## 1. Number of Immigration Authorization in Force by Type

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**Canonical URL:** [1. Number of Immigration Authorization in Force by Type](https://www.imf.org/-/media/files/publications/cr/2024/english/1andea2024002.pdf)

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---

### Overview and context
- Housing affordability in Andorra is primarily a rental affordability problem driven by an exceptionally high share of tenants and sustained demand for rental housing.
- In a 2023 sentiment survey, 67 percent of the population considers that housing affordability needs to improve, compared to only 3 percent in 2015.
- Limited supply due to geography, combined with strong demand (including reliance on temporary migrant workers and permanent residents), has pushed up rents and created housing stress that is macro-critical for labor market attractiveness and investment decisions.
- A new System of Housing Statistics, a rental supply-and-demand simulation tool, and microdata from the Survey of Living Conditions permit granular analysis to better target housing policies.

### Key statistics on immigration authorizations (2018–2022)
- Total immigration authorizations in force by year (percent of total population):
  - 2018: 60.5
  - 2019: 60.9
  - 2020: 60.8
  - 2021: 59.3
  - 2022: 62.4
- Footnote detail preserved:
  - Out of them, 82 percent were associated with a work authorization, either temporary or permanent, and most of them entailed residence in the country.
  - Access to citizenship in Andorra requires 20 years of residence.
- Immigrants are more likely to be tenants; almost half of immigration authorizations have resided in the country for more than 10 years.
- Anecdotal evidence: demand for rental housing increased during and after the pandemic as foreign residents arrived, contributing to a 7 percent population increase.

### Rental affordability: measures and aggregate findings
- Two standard measures used:
  - Housing cost overburden rate: Share of population within households whose housing costs (including rent, mortgage payments, services, etc., net of housing allowances) represent more than 40 percent of the total disposable income of the household (net of housing allowances).
  - Rent-to-income ratio: Median across households of the annualized rent as a share of disposable household income.
- Key aggregate and ownership-disaggregated findings (2019):
  - Aggregate housing cost overburden rate: 13.9 percent of the population.
  - Homeowners:
    - Owners without mortgage: 3.7 percent (overburden rate).
    - Owners with mortgage: 1.3 percent (overburden rate).
  - Renters: 13.6 percent (overburden rate).
  - Tenant prevalence: 62 percent of the total population lived in rented houses in 2019 (62.4 percent depicted).
  - Median rent-to-income ratio prior to the pandemic: about 20 percent.
  - Interquartile range of rent-to-income ratio: about 15 percentage points; some households face rent-to-income ratios above 50 percent.
  - Andorra aggregate overburden rate in 2019: 9.5 percent reported in text vs 13.9 percent elsewhere — report highlights that Andorra’s aggregate overburden exceeds the EU average of 7 percent (noting aggregate figures presented).

### Distributional and quintile-specific statistics (2019)
- Tenant share by income quintile:
  - Quintile 1: 70.7 percent
  - Quintile 2: 81.6 percent
  - Quintile 5: 35.9 percent
- Tenant overburden rate by quintile:
  - Quintile 1 (lowest): 42.6 percent of renters in that quintile are overburdened (alternative figure: 33.8 percent shown in some tables for Quintile 1).
  - Second quintile: overburden rates fall to about 1/4 of bottom rates (reported qualitatively).
- Housing cost overburden rate for those in the lowest income quintile:
  - Estimated at 34 percent in 2019 (figure cells show 33.8 percent and other charted values).
- Charted values related to the lowest quintile (2019):
  - Housing Cost Overburden Rate (by citizenship): 33.8; 26.4; 38.0.
  - Housing Cost Overburden Rate (by educational attainment): 33.8; 28.9; 35.0; 48.7.
  - Housing Cost Overburden Rate (by employment status): 33.8; 33.8; 61.6; 32.1.
  - Shares in the lowest income quintile by characteristics (percent of population in the lowest income quintile, 2019): 64.3; 47.6; 36.1; 15.2; 67.6; 2.0; 30.5.
  - Housing Cost Overburden Rate: Lowest Income Quintile (Percent of total population in the lowest income quintile, 2019): 48.8; 33.8.

### Household-level descriptive statistics (selected Survey of Living Conditions figures)
- Average annual disposable income (euros) shown (selected cells):
  - Tenants: 32,430.0
  - Owners with mortgage: 53,470.4
  - Owners without mortgage: 56,664.1
  - Additional cells: 36,258.8; 56,125.4; 55,781.2; 38,581.2; 48,643.6; 58,908.2
- Average household size (members):
  - Tenants ~2.1
  - Owners with mortgage ~2.6
  - Owners without mortgage ~2.2
- Share by nationality (percent, reference person):
  - Tenants: Nationals 28.4 / Foreigners 71.6
  - Owners with mortgage: Nationals 59.0 / Foreigners 41.0
  - Owners without mortgage: Nationals 52.8 / Foreigners 47.2
- Educational attainment and employment status (selected cells):
  - Tenants skew lower-educated (example cell: Low education ~43.9 percent for tenants).
  - Share employed among tenants ~78.0 percent; owners with mortgage ~89.2 percent; owners without mortgage ~52.8 percent.

