 106.9 percent of GDP.
  - Financial account: net portfolio investment reached 41.8 percent of GDP in 2022. Financial account position remained strong at 17.9 percent of GDP in 2022.
- Reserves and FX classification
  - 2021 allocation of IMF SDRs increased reserves to about 5 percent of GDP.
  - Additional €100 million (equivalent to 3.7 percent of GDP) deposited in March 2022 at the Bank of Spain; €40 million at the Banque de France; €60 million at the Nederlandsche Bank as gross international reserves in 2022.
  - As of end-2023, total level of international reserves amount to 10 percent of GDP.
  - Exchange rate arrangements: legal tender is the euro; de jure and de facto exchange rate arrangements classified as “no separate legal tender”.
  - Staff assessment: Reserves should amount to 9 percent of GDP in 2023 under assumptions noted; authorities have already accumulated this amount.

### Structural Bottlenecks, Housing, Climate, and Governance
- Structural constraints and diversification
  - Geography, small domestic market, and low investment limit potential growth.
  - Tourism and hospitality exposure: trade and hospitality activity account for about 30 percent of GVA and 40 percent of employment; with connected sectors the share could be more than half of the economy.
  - Investment hampered by high red tape and difficulties attracting talent and building human capital.
  - Government adopted a business digitalization program in June 2022; December 2022 law on digital economy allows a special economic zone and framework for incubators and digital nomads.
- Housing affordability
  - Survey: housing affordability noted as most pressing economic issue for 57 percent of respondents.
  - Andorra is an outlier: renter-dominated market—70 percent of households are tenants.
  - Housing cost overburden rate for lowest income quintile among the highest in the region.
  - Authorities eased housing support requirements, implemented temporary caps on rent increases, increased stock of social apartments, repurposed buildings for residential housing, and slowed construction permits for housing intended for sale.
  - Policy directions: raise rental stock; consider public investment in affordable housing; use temporary targeted measures to minimize market distortions.
- Climate change
  - Climate change macro-critical due to dependence on winter tourism; tourism (mostly winter) accounts for one third of the economy.
  - Authorities’ climate strategy: reduce 37 percent of non-absorbed emissions compared to 2005 levels by 2030, and achieve carbon neutrality by 2050.
  - Staff: achieving decarbonization objectives would require a considerable increase in the carbon tax and very substantial efficiency gains in power, transport, and residential sectors.
  - Policy directions: accelerate adaptation, promote renewable and high energy efficiency technologies, explore additional financing options possibly with the European Investment Bank.
- Governance, AML/CFT, and data gaps
  - Ratify the United Nations Convention Against Corruption (UNCAC) and develop an anti-corruption strategy recommended.
  - Public procurement reform introduced a contracting platform and electronic invoicing; beneficial ownership information of companies awarded procurement contracts is available for Andorran companies upon justified request.
  - Andorra ranked 4th of 152 countries by the Basel AML index and positively assessed by Moneyval.
  - AFA introduced quarterly reporting requirement for cross-border transactions of supervised entities and subsidiaries.
  - Data improvements: National Summary Data Page started in 2022; annual time series for general government in fiscal accounts began in 2023; GDP by expenditure not yet available.

### Policy Priorities and Recommendations (aggregated)
- Fiscal policy
  - Maintain tight fiscal policy as long as growth remains close to potential and price pressures are persistent.
  - Channel fiscal space toward higher infrastructure and affordable housing to tackle structural bottlenecks.
  - Continue diversifying debt and extending maturities; use future surpluses to decrease outstanding debt and increase international reserves.
  - Prioritize comprehensive pension reform (adjustment of contribution rate, conversion factor, retirement age) to ensure long-term sustainability; aim for reform approval by mid-2025.
- Financial sector
  - Maintain close surveillance of the banking sector given its large size and international exposure; complement the LOLR with a strengthened resolution framework.
  - Reinforce resolution planning requirements; explore implications for deposit insurance; work closely with foreign supervisors.
  - Monitor impact of widening interest rate margins on asset quality and require proactive bank action if deterioration occurs.
  - Ensure the AFA is autonomous and fully resourced.
- Structural reforms
  - Implement ambitious structural reforms to diversify the economy: remove investment constraints, improve housing affordability, retain talent, foster digitalization and economic efficiency.
  - Improve connectivity and infrastructure (heliport, tram/cable projects, multi-purpose arena).
  - Accelerate climate change adaptation strategy.
  - Prepare to take full advantage of the EU Association Agreement using transition periods to minimize disruptions and communicate implications clearly.
- Governance and data
  - Continue to strengthen AML/CFT framework, focus on ML/TF risks related to cross-border flows and virtual assets.
  - Request and publicly disclose beneficial ownership information for bidders.
  - Close data gaps with IMF technical assistance; improve timeliness/frequency of IIP and BoP statistics and monetary and financial statistics.

### Key Projections and Selected Indicators
- Real GDP growth: -11.2 (2020); 8.3 (2021); 9.6 (2022); 2.3 (2023); 1.8 (2024); 1.5 (2025–2028).
- Inflation (period average): 0.1 (2020); 1.7 (2021); 6.2 (2022); 5.6 (2023); 4.3 (2024); 2.4 (2025); 2.1 (2026); 1.7 (2027–2028).
- Unemployment rate: 2.9 (2020); 3.3 (2021); 2.1 (2022); 1.5 (2023–2028).
- Gross international reserves (millions of euros): 41.9 (2020); 138.1 (2021); 338.4 (2022–2028).
- Public debt (percent of GDP): 46.4 (2020); 48.6 (2021); 39.1 (2022); 36.4 (2023); 34.7 (2024); 33.4 (2025); 32.3 (2026); 31.3 (2027); 30.8 (2028).
- Fiscal and public sector headline figures (selected, millions):
  - Revenue: 2020: 521.6; 2021: 544.0; 2022: 695.4; 2023: 731.8; 2024: 765.1; 2025: 792.1; 2026: 818.5; 2027: 847.4.
  - Tax Revenue: 2020: 306.5; 2021: 353.3; 2022: 468.5; 2023: 476.5; 2024: 505.4; 2025: 528.7; 2026: 548.1; 2027: 566.5; 2028: 587.2.
  - Expenditure: 2020: 621.8; 2021: 618.3; 2022: 600.8; 2023: 665.9; 2024: 722.0; 2025: 747.4; 2026: 778.3; 2027: 801.5; 2028: 834.4.
  - Net lending/borrowing: 2020: -100.1; 2021: -74.3; 2022: 94.6; 2023: 13.1; 2024: 9.7; 2025: 17.7; 2026: 13.9; 2027: 17.0; 2028: 13.0.
  - Public Debt (millions of euros): 2020: 1,106.0; 2021: 1,302.0; 2022: 1,190.4; 2023: 1,190.4; 2024: 1,190.4; 2025: 1,190.4; 2026: 1,190.4; 2027: 1,190.4; 2028: 1,210.4.
  - Nominal GDP (millions, euros): 2020: 2,531.1; 2021: 2,811.0; 2022: 3,210.3; 2023: 3,445.6; 2024: 3,613.0; 2025: 3,755.7; 2026: 3,880.4; 2027: 4,007.4; 2028: 4,136.6.
- Financial soundness indicators (selected)
  - Regulatory capital to risk-weighted assets: 2019: 21.8; 2020: 22.5; 2021: 22.2; 2022: 19.5; 2023: 19.9; 2023Q1: 20.1; 2023Q2: 20.2.
  - Nonperforming loans to total gross loans: 2019: 7.3; 2020: 6.1; 2021: 5.1; 2022: 3.3; 2023: 3.5; 2023Q1: 3.6; 2023Q2: 3.5.
  - LCR: 2019: 201.7; 2020: 198.7; 2021: 220.3; 2022: 218.3; 2023: 207.3; 2023Q1: 202.7; 2023Q2: 199.6.
  - Customer deposits to total (noninterbank) loans: 2019: 149.2; 2020: 150.7; 2021: 159.2; 2022: 181.0; 2023: 178.5; 2023Q1: 170.8; 2023Q2: 168.0.
  - Note: Data for 2023 are preliminary and unaudited, and subject to revisions.