### Data limitations affecting the analysis
- Four data constraints:
  - The survey records nationality but not the immigration status of the reference person.
  - Temporary/seasonal foreign workers are excluded from the survey.
  - 2020 data could be biased by the support package provided to renters during the COVID pandemic; analysis excludes 2020 data for trend purposes.
  - Data availability is limited to 2020, not capturing most recent price developments.

### Growing housing market imbalance — supply and demand dynamics
- Demand factors:
  - Number of households is the main determinant of quantitative housing demand.
  - Average household size is decreasing, increasing demand for smaller houses.
  - Greater immigration and seasonal workers increase demand for rental or purchase contracts; number of seasonal workers has doubled in the past eight years.
  - Seasonal workers increase need for short-term housing during the winter season.
- Supply factors:
  - Supply depends on pre-existing inventory, availability of land, costs of construction materials, and government policies.
  - When supply is inelastic, prices rise faster as increased demand translates into higher prices rather than increased construction.
- Net effect: insufficient supply of affordable units; residential real estate and rental prices have increased faster than wages; market mobility has been reduced.

### Housing stock, construction, prices, and transactions
- Historical and administrative data:
  - 1990 study: 21,627 homes; 65 percent used as primary residence; properties for housing constituted 55 percent of total properties (3,641 building units); 10 percent detached/semi-detached houses and 90 percent apartments.
  - 1990 to 2021 estimates: number of properties increased from 6,653 to 10,468, of which 3,442 were intended mainly for housing.
  - Number of housing units reached 41,215 units in 2021, almost doubled since 1990.
- Table excerpts (1990):
  - Properties for housing (main residence): 14,085 — 65.1 percent.
  - Secondary residence: 3,451 — 16.0 percent.
  - Vacant housing: 2,495 — 11.5 percent.
  - Total: 21,627 — 100.0.
- Table excerpts (2021):
  - Type of units: Housing 41,215 — 50.0 percent; Tourist apartment 3,319 — 4.0 percent; Parking 14,561 — 17.7 percent; Storage room 7,792 — 9.5 percent.
  - Type of properties: Housing 3,442; Others 7,026; Total 10,468.
- Prices and transactions:
  - Between 2015 and 2022 housing prices increased by 61 percent, compared with 48 percent on average in EU countries.
  - Number of residential real estate transactions averaged 1,600–1,800 apartment units sold per year over the last decade.
  - About half of real estate transactions are carried out with mortgage at an average of EUR375,000 in 2022.
  - Foreign investment in real estate:
    - Total value around EUR70 million in 2015 and EUR183 million in 2022.
    - Almost 30 percent of residential real estate transactions are done by foreigners.

### Rental market dynamics, tenure, and access to credit
- Salaries and rents:
  - Andorra’s average net salary: EUR1,200 compared to EUR1,420 in a sample of EU countries.
  - Average salary rose by 6 percent between 2017 and 2021.
  - Average rental price per m² rose by 20 percent between 2017 and 2021.
  - For households that have stayed less than a year, rental prices increased by 32 percent between 2017 and 2021.
- Tenure lengthening and reduced market fluidity (2010–2021):
  - Share of households occupying their home for more than 5 years increased from 49 to 64 percent.
  - About 13 percent of total households have stayed for 20 years.
  - Share occupying for less than one year decreased from 11 to 6 percent (decline from 2,100 to 1,350 households).
- Credit access:
  - Access to mortgage financing for residents is constrained by high qualification standards and high interest rates.
  - Mortgage finance limited first-time home buyers; disparity between wealthier residents able to borrow and the rest who remain renters.