### Risk Assessment Matrix — Key Domestic and Global Risks and Responses
- Global risks (likelihood / expected impact / policy responses)
  - Intensification of regional conflict(s): Likelihood: High. Expected impact: Low on Andorra; policy responses include coping with rising and volatile food and energy prices and diversifying tourism.
  - Commodity price volatility: Likelihood: High. Expected impact: Medium; policy responses include long-term energy contracts and accelerate energy diversification.
  - Abrupt global slowdown or recession: Likelihood: Medium. Expected impact: High; policy responses include diversify economy and stand ready with targeted fiscal and financial support.
  - Monetary policy miscalibration: Likelihood: Medium. Expected impact: Medium; policy responses include tight fiscal policy, intensified financial supervision, and targeted social support.
  - Extreme climate events: Likelihood: Medium. Expected impact: Medium; policy responses include adaptation policies and targeted support to ski-related businesses.
- Domestic risks (likelihood / expected impact / policy responses)
  - Labor shortages: Likelihood: Medium. Expected impact: Medium. Responses: encourage domestic labor participation, reduce rigidities, housing support and training.
  - Housing affordability worsen: Likelihood: High / Medium. Expected impact: High / Medium. Responses: improve affordability for tenants, income support programs, rent controls, boost rental availability.
  - Reputational shock to banking sector: Likelihood: Low. Expected impact: High / Medium. Responses: improve ML/TF framework, monitor cross-border flows, keep fiscal and external buffers.

### Sovereign Risk and Debt Sustainability (selected)
- Overall risk of sovereign stress: low.
- Public debt trajectory (percent of GDP) — Actual / Projection:
  - 2022: 39.1; 2023: 36.4; 2024: 34.7; 2025: 33.4; 2026: 32.3; 2027: 31.3; 2028: 30.8; 2029: 30.3; 2030: 29.9; 2031: 29.4; 2032: 29.3.
- Change in public debt (percent of GDP): 2022: -9.5; 2023: -2.6; 2024: -1.7; 2025: -1.3; 2026: -1.1; 2027: -1.0; 2028: -0.5; 2029: -0.5; 2030: -0.5; 2031: -0.5; 2032: -0.1.
- Gross financing needs (GFN) and debt service (percent of GDP) (selected)
  - GFN: 2022: 14.5; 2023: -2.6; 2024: -1.9; 2025: -2.7; 2026: -2.7; 2027: 9.9; 2028: -1.4; 2029: -1.6; 2030: -1.5; 2031: 9.5; 2032: 0.0.
  - Debt service: 2022: 20.1; 2023: 0.6; 2024: 0.5; 2025: 0.6; 2026: 0.6; 2027: 13.2; 2028: 1.8; 2029: 1.8; 2030: 2.0; 2031: 13.1; 2032: 3.7.
- Medium-term risk signals: Medium-term risks assessed as low; Debt fanchart index (DFI): 0.9 — Risk signal: 3/Low. GFN financeability index (GFI): 0.4 — Risk signal: 4/Low.
- Identified long-term contingencies: Pensions and Health modules triggered; social security fund projected to accumulate deficits starting from 2026, rising to 8.2 percent of GDP by 2042 and its reserve fund projected to be depleted by 2040.

### Authorities’ Views and Responses (selected)
- Authorities generally agreed with staff on the outlook and balance of risks; they are slightly more optimistic on medium-term diversification and private investment.
- Authorities view the 2024 budget as an important expansion of public investment (including housing) while preserving fiscal responsibility.
- Parliamentary majority leading pension reform, aiming for approval by mid-2025.
- Authorities plan investments in renewable energy and transportation and expect the EU Association Agreement to support diversification.
- Authorities’ fiscal statement highlights: general government balance large surplus in 2022 (4.8 percent) and 2023 (2.6 percent); general government debt ratio 36.4 percent (2023); average interest rate for government debt in 2023: 1.34 percent; average maturity: 7.3 years; government has no financing needs until 2027.

*Source: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION — PRINCIPALITY OF ANDORRA (February 9, 2024).*

### 1.5 percent. Real GDP growth is forecasted at 1.8 percent in 2024 and at 1.5 percent from

### 1andea2024001 - 1.5 percent. Real GDP growth is forecasted at 1.8 percent in 2024 and at 1.5 percent from

### Outlook and Risks
- Medium-term growth and inflation forecasts
  - Real GDP growth is forecasted at 1.8 percent in 2024 and at 1.5 percent from 2025 onwards, comparable to average growth in the euro area.
  - Inflation is projected to subside from 4.3 percent in 2024 to 2 percent only by end-2025, in line with price developments in neighboring countries and domestic second-round effects.
- Risk assessment
  - Risks to the outlook are balanced but subject to substantial uncertainty and bottlenecks.
  - Downside risks: slower than expected global growth, more persistent inflation, and tighter for longer monetary policy in the region.
  - Structural and medium-term downside risks: housing affordability issues, labor shortages, and climate change.
  - Upside scenarios: greater than expected regional growth and lower inflation could increase tourist flows and investments; adoption of the EU Association Agreement would open new markets over the medium-term.
- Buffers
  - Solid macroeconomic buffers are noted as serving to mitigate downside risks should they materialize.

### Recent Developments and Macro Performance
- Growth and output
  - Real GDP growth: -11.2 (2020), 8.3 (2021), 9.6 (2022), 2.3 (2023), with projections 1.8 (2024) and 1.5 (2025–2028).
  - Real GDP recovered fully to its pre-pandemic level in 2022; estimated growth in 2023 was 2.3 percent driven by the service sector and a record number of visitors.
- Inflation and prices
  - Inflation (percent, period average): 0.1 (2020), 1.7 (2021), 6.2 (2022), 5.6 (2023), projected 4.3 (2024), 2.4 (2025), 2.1 (2026), 1.7 (2027–2028).
  - Inflation (percent, end of period): -0.5 (2020), 3.3 (2021), 7.2 (2022), 4.6 (2023), 3.8 (2024), 2.0 (2025), 1.7 (2026–2028).
  - Headline inflation reached 5.6 percent on average in 2023; core inflation ended at 5.5 percent in December 2023.
- Labor market
  - Unemployment rate (percent): 2.9 (2020), 3.3 (2021), 2.1 (2022), 1.5 (2023–2028 projections).
  - Unemployment declined to 1.2 percent at 2023Q3, or 266 individuals.
  - Labor market characterized by tightness and rising vacancies; workforce increased almost 8 percent over two years due to immigration.
  - Government mandated increases (close to 15 percent cumulatively) in the minimum wage in 2022–23.
- External and reserves
  - Current account (percent of GDP): 15.5 (2020), 14.1 (2021), 17.3 (2022–2023), projected 17.5 (2024) rising gradually to 17.8 (2028).
  - Gross international reserves (millions of euros): 41.9 (2020), 138.1 (2021), 338.4 (2022–2028).
- Fiscal and public debt
  - General government revenue (percent of GDP): 41.3 (2020), 37.9 (2021), 39.7 (2022), 38.8 (2023), 38.5 (2024), trend rising to 39.6 (2028).
  - General government expenditure (percent of GDP): 42.3 (2020), 39.0 (2021), 34.9 (2022), 36.1 (2023), 36.6 (2024), rising to 37.0 (2028).
  - Net lending/borrowing (overall balance, percent of GDP): -1.1 (2020), -1.2 (2021), 4.8 (2022), 2.6 (2023), 1.9 (2024), projected 2.6 (2025) and gradual decline to 2.5 (2028).
  - Public debt (percent of GDP): 46.4 (2020), 48.6 (2021), 39.1 (2022), 36.4 (2023), 34.7 (2024), declining to 30.8 (2028).