### Policy-relevant implications and high-level recommendations (housing)
- Core diagnosis:
  - Affordability is primarily a rental affordability issue due to disproportionate tenant numbers.
  - Supply–demand mismatch concentrated in the affordable segment; limited market fluidity exacerbates shortages of short-term rentals, complicating hiring of foreign and seasonal workers.
- Short-term measures (contain demand and provide relief):
  - Increase rental availability from existing stock; mobilize vacant properties.
  - Income support: housing allowances or rent aid (noting recent flexibilization and increase: EUR3.5 million; 1,471 households in 2022).
  - Temporary rent measures: mandatory extension of rental contracts (2019–23) and new extension until 2027; temporary cap on rent increases (5 percent for extended contracts, 2 percent for contracts in place for at least one year) for rents above EUR8/m².
- Medium-term measures (increase supply and structural policies):
  - Tax incentives for owners who offer affordable housing (5 percent IS, IRPF).
  - Creation of a tax on vacant properties (EUR20 m² proposed; planned increase to EUR50 m²) aiming to bring 3,000 houses back to the market.
  - Creation of a public housing park of up to 300 homes at an affordable price (EUR50 million).
  - Reservation of 10 percent of housing developments intended for sale in favor of residents of more than 10 years.
  - Public-private partnerships and administrative concessions to construct affordable housing.
  - Guarantee program for the purchase of a first home (guarantee 20 percent of mortgage value); exemption from real estate transfer tax for first home purchase.
- Targeting and sequencing:
  - Prioritize tenants and low-income renters; complement income support with supply responses to avoid distortions.
  - Map housing policies into an overarching national-level strategy linked to transport, utilities, public services.
- Cautions:
  - Administrative controls (mandatory extensions and caps) provide temporary relief but lengthen tenure, reduce market fluidity, and widen price gap between new and old tenants.
  - Income support without supply responses has limited effectiveness.

### Lessons from other countries (policy instruments)
- Income support programs:
  - Housing allowances or vouchers can be means-tested and effective at targeting; risks include upward pressure on rents and ineffectiveness if supply is lacking.
- Rent control and landlord-tenant regulations:
  - Can prevent sudden rent spikes and increase tenant bargaining power but may discourage investment and reduce housing supply; tend to benefit longer-stay tenants.
- Raising rental housing supply from existing stock:
  - Tools: vacancy tax, limits on short-term rentals, tax on foreign homebuyers, requisition/conversion, “gentle requisitioning” or “solidarity leases”.
  - Caveat: impacts often concentrated on high-priced properties; compulsory conversion is a last resort.
- Boosting housing stock:
  - Regulatory, financing, land sales, social rental housing, and public–private partnerships can increase affordable supply; social rental housing is costly and requires careful targeting.
- Regulatory, zoning, and infrastructure policies:
  - Streamlining permits and investment in public infrastructure can increase supply elasticity.

---

### 2. Compared to peers, Andorran banks operate in a different regulatory and institutional environment—and tend to self-insure through large prudential buffers

### Banking landscape and prudential positions
- Only 3 banks operate currently in Andorra after several mergers; all are majority privately owned by local families.
- Andorran banks are banking groups with diversified financial services in Europe, Latin America, and the U.S.; some have ownership in real sector companies in Andorra.
- Institutional framework:
  - Andorra adopted the euro after signing a Monetary Agreement with the EU in 2011 but does not have a central bank.
  - Andorran banks do not have direct access to a national central bank or to ECB refinancing facilities.
  - Introduction of the lender of last resort facility in 2022 provides a backstop for a solvent, but temporarily illiquid bank.
- Prudential buffers (as of 2023Q3):
  - System-wide total capital ratio: 16.3 percent.
  - System-wide Tier 1 ratio: 15.6 percent.
  - System-wide LCR ratio: 200 percent (regulatory minimum: 100 percent).

### Business model, AUM, and balance-sheet composition
- Assets under management (AUMs) off-balance sheet: €64 billion — or 20-times GDP in 2022.
- By AUM-to-GDP ratio, Andorran banks are the third largest group among peers.
- On-balance-sheet composition at end-2022:
  - About half of assets in loans.
  - One fifth in debt securities.
  - 6 percent in cash.
- Domestic credit:
  - Credit to the private sector to GDP: 190 percent.
  - About 41 percent of loans are given to non-residents (majority short-term loans to foreign banks).
- Profitability and income mix:
  - ROA in 2022: 0.6 percent.
  - ROE in 2022: 6 percent.
  - Net fees and commissions historically >50 percent of operating income; net interest income share historically ~20 percent.
  - Interest rate increases boosted net interest margin to account for ~half of operating income in 2023.

### Funding, costs, and international expansion
- Funding:
  - Deposits account for almost 90 percent of funding (end-of-2022).
  - One third of deposits comes from nonresidents; typically tied to investments and sticky.
- Cost structure:
  - Cost-to-income ratio between 70 and 85 percent.
- International expansion:
  - Growth focused on new markets abroad via private banking and asset management.
  - Subsidiaries abroad subject to host-country regulation and (in euro area countries) access to ECB liquidity.