### Financial Sector and Supervision
- Banking sector health
  - Regulatory capital to risk-weighted assets: 22.5 (2020), 21.5 (2021), 19.5 (2022), 20.2 (2023Q3).
  - Nonperforming loans to total gross loans: 6.1 (2020), 5.2 (2021), 3.3 (2022), 3.5 (2023Q3).
  - Credit to nonfinancial private sector (percent of GDP): 150.3 (2020), 135.2 (2021), 116.6 (2022), 102.7 (2023).
- Supervisory priorities and risks
  - Banking system remains profitable, well-capitalized, and liquid.
  - Directors emphasized continued monitoring given the large size of banks and their international exposure; large banks constitute a systemic risk and require close supervision.
  - Commended introduction of the lender of last resort facility; encouraged strengthening the resolution framework.
  - Ensuring the Andorran Financial Authority is autonomous and fully resourced is key.

### Policy Priorities and Recommendations
- Fiscal policy
  - Maintain tight fiscal policy as long as growth remains close to potential and price pressures are persistent.
  - There is fiscal space for higher public investment to support potential growth and mitigate structural bottlenecks.
  - Channel available fiscal space toward higher infrastructure and affordable housing to tackle structural bottlenecks.
  - Pension system reform is overdue to secure long-term sustainability; authorities should build consensus to implement needed pension reforms given population aging.
- Structural reforms and governance
  - Ambitious structural reforms to diversify the economy and address bottlenecks: remove constraints on investment, improve housing affordability, retain talent, foster digitalization and economic efficiency.
  - Expand climate change adaptation strategy.
  - Prepare to take full advantage of the EU Association Agreement once adopted, to access the single market.
  - Continue efforts in governance, anticorruption, and AML/CFT frameworks; close data gaps with IMF technical assistance.
- Financial sector measures
  - Monitor the impact of widening interest rate margins on asset quality.
  - Further strengthen the resolution framework and ensure the regulator’s autonomy and resourcing.

### Key Projections and Indicators (selected)
- Real GDP growth: -11.2 (2020); 8.3 (2021); 9.6 (2022); 2.3 (2023); 1.8 (2024); 1.5 (2025–2028).
- Inflation (period average): 0.1 (2020); 1.7 (2021); 6.2 (2022); 5.6 (2023); 4.3 (2024); 2.4 (2025); 2.1 (2026); 1.7 (2027–2028).
- Unemployment rate: 2.9 (2020); 3.3 (2021); 2.1 (2022); 1.5 (2023–2028).
- Gross international reserves (millions of euros): 41.9 (2020); 138.1 (2021); 338.4 (2022–2028).
- Public debt (percent of GDP): 46.4 (2020); 48.6 (2021); 39.1 (2022); 36.4 (2023); 34.7 (2024); 33.4 (2025); 32.3 (2026); 31.3 (2027); 30.8 (2028).

*Source: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION — PRINCIPALITY OF ANDORRA (February 9, 2024).*

### 4.      On the back of the strong growth momentum, fiscal consolidation proceeded

### 4.      On the back of the strong growth momentum, fiscal consolidation proceeded promptly, and fiscal buffers were rebuilt

### Fiscal performance and public finances
- Primary surplus of 3.6 percent of GDP in 2022; public debt down to 37.1 percent of GDP—below the 40 percent fiscal rule.
- Estimated primary balance surplus of 0.9 percent of GDP and overall surplus of 0.4 percent of GDP in 2023.
- Revenue diversification measures introduced in 2022:
  - Tourist and carbon taxes.
  - Law on the effective tax rate adopted in January 2023 stipulating a minimum effective tax rate of 3 percent on the current year profits, to be applied from 2024.
  - 10 percent capital gains tax on resold properties to limit housing speculation in luxury real estate and incentivize affordable housing.
- Debt management and reserves:
  - Issued €1.2 billion in Eurobonds in 2022 to extend debt maturity at favorable rates and diversify financing sources.
  - Authorities added funds from debt issuance to the 2021 allocation of IMF Special Drawing Rights (SDRs) to bring reserves up to 10 percent of GDP.
  - Average maturity of debt increased from 2.7 years in 2019 to about 8 years by end-2022.
- Fiscal framework and projections:
  - Central government debt ceiling of 40 percent of GDP and an overall deficit limit of 1 percent.
  - Government expected to continue running primary balance surpluses of about 1 percent of GDP over the medium term, resulting in a reduction of debt to about 30 percent of GDP by 2027.
  - 2024 budget projects an increase in public investment in affordable housing and infrastructure.

### Banking sector, profitability, and resilience
- Profitability improvements:
  - Annualized ROA of 0.8 percent in 2023Q3, up from 0.6 percent in 2022 and 0.5 percent in 2021.
  - Increase in interest margins drove profitability above European peers.
- Credit and asset quality:
  - Domestic credit declined by 4.7 percent during the first 9 months of 2023 due to faster amortization of variable rate loans.
  - Nonperforming loans stabilized above 3 percent in 2023 after declining substantially in 2022.
- Capitalization and liquidity:
  - Tier 1 capital ratio at 19.4 percent at 2023Q3.
  - LCR at around 200 percent at 2023Q3.
- Structural size and exposures:
  - Bank consolidated assets were 5.5 times GDP at end-2022.
  - Off-balance sheet assets under management were 20 times GDP at end-2022.
  - Nonresident deposits were about 109 percent of GDP in 2022.
- Regulatory and policy actions:
  - Law 36/2022 established a Lender of Last Resort (LOLR) facility in December 2022 to provide emergency liquidity assistance to distressed but solvent banks.
  - The LOLR can be activated by a special technical commission chaired by the Minister of Finance and was developed in line with IMF technical assistance.
  - Sector consolidation reduced number of banks from 5 to 3, with cost-to-income ratio above 70 percent in 2022.
- Income structure:
  - Banks’ operating income decomposition (end-of-2022): Net Interest Income 27%, Net Fees and Commissions Income 56%, Others 17%.

### External sector and current account
- Current account:
  - Current account balance rose to 17.3 percent of GDP in 2022.
  - Net exports and net primary income on average contribute almost equally to the large current account surplus.
- Trade and tourism dynamics:
  - Trade surplus in services (driven primarily by tourism) larger than trade deficit in goods, yielding a positive overall trade balance.
  - Goods and services balance recovered in 2022 with tourism resumption and contained energy price increases due to long-term supply contracts.
  - Tourist expenditure recovered, driven by a sharp increase in expenditure per visitor.
  - Number of visitors reached a record 9.2 million during January to October of 2023, a 13 percent increase from the same period in 2022.
- Staff assessment:
  - Staff assesses the external position to be substantially stronger than the level implied by fundamentals and desirable policies—suggesting an imbalance in the savings-investment balance.

### Outlook and risks
- Growth and inflation forecasts:
  - Growth forecast at 1.8 percent in 2024 and at 1.5 percent from 2025 onwards (staff baseline).
  - Projected headline inflation at 4.3 percent in 2024 due to higher imported prices; inflation projected to subside to 2 percent only by end-2025 and remain slightly below 2 percent thereafter.
  - Investment projected to remain low; consumption expected to be the main growth driver.
- Risk assessment:
  - Risks are balanced but subject to substantial uncertainty and bottlenecks.
  - Downside risks include slower global growth, more persistent inflation, tighter for longer monetary policy, and climate-related risks due to reliance on winter tourism.
  - Upside scenario: stronger regional demand, lower inflation, and adoption of the EU Association Agreement could boost tourism and investment.
- Macroeconomic buffers available:
  - Low debt, fiscal space, newly constituted foreign reserves, large current account surplus, and well-capitalized and liquid banks to mitigate downside risks.

### Structural bottlenecks and policy priorities
- Identified constraints:
  - Geography, small domestic market, and low investment limit potential growth.
  - Housing affordability issues, labor shortages, and climate change are structural bottlenecks.
  - Population aging poses substantial contingent liabilities.
- Pension and healthcare:
  - Social security fund projected to accumulate deficits starting from 2026, rising to 8.2 percent of GDP by 2042 by which point its reserve fund will be depleted.
  - Public pension expenditure as a share of GDP expected to see one of the largest increases in the region.
  - Pension reform is a priority; political consensus sought with aim to have reform approved by mid-2025.
  - Authorities preparing the ground for a healthcare reform over the medium-term.
- Policy recommendations and priorities:
  - Use room within the fiscal framework to implement growth-enhancing public investment (social and affordable housing, upskilling the workforce, improving connectivity) while maintaining fiscal discipline.
  - Continue to strengthen the public sector balance sheet through debt reduction and reserve accumulation; use future surpluses to decrease outstanding debt and increase international reserves.
  - Continue policy of diversifying debt and extending maturities to decrease rollover risks and mitigate interest rate increases.
  - Prioritize comprehensive pension reform (adjustment of contribution rate, conversion factor, retirement age) to ensure long-term sustainability of the social security fund.
  - Maintain close surveillance of the banking sector given its large size and international exposure; complement the LOLR with continued close supervision and a well-designed resolution framework.
  - Monitor interest rate effects on asset quality and require proactive bank action in case of significant deterioration; closely monitor large exposures and connected lending.

### Authorities’ views
- Authorities generally agreed with staff on the outlook and balance of risks; they are slightly more optimistic on medium-term diversification and private investment.
- Authorities view the 2024 budget as an important expansion of public investment (including housing) while preserving fiscal responsibility.
- Parliamentary majority leading pension reform, aiming for approval by mid-2025.
- Authorities plan investments in renewable energy and transportation to mitigate carbon emissions and expect the EU Association Agreement to support diversification.

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1andea2024001.pdf*

### 16.      The changing financial landscape brings opportunities and risks for banks. Andorran

### 1andea2024001 - 16.      The changing financial landscape brings opportunities and risks for banks. Andorran

### Banking sector — opportunities, risks, and supervisory priorities
- Findings
  - Andorran banks have been expanding in the EU and the US where they run independent subsidiaries focused on private banking services.
  - Expansion abroad diversifies revenues and profits but exposes banks to additional country and reputational risks.
  - The March 2023 banking turmoil in the US and Europe revealed rapid propagation of bank stress driven by abrupt shifts in market sentiment and customer (especially high net worth individuals) and counterparty behaviors.
  - Increased speed of bank runs due to 24/7 payments, mobile banking, and social media.
  - The lender of the last resort facility was introduced in 2022.
  - Banks’ main source of income is the relatively low-risk private banking business, but banks are of systemic importance.

- Policy recommendations for the AFA and supervisors
  - Reinforce resolution planning requirements.
  - Explore implications for deposit insurance.
  - Work closely with foreign supervisors and continue close cooperation with supervisory authorities from jurisdictions where Andorran banks operate.
  - Ensure the AFA is an autonomous, fully resourced supervisor with the power to conduct in-depth, risk-based assessments, enforce findings, and deploy a solid crisis management capacity.
  - Continue close monitoring of banking activities and monitor the effect of interest rate increases on asset quality; require banks to act proactively if deterioration occurs.

### Impact of the EU Association Agreement on the financial sector
- Findings
  - The Agreement will simplify entrance to EU countries for Andorran banks and will also allow foreign banks to expand in Andorra and compete with domestic banks.
  - Financial sector integration incorporates a transitional period of 15 years over which Andorra should fully adopt the EU financial sector legislation, supervision, and regulation.
  - The Agreement gives significant flexibility on the timing of the integration of each of the four subsectors covered (banking, insurance, asset management, and financial services).
  - Implementation will depend on an assessment of the successful transposition of the EU framework for each subsector.
  - The Agreement does not impose restrictions on Andorra’s taxation system.
  - A quota system for active residents, passive residents and seasonal or cross-border workers will be established on free movement of people.

- Policy recommendations
  - Use the transition periods to prepare the economy and the banking system to continue providing financial services while reaping benefits and minimizing distortions.
  - Communicate implications of the Agreement clearly and prepare for smooth transition.

### Structural policies — diversification, investment, and digitalization
- Findings
  - Economic diversification and improvements in relative terms-of-trade would support real GDP and real income growth.
  - The deep recession in 2020 illustrated exposure to the hospitality sector and to external demand mostly from France and Spain.
  - Trade and hospitality activity account for about 30 percent of the economy’s gross value added (GVA) and 40 percent of employment; with other sectors connected to tourism, the share could be more than half of the economy.
  - Better infrastructure projects (planned heliport, projects for tram and cable transportation, multi-purpose arena) aim to enhance attractiveness beyond immediate neighbors.
  - Investment suffers from high red tape and difficulties attracting talent and building human capital.
  - The government adopted a business digitalization program in June 2022.
  - The December 2022 law on digital economy, entrepreneurship and innovation allows creation of a special economic zone and a legal framework for incubators and digital nomads.

- Policy recommendations
  - Reduce administrative rigidities associated with starting a business.
  - Favor access to alternative sources of financing.
  - Implement measures to attract and retain talent.
  - Foster coordination between central and local governments and continue digitalization of public administration.

### Housing affordability — findings and policy directions
- Findings
  - In a recent survey, housing affordability was noted as the most pressing economic issue for 57 percent of respondents in Andorra.
  - Andorra is an outlier in Europe with a renter-dominated real estate market—70 percent of households are tenants.
  - Affordability tends to be lower for renters; seasonal demand for temporary housing compounds concerns and complicates hiring of foreign workers.
  - Low-skilled workers and low-income households are disproportionately affected.
  - The housing cost overburden rate for those in the lowest income quintile was among the highest in the region.
  - Authorities have eased requirements for housing support, implemented temporary caps on rent increases, increased the stock of social apartments, repurposed buildings for residential housing, and slowed construction permits for housing intended for sale rather than rent.

- Policy recommendations
  - Raise the stock of rental housing; consider public investment in affordable housing.
  - Focus on temporary and well-targeted measures that minimize market distortions and restore proper market incentives to invest in rental property development.
  - Use measures to curb real estate speculation consistently with other priorities such as attracting foreign investment and highly qualified workers.

### Climate change — macro-critical risks and strategy
- Findings
  - Climate change is macro-critical given dependence on winter tourism; tourism (mostly winter) accounts for one third of the economy.
  - Risks include shorter winter seasons, declining snow falls, higher costs from artificial snow making.
  - Andorra’s higher altitude makes it more resilient than other winter tourism locations in the region.
  - The authorities’ climate strategy seeks to reduce 37 percent of non-absorbed emissions compared to 2005 levels by 2030, and to achieve carbon neutrality by 2050.
  - Staff calculations indicate achieving decarbonization objectives would require a considerable increase in the carbon tax and very substantial efficiency gains in the power, transport, and residential sectors.

- Policy recommendations
  - Accelerate the adaptation component of the climate strategy.
  - Promote renewable and high energy efficiency technologies and efficient energy use across sectors.
  - Explore additional financing options to scale up measures, possibly in cooperation with the European Investment Bank.

### Governance, AML/CFT, and data gaps
- Findings
  - Ratifying the United Nations Convention Against Corruption (UNCAC) and developing an anti-corruption strategy are recommended priorities.
  - Public procurement reform introduced a new contracting platform and electronic invoicing; a public website for procurement contracts was launched in September 2022.
  - Beneficial ownership information of companies awarded procurement contracts is only available for Andorran companies from the Registry of Commerce and is disclosed upon justified request.
  - Andorra is ranked 4th of 152 countries by the Basel AML index and positively assessed by Moneyval.
  - The AFA introduced a new quarterly reporting requirement for cross-border transactions of supervised Andorran entities and their subsidiaries.
  - Andorra maintains the National Summary Data Page starting in 2022; annual time series for the general government in fiscal accounts began in 2023.
  - GDP by expenditure is not yet available; authorities aim to start compiling it.

- Policy recommendations
  - Request and publicly disclose beneficial ownership information for bidders (including foreigners).
  - Continue to enhance the AML/CFT framework, focusing on ML/TF risks related to cross-border flows and virtual assets.
  - Focus AML/CFT supervisory resources on higher risk areas and effectively impose sanctions for regulatory breaches.
  - Continue closing data gaps with IMF technical assistance and improve timeliness/frequency of International Investment Position and balance of payment statistics; continue work on monetary and financial statistics.

### Staff appraisal — outlook and priorities
- Key findings and projections
  - The Andorran economy experienced strong growth in 2022, closing the output gap after a deep COVID recession.
  - The economy is growing slightly above potential, driven by the service sector and a record number of visitors.
  - Over the medium-term, growth is projected to converge to potential growth at around 1.5 percent.
  - Public debt is expected to fall below 30 percent of GDP by 2028.
  - Population aging will increase healthcare and pension costs; public pension expenditure as a share of GDP is expected to see one of the largest increases in the region and poses sustainability risks.

- Policy recommendations
  - Use available fiscal space to address structural bottlenecks while maintaining fiscal discipline given persistent inflation and a positive output gap.
  - Proceed with pension reform expeditiously and comprehensively to ensure sustainability of the social security fund.
  - Ensure the AFA remains autonomous and fully resourced to preserve financial stability.
  - Improve connectivity and infrastructure, address housing affordability with targeted measures that minimize market distortions, and accelerate the climate adaptation strategy.

*Source: IMF staff report chapter content provided in the supplied PDF excerpt.*

### 35.      The recently negotiated EU Association Agreement has the potential to unlock

### 1andea2024001 - 35.      The recently negotiated EU Association Agreement has the potential to unlock

### EU Association Agreement: opportunities and implementation timing
- If approved by referendum in the first half of 2025, the agreement will take effect after that and eventually result in full access to the EU market without imposing restrictions on tax policy.
- Significant transition periods for various sectors are included to:
  - allow the government to prepare the economy to take full advantage of access to the single market;
  - avoid disruptions, particularly in the financial sector.

### Governance, transparency, and data improvements
- Progress to continue:
  - transparency and accountability of public spending;
  - countering corruption;
  - improving data (including macroeconomic statistics and better information exchange between central and local governments).
- Specific reforms underway or recommended:
  - reform of the public procurement framework and introduction of an electronic contracting and invoicing platform (noted as welcome).
  - ratify the United Nations Convention Against Corruption and develop an anti-corruption strategy (identified as key priorities).
  - further improve the effectiveness of the AML/CFT framework to reinforce financial stability.

### IMF engagement
- Recommendation: the next Article IV consultation with the Principality of Andorra should take place on the standard 12-month cycle.

### Fiscal and public sector headline figures (selected projections and levels as presented)
- Revenue (millions, national currency): 2020: 521.6; 2021: 544.0; 2022: 695.4; 2023: 731.8; 2024: 765.1; 2025: 792.1; 2026: 818.5; 2027: 847.4.
- Tax Revenue (millions): 2020: 306.5; 2021: 353.3; 2022: 468.5; 2023: 476.5; 2024: 505.4; 2025: 528.7; 2026: 548.1; 2027: 566.5; 2028: 587.2.
- Expenditure (millions): 2020: 621.8; 2021: 618.3; 2022: 600.8; 2023: 665.9; 2024: 722.0; 2025: 747.4; 2026: 778.3; 2027: 801.5; 2028: 834.4.
- Net lending/borrowing (millions): 2020: -100.1; 2021: -74.3; 2022: 94.6; 2023: 13.1; 2024: 9.7; 2025: 17.7; 2026: 13.9; 2027: 17.0; 2028: 13.0.
- Public Debt (millions of euros): 2020: 1,106.0; 2021: 1,302.0; 2022: 1,190.4; 2023: 1,190.4; 2024: 1,190.4; 2025: 1,190.4; 2026: 1,190.4; 2027: 1,190.4; 2028: 1,210.4.
- Percent of GDP: Public Debt: 2020: 43.7; 2021: 46.3; 2022: 37.1; 2023: 34.5; 2024: 32.9; 2025: 31.7; 2026: 30.7; 2027: 29.7; 2028: 29.3.
- Nominal GDP (millions, euros): 2020: 2,531.1; 2021: 2,811.0; 2022: 3,210.3; 2023: 3,445.6; 2024: 3,613.0; 2025: 3,755.7; 2026: 3,880.4; 2027: 4,007.4; 2028: 4,136.6.
- Memorandum: Gross Financing Needs (millions, euros): 148.4; 572.4; 536.6; 0.0; 0.0; 0.0; 0.0; 483.0; 0.0. Percent of GDP shown as: 5.9; 20.4; 16.7; 0.0; 0.0; 0.0; 0.0; 12.1; 0.0.

### Financial soundness and banking-sector indicators (selected)
- Regulatory capital to risk-weighted assets: 2019: 21.8; 2020: 22.5; 2021: 22.2; 2022: 19.5; 2023: 19.9; 2023Q1: 20.1; 2023Q2: 20.2.
- Nonperforming loans to total gross loans: 2019: 7.3; 2020: 6.1; 2021: 5.1; 2022: 3.3; 2023: 3.5; 2023Q1: 3.6; 2023Q2: 3.5.
- Liquidity coverage ratio (LCR): 2019: 201.7; 2020: 198.7; 2021: 220.3; 2022: 218.3; 2023: 207.3; 2023Q1: 202.7; 2023Q2: 199.6.
- Customer deposits to total (noninterbank) loans: 2019: 149.2; 2020: 150.7; 2021: 159.2; 2022: 181.0; 2023: 178.5; 2023Q1: 170.8; 2023Q2: 168.0.
- Foreign-currency-denominated liabilities to total liabilities: 2019: 22.5; 2020: 21.6; 2021: 20.8; 2022: 20.4; 2023: 19.7; 2023Q1: 20.2; 2023Q2: 21.3.
- Note: Data for 2023 are preliminary and unaudited, and subject to revisions.

### External sector assessment — overall
- Overall Assessment: The external position of Andorra in 2023 was substantially stronger than the level implied by fundamentals and desirable policies. With one of the world’s largest current account surpluses, this result is in line with expectations.
- Data limitations noted:
  - BOP and IIP data available only from 2017 and 2018, respectively;
  - IMF staff projects current account data but do not project the financial account and IIP.
- Potential policy response: Rebalance the economy towards greater investment to address an excessive savings-investment gap and support medium-term potential growth, economic diversification, tourism resilience, and structural bottlenecks such as lack of affordable housing.

### Foreign assets and liabilities (IIP) and financial account
- IIP trajectory:
  - IIP position peaked at 390.9 percent of GDP in 2021 and declined to 339.9 percent of GDP in 2022.
  - 2022 NIIP: 339.9 percent of GDP. Gross Assets: 577.3; Gross Liabilities: 237.4. Debt Assets: 218.2; Debt Liabilities: 32.2 (all in percent of GDP).
- More than half of total liabilities owed by Andorra were concentrated in currency and deposits from non-residents, estimated at 106.9 percent of GDP (noted as a potential liquidity risk).
- Financial account: net portfolio investment reached 41.8 percent of GDP in 2022. Financial account position remained strong at 17.9 percent of GDP in 2022.
- Assessment: High gross other investment liabilities stemming from dependence on foreign depositors warrants attention. Andorra passed into law a Lender of Last Resort facility in December 2022.

### Current account, competitiveness, and REER
- Current Account balance (percent of GDP): 2019: 18.0; 2020: 15.5; 2021: 14.1; 2022: 17.3; 2023: 17.3; projected 2024–2028: 17.3, 17.5, 17.6, 17.7, 17.7, 17.8 (through 2028).
- Drivers: tourism exports (trade surplus in services) and net primary income contribute almost equally to the large current account surplus.
- 2023 assessment:
  - CA model: actual CA 17.3 percent of GDP; CA Norm 12.6 percent of GDP; CA Gap 5.1 percent of GDP; relative policy gap 5.1 percent of GDP.
  - REER gaps: CA-model implied REER undervaluation -11.4 percent; REER index model undervaluation -8.8 percent.
  - CA model / REER model reported CA Gap values: 5.1 and 3.9 (in percent of GDP) respectively.
- Price and cost competitiveness indicators:
  - CPI-based REER depreciated by 13 percent between end-2020 and November 2023.
  - Unit Labor Costs (ULC) are about 42 percent of Spain’s in trade and tourism.
  - "1-week Cost of Ski Vacation" index shows Andorra is an inexpensive destination compared with other European ski destinations, especially in hotel cost comparisons.
- IMF staff conclusion: REER and current account results corroborate that Andorra’s external position is stronger than fundamentals imply, indicating excess savings / low investment.

### Reserves, FX classification, and liquidity buffers
- IMF SDR allocation and deposits:
  - 2021 allocation of IMF SDRs increased 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 in March 2022.
  - €40 million were deposited at the Banque de France, and €60 million at the Nederlandsche Bank as gross international reserves in 2022.
  - As of end-2023, the total level of international reserves amount to 10 percent of GDP.
- Exchange rate arrangements: Andorra’s legal tender is the euro; de jure and de facto exchange rate arrangements classified as “no separate legal tender”.
- Staff assessment:
  - Reserves should amount to 9 percent of GDP in 2023 under the assumption that banks have enough high-quality liquid assets to cover their liquidity needs. Authorities have already accumulated this amount.
  - Authorities are exploring additional funding sources and negotiating opening additional accounts at central banks of other euro area members.
- Government liquidity availability (percent of 2023 GDP) shown:
  - Liquidity availability: 6.0 (€206M) and 3.0 (€102M) and 4.1 (€138M) and 5.9 (€200M) in the graphic context (labels as presented).
  - Fiscal buffer defined as equivalent to one month of total government spending.

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

### Annex II. Risk Assessment Matrix

### Annex II. Risk Assessment Matrix

### Global Risks: likelihood, impact, and policy responses
- Intensification of regional conflict(s)
  - Likelihood: High.
  - Expected impact: Low on Andorra (limited direct linkages with Russia and Ukraine); indirect effects via higher inflation regionally and lower tourism flows.
  - Policy responses:
    - Implement policies to cope with rising and volatile food and energy prices.
    - Implement policies to diversify the tourism sector, improve its standards and remain competitive.

- Commodity price volatility
  - Likelihood: High.
  - Expected impact: Medium. Higher energy and food prices push up headline and core inflation regionally, could weigh on tourism; domestic exposure to energy price volatility partially mitigated by long-term contracts; core inflation could remain persistently high; wage increases tend to follow CPI; disproportionate effects on low-income households.
  - Policy responses:
    - Implement policies to cope with rising and volatile food and energy prices, including consumption moderation.
    - Continue setting long-term contracts with energy suppliers, to the extent possible.
    - Accelerate planned reforms to reduce the share of imported energy and boost domestic energy production.

- Abrupt global slowdown or recession
  - Likelihood: Medium.
  - Expected impact: High. Slowdown or recession in the region could disrupt the hospitality sector and weaken economic growth.
  - Policy responses:
    - Accelerate policies to diversify the economy and increase the resilience of the tourism sector.
    - Stand ready with targeted fiscal and financial support measures.

- Monetary policy miscalibration
  - Likelihood: Medium.
  - Expected impact: Medium. Premature loosening by major central banks could de-anchor inflation expectations and trigger wage-price spiral with spillovers to financial markets; Andorra impacted through imported prices.
  - Policy responses:
    - Given importance of imported inflation, tight fiscal policy, intensified financial supervision, and structural reforms will be useful but of limited impact.
    - Policies to mitigate social impact of lasting inflation, including targeted social support, will be important.

- Extreme climate events
  - Likelihood: Medium.
  - Expected impact: Medium. Rising temperatures affect Andorra's ski slopes; reduced snow shortens ski seasons and negatively impacts tourism; partly mitigated by higher slopes and early investments in artificial snow-making equipment.
  - Policy responses:
    - Develop adaptation policies to respond to climate change.
    - Provide targeted and temporary support to ski-related businesses, as needed.

### Domestic Risks: likelihood, impact, and policy responses
- Labor shortages
  - Likelihood: Medium.
  - Expected impact: Medium. Hospitality sector reliance on foreign seasonal workers; shortages amplified by lack of affordable housing and labor market rigidities; tight labor market and further wage pressures.
  - Policy responses:
    - Continue policies encouraging domestic labor force participation.
    - Reduce labor market rigidities.
    - Improve attractiveness of the Andorran labor market, including housing support and training.

- Housing affordability worsen
  - Likelihood: High / Medium.
  - Expected impact: High / Medium. Rising real estate and rent prices worsen housing cost overburden; lack of affordable housing increases inequality and reduces labor market attractiveness for foreign and seasonal workers; may affect foreign investment decisions.
  - Policy responses:
    - Focus on improving affordability for tenants.
    - Income support programs, rent controls, and landlord-tenant regulation could provide temporary relief.
    - Implement measures to boost rental availability from existing housing stock.
    - Raise the low stock of rental housing and access to it.

- Reputational shock to the banking sector
  - Likelihood: Low.
  - Expected impact: High / Medium. Large banks focused on private banking and dependent on large foreign deposits could face deposit flight; a banking failure would have considerable economic impact. Mitigating factors: well capitalized and liquid banks and limited sovereign-bank nexus.
  - Policy responses:
    - Further improve effectiveness of the ML/TF framework and continue to effectively monitor cross border flows.
    - Keep fiscal and external buffers to mitigate a potential effect on the economy.

### Key findings from Annex III — Sovereign Risk and Debt Sustainability Assessment
- Overall risk of sovereign stress: low.
- Public debt projections and fiscal framework
  - Public debt projected to decline to about 30 percent of GDP on the back of primary surpluses over the medium term.
  - Fiscal framework prescribes a central government public debt ceiling of 40 percent of GDP.
  - Under the baseline, growth to long-term potential of 1.5 percent.
  - Projected public debt about 31 percent of GDP by 2028.
  - Central government debt ceiling: 40 percent of GDP; general government debt ceiling: 55 percent of GDP.

- Recent debt dynamics and debt management
  - Public debt increased during the pandemic; Euro Medium Term Notes issuance program allowed the government to borrow €1.175 billion with 5 to 20 years maturity.
  - Average debt maturity extended from 2.7 years in 2019 to 8 years at end-2022.
  - Authorities borrowed €17 million from the Council of Europe Development Bank during 2020–22 for infrastructural needs.
  - The first large rollover comes in 2027 for €500 million notes; assumption that government will roll over maturing debt into same instruments with some uncertainty about rollover rates.

- Risks and contingencies
  - Risks to the debt profile considered manageable; major risk is refinancing of notes in 2027 and 2031 at potentially higher rates than borrowed in 2021–22.
  - Baseline assumes gradual reduction in interest rates globally over the medium-term, making 2027 rollover manageable.
  - Andorran social security fund projected to be depleted by 2040 due to an unsustainable pension system; pension reform under debate needs approval soon to prevent spillovers.

### Baseline scenario and fiscal-macro numbers (selected exact figures)
- Public debt (percent of GDP) — Actual / Projection:
  - 2022: 39.1
  - 2023: 36.4
  - 2024: 34.7
  - 2025: 33.4
  - 2026: 32.3
  - 2027: 31.3
  - 2028: 30.8
  - 2029: 30.3
  - 2030: 29.9
  - 2031: 29.4
  - 2032: 29.3

- Change in public debt (percent of GDP):
  - 2022: -9.5
  - 2023: -2.6
  - 2024: -1.7
  - 2025: -1.3
  - 2026: -1.1
  - 2027: -1.0
  - 2028: -0.5
  - 2029: -0.5
  - 2030: -0.5
  - 2031: -0.5
  - 2032: -0.1

- Primary deficit (percent of GDP):
  - 2022: -5.5
  - 2023: -3.2
  - 2024: -2.5
  - 2025: -3.2
  - 2026: -3.2
  - 2027: -3.3
  - 2028: -3.3
  - 2029: -3.4
  - 2030: -3.5
  - 2031: -3.7
  - 2032: -3.8

- Noninterest revenues (percent of GDP): 2022: 39.7; 2023: 38.8; 2024: 38.5; 2025: 39.4; 2026: 39.5; 2027: 39.5; 2028: 39.6; 2029: 39.6; 2030: 39.7; 2031: 39.8; 2032: 39.8

- Noninterest expenditures (percent of GDP): 2022: 34.2; 2023: 35.6; 2024: 36.0; 2025: 36.2; 2026: 36.3; 2027: 36.2; 2028: 36.3; 2029: 36.3; 2030: 36.2; 2031: 36.1; 2032: 36.1

- Automatic debt dynamics (percent of GDP): 2022: -5.0; 2023: -2.3; 2024: -1.2; 2025: -0.7; 2026: -0.5; 2027: -0.3; 2028: 0.2; 2029: 0.3; 2030: 0.3; 2031: 0.3; 2032: 0.6

- Other identified flows (percent of GDP): 2022: 2.0; 2023: 2.6; 2024: 1.9; 2025: 2.7; 2026: 2.7; 2027: 2.6; 2028: 2.5; 2029: 2.7; 2030: 2.8; 2031: 2.9; 2032: 3.1

- Gross financing needs (GFN) (percent of GDP): 2022: 14.5; 2023: -2.6; 2024: -1.9; 2025: -2.7; 2026: -2.7; 2027: 9.9; 2028: -1.4; 2029: -1.6; 2030: -1.5; 2031: 9.5; 2032: 0.0

- Debt service (percent of GDP) — component of GFN:
  - 2022: 20.1
  - 2023: 0.6
  - 2024: 0.5
  - 2025: 0.6
  - 2026: 0.6
  - 2027: 13.2
  - 2028: 1.8
  - 2029: 1.8
  - 2030: 2.0
  - 2031: 13.1
  - 2032: 3.7

- Memo macro numbers:
  - Real GDP growth (percent): 2022: 8.8; 2023: 3.0; 2024: 1.8; 2025: 1.5; 2026: 1.5; 2027: 1.5; 2028: 1.5; 2029: 1.5; 2030: 1.5; 2031: 1.5; 2032: 1.5
  - Inflation (GDP deflator; percent): 2022: 4.2; 2023: 4.9; 2024: 3.1; 2025: 2.4; 2026: 1.8; 2027: 1.8; 2028: 1.7; 2029: 1.7; 2030: 1.7; 2031: 1.7; 2032: 1.7
  - Nominal GDP growth (percent): 2022: 14.2; 2023: 7.3; 2024: 5.0; 2025: 3.9; 2026: 3.3; 2027: 3.3; 2028: 3.2; 2029: 3.2; 2030: 3.2; 2031: 3.2; 2032: 3.2
  - Effective interest rate (percent): 2022: 1.7; 2023: 1.6; 2024: 1.6; 2025: 1.7; 2026: 1.7; 2027: 2.3; 2028: 4.0; 2029: 4.1; 2030: 4.1; 2031: 4.2; 2032: 5.4

### Medium-term and long-term risk assessment signals
- Medium-term risks: assessed as low; mechanical signal: Low.
- Debt fanchart and GFN indicators
  - Debt fanchart index (DFI): 0.9 — Risk signal: 3/Low.
  - Average baseline GFN: -1.9 / -0.6 (percent of GDP) (modules reported as "Average baseline GFN-1.9-0.6 (percent of GDP)").
  - GFN financeability index (GFI): 0.4 — Risk signal: 4/Low.
  - Final assessment: Prob. of missed crisis, 2023-2028, if stress not predicted: 0.0 pct.
  - Prob. of false alarms, 2023-2028, if stress predicted: 89.8 pct.

- Triggered modules and long-term risks
  - Triggered modules include Pensions and Health.
  - Andorra: Long-Term Risk Assessment highlights "Large Amortization" as a projection-related risk; overall risk indication includes "Medium-term extrapolation with debt stabilizing primary balance" and "Large amortizations."

### Policy recommendations and priorities (aggregated)
- Maintain and preserve fiscal buffers and primary surpluses to continue declining public debt toward about 31 percent of GDP by 2028.
- Keep proactive debt management strategy (e.g., lengthening maturities and taking advantage of favorable rates) and prepare for large rollovers in 2027 and 2031.
- Approve pension reform soon to prevent social security fund depletion by 2040 and potential adverse spillovers to fiscal position.
- Strengthen ML/TF framework and cross-border flow monitoring to reduce reputational banking risks.
- Implement adaptation and targeted support measures for climate-related impacts on ski-tourism; accelerate energy diversification and domestic energy production.
- Address housing affordability and labor market constraints to support tourism sector resilience and labor supply (including housing support, rental stock measures, and labor market reforms).
- Stand ready with targeted fiscal and financial support measures in the event of regional recession or systemic shocks.

*Source: Annex II. Risk Assessment Matrix; Annex III. Sovereign Risk and Debt Sustainability Assessment, 1andea2024001 - Annex II. Risk Assessment Matrix.*

### Annex IV. Authorities’ Response to Past IMF Policy

### Annex IV. Authorities’ Response to Past IMF Policy Recommendations

### Fiscal Policy
- IMF 2022 Article IV recommendation: Stand ready to reinstate COVID-related support measures if the recovery falters; provide targeted support to sectors still emerging from the pandemic to prevent long-term scarring.
  - Authorities’ response: The economy recovered strongly in 2021–22 and no support measures were needed.
- IMF 2022 recommendation: Find the right balance between consolidation to meet the fiscal rule targets and allowing for growth-enhancing spending.
  - Authorities’ response: Fiscal consolidation proceeded swiftly. However, the central government investment remains low, though there are plans to increase it in the next few years.
- IMF 2022 recommendation: Continue to diversify Andorra’s debt in both the international and domestic markets, focusing on maintaining low gross financing needs.
  - Authorities’ response: The authorities completed their medium-term issuance program in 2022, which enabled them to lock in favorable rates and increase debt maturity.
- IMF 2022 recommendation: Reform the pension system to ensure its sustainability.
  - Authorities’ response: The reform has been delayed and is currently being discussed by the legislators.
- Authorities’ summary (statement):
  - General government balance: large surplus in 2022 (4.8 percent) and 2023 (2.6 percent).
  - General government debt ratio: 36.4 percent (2023), peak 48.6 percent (2021).
  - Primary balance surpluses of about 1 percent expected over the medium-term; could bring debt below 30 percent by 2028.
  - Average interest rate for government debt in 2023: 1.34 percent; average maturity: 7.3 years.
  - Government has no financing needs until 2027.
  - Public debt management remains a priority given demographic pressures and increased age-related spending.
  - Key health and pension developments: in January 2024 the Government announced key features of the healthcare system National Pact; Parliamentary majority working to build consensus on pension reform.

### Financial Sector
- IMF 2022 recommendation: Continue close monitoring of the banking sector after withdrawal of COVID-related support.
  - Authorities’ response: The supervisor closely monitors asset quality at banks including early indicators.
- IMF 2022 recommendation: Further reinforce supervision of liquidity risk, including enhancing monitoring and stress testing of net liquidity outflows.
  - Authorities’ response: The AFA closely follows movements of deposits and exposures to counterparties; completed a comprehensive liquidity stress test in 2023 demonstrating banks’ resilience to liquidity shocks.
- Authorities’ summary (statement):
  - Banking sector metrics as of 2023Q3:
    - Tier 1 capital ratio on an aggregate individual basis: 19.4 percent.
    - LCR: approximately 200 percent.
    - Profitability: ROA improved from 0.5 percent (2021) and 0.6 percent (2022) to an annualized ROA of 0.8 percent in 2023Q3.
  - Macroprudential toolkit available to the AFA: capital conservation buffer, countercyclical capital buffer, capital buffer for systemically important institutions, systemic risk buffer.
  - Supervisory framework based on Basel Committee Core Principles and SREP guidelines.
  - Liquidity resilience: bill establishing Lender of Last Resort mechanism entered into force in December 2022; model replicates ECB emergency liquidity assistance; ECB extended maturity of temporary liquidity line (up to € 35 million) with the AFA until 31 January 2025.

### Structural Policies
- IMF 2022 recommendations and authorities’ responses:
  - Improve country connectivity and infrastructure to boost and diversify tourism.
    - Response: Authorities investing in a heliport to be completed by 2025; measures (notably for foreign seasonal workers) support diversification of the tourism sector.
  - Create a favorable environment for investment in high value-added sectors.
    - Response: Government adopted a program to help private businesses with digitalization; new law on digital economy, entrepreneurship and innovation provides for creation of a special economic zone to develop and test digital and innovative products.
  - Invest in education, vocational training, and reskilling to prepare workers for shift to high-skilled jobs.
    - Response: (No specific action detailed in annex text.)
  - Improve housing supply—tax empty properties more heavily and increase social housing stock to expand rental supply.
    - Response: Authorities have eased requirements for housing support; implemented temporary caps on rent increases; increased tax on empty properties; increased stock of social apartments; repurposed buildings for residential housing; slowed down construction permits for housing built to be sold rather than rented.
  - Build resilience to climate change.
    - Response: A comprehensive adaptation strategy still needs to be drawn out. Measures to foster mitigation are being adopted.
- Authorities’ statement on structural reforms:
  - Association Agreement with the EU: agreement at negotiators’ level reached in December 2023; will account for Andorra’s particular situation and include transition periods, particularly in the financial sector.
  - Housing: housing affordability is a key priority; government announced development of new houses (some projects commenced in early 2024) and an extension of lease contracts until 2027 to ensure sufficient affordable housing.
  - Climate commitments: ratified Paris Agreement (2016); committed to reducing emissions by 55 percent by 2030 and achieving carbon neutrality by 2050; implemented a carbon tax in 2021; public programs to improve building energy efficiency and acquisition of electric vehicles; state-owned energy enterprise investing in green energy with neighboring countries.

### Governance and Transparency
- IMF 2022 recommendation: Further align Andorra’s anti-corruption framework to international standards: ratify the United Nations Convention Against Corruption, develop an anti-corruption strategy, advance reform of public procurement framework, and publish beneficial ownership information.
  - Authorities’ response: No action has been taken (per annex table). Authorities’ statement: reiterate firm commitment to further strengthening national anticorruption framework and are currently considering the ratification of the UN Convention against Corruption.
- IMF 2022 recommendation: Continue efforts to close data gaps to enhance transparency and improve surveillance.
  - Authorities’ response: Progress in improving data quality across all sectors supported by IMF technical assistance.
- Authorities’ statement on AML/CFT and transparency:
  - AML/CFT alignment: steps taken to align with international best practices, including FATF recommendations.
  - Moneyval evaluation: currently rated Fully Compliant (C) and Largely Compliant (LC) in 37 of the 40 recommendations.
  - Implemented AML/CFT European regulations; updated National Risk Assessment; scaled up on-site inspections.

### Data, Statistics, and Technical Assistance
- Data adequacy: Broadly adequate for surveillance, but widespread data gaps exist; significant progress since IMF membership, particularly on Balance of Payments (BoP) statistics.
- National accounts and GDP:
  - Annual GDP by economic activities available only in nominal terms and published with a one-year lag.
  - Real GDP by economic activities: only growth rates published at quarterly frequency with a three-month lag; lower disaggregation than annual nominal series.
  - GDP by expenditure components: not available (neither nominal nor real). Authorities plan to publish expenditure and income components of GDP starting from 2024.
  - Authorities will extend quarterly GDP growth series backwards to start in 2002 (not in 2010).
  - Monthly value unit index of goods exports and imports started in 2022:Q3.
- Price statistics:
  - CPI and components published monthly within two weeks after reference period; weights updated annually; owner-occupied housing included using rental equivalence approach. Producer price index not compiled.
- Government finance statistics:
  - Fiscal data at annual frequency reported with a three-to-six-month delay after audit of public sector accounts.
  - Detailed monthly revenue and expenditure execution reports not available; quarterly fiscal data available on request with three-month delay.
  - Periodic reports on scheduled future debt service distinguishing amortization and interest needed; authorities only shared future debt service data for the central government.
- Monetary and financial statistics:
  - More granularity needed to produce the Other Depository Corporation survey per international standards.
  - Monetary and financial statistics (MFS) are not reported to IMF’s Statistics Department due to capacity constraints. IMF Technical Assistance in this area planned for 2024.
- Financial sector surveillance:
  - FSIs provided quarterly, but inconsistencies identified between FSI data and monetary statistics.
  - FSIs not directly reported to IMF’s Statistics Department.
  - Data on financial health of corporates and households not available yet; authorities will start publishing aggregate company financial statistics and financial ratios at annual frequency starting from 2022:Q3.
  - Real estate prices (residential and commercial) available quarterly.
- External sector statistics:
  - First annual BoP statistics disseminated May 2021 (with 2019 data); BoP data extended to 2022 and coverage and quality improved with IMF assistance.
  - International Investment Position (IIP) data available for 2019–22.
  - Authorities working to start compiling quarterly BoP and IIP by end-2024.
- e-GDDS:
  - Andorran authorities implemented the Enhanced General Data Dissemination System (e-GDDS) by launching a National Summary Data Page on May 6, 2022.
- Technical assistance (selected, 2020–23):
  - STA: External Sector Statistics (2020–23).
  - MCM: Bank Supervision (2021).
  - STA: e-GDDS (2021).
  - MCM: Systemic Liquidity Management: lender of last resort framework (2022).
  - Government Finance and Public Sector Debt Statistics (2023).

### Macroeconomic Outlook and Key Indicators (authorities’ statement)
- Real GDP growth: 8.3 percent (2021) and 9.6 percent (2022).
- GDP growth in 2023: 2.3 percent.
- Growth projection for 2024: 1.5 percent (expected to remain above potential).
- Tourism: 12 million overnight stays in 2023 against 10 million in 2022 and 8.8 million in 2019.
- Employment and labor market:
  - Job growth: 10.5 percent in 2021/2022 and 5.4 percent in 2022/2023.
  - Unemployment: 1.7 percent in 2023.
- Inflation:
  - Peak in 2022: 7.1 percent.
  - Expected to reach target level of 2 percent in 2025.
- International reserves and FX liquidity:
  - International reserves include € 138 million in SDRs and over € 200 million in reserves deposited at the central banks of Spain, France, and the Netherlands.
  - Authorities meet IMF’s calculated potential FX-liquidity needs of up to 9 percent of GDP in 2023.

*Annex IV. Authorities’ Response to Past IMF Policy Recommendations — Staff report extract.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1andea2024001.pdf_