### Empirical determinants of private banks’ profitability (sample and results)
- Sample: 275 private banks from 39 countries (2013–2022), including 5 banks from Andorra.
- Regression results (selected coefficients and p-values):
  - ROAA:
    - log Total Assets: 0.302** (0.026)
    - Equity/Total Assets: 0.118*** (0.000)
    - Real GDP growth: 0.304** (0.02)
    - Lagged interest rate: 0.692** (0.049)
    - Observations: 1,919; Adjusted R-squared: 0.166
  - ROAE:
    - log Total Assets: 0.129 (0.605)
    - Equity/Total Assets: 0.07*** (0.000)
    - Real GDP growth: 0.352 (0.143)
    - Lagged interest rate: 2.263*** (0.000)
    - Observations: 1,919; Adjusted R-squared: 0.022
- Interpretation:
  - Size, capitalization, economic growth, and interest rates are positively associated with bank profitability.
  - Higher interest rate and capitalization are significant for both ROAA and ROAE.

### Systemic features, risks, and institutional arrangements
- Total banking system assets: 5.5 times the country’s economy.
- Consolidated assets of each bank exceed GDP.
- Main risks: compliance, reputational, operational; credit risks are lower given collateralization; market risks mainly on clients’ side.
- Regulatory and supervisory bodies:
  - Andorran Financial Authority (AFA): established 1989; staff of 25 at end-2022.
  - UIFAND: Financial Intelligence Unit of Andorra (AML/CFT) created in 2000.
  - Agency of Resolution of Banking Entities: created in 2015.
- Macroprudential measures:
  - Capital conservation buffer, buffer for systemically important institutions, and countercyclical capital buffer exist.
  - Activation of the countercyclical capital buffer by the AFA to 0.5 percent from Oct 1, 2024.
- International context:
  - EU Association Agreement provides a 15-year transitional period to align financial legislation, supervision, and regulation with the EU and offers passporting opportunities.

### Policy implications (banking)
- Maintain and reinforce solid capital and liquidity buffers given limited financial safety nets and systemic size.
- Continue strengthening AML/CFT frameworks and supervisory cooperation with international partners.
- Prepare for adjustments associated with the EU Association Agreement, including harmonization and potential competition from European banks.
- Monitor and manage cross-border expansion risks with host–home coordination and subsidiarization where relevant.
- Strengthen recovery and resolution frameworks and prepare for possible expanded supervisory demands (staffing/resources).

---

### Climate change strategy, CPAT analysis, and policy implications

### Climate exposure, trends, and targets
- Macro-criticality: winter tourism accounts for one third of the economy.
- Observed trend since 1950: temperature increase averaging 0.20° per decade (most evident during summer).
- Observed precipitation change: annual rainfall decreased by—22.01 mm per decade since 2050 (as reported).
- Projected annual snow cover decline: expected to decline by 75–100 cm by 2090.
- Emissions and energy:
  - CO2 emissions: 5.6 metric tons per capita (2017).
  - Forest absorption: 23 percent of CO2 emissions.
  - Energy sector emits more than 95 percent of greenhouse emissions.
  - Mobility subsector: more than half of energy demand; fossil fuels 75 percent of demand.
  - Imported electricity from France and Spain: 76 percent of demand; local production 24 percent (81 percent hydraulic).
- Strategic goal:
  - Reduce 37 percent of non-absorbed emissions compared to 2005 levels by 2030; achieve carbon neutrality by 2050.
  - Authorities plan to revise the 2030 reduction target from 37 to 55 percent.

### Strategy components and key actions (five programs)
- Decarbonization: energy transition; sustainable mobility; agriculture and forest management; circular economy; industry.
- Adaptation and Resilience: plan for adaptation; nature-based solutions.
- Financing Tools: national carbon credit market; Green Fund; taxation tools.
- Social Transition: sensitization, education, training, participation.
- Innovation, Research and Observation: innovation, research, systemic observation.

### Financing and implementation instruments
- Carbon tax:
  - Introduced in 2022; CO2 branch tax rate set at €30 per ton of carbon dioxide equivalent.
  - Half of the €30 per ton is assumed by the government.
  - Compared to peers: below regional average of €42 per ton.
  - IMF estimate cited: a floor of USD75 per ton needed for advanced economies to reduce emissions by 29 percent by 2030; other estimates suggest €120 per ton by 2030 to decarbonize by 2050 in euro area countries.
- Green Fund:
  - Established to finance mitigation and adaptation initiatives; composed annually into the draft general budget law; sustained by earmarked taxes, budgetary allocations, donations, and other contributions.
- FEDA 5-year investment plan (2024–28): total €208.80 million — 7.43 percent of 2024 GDP.
  - Electricity Generation: 97.62 — 3.47
  - Transmission: 45.01 — 1.60
  - Distribution: 8.34 — 0.30
  - Heating Generation: 9.70 — 0.35
  - Heating Distribution: 19.56 — 0.70
  - Mobility Electric charge: 1.32 — 0.05
  - Mobility: 2.03 — 0.07
  - Waste Environment: 0.70 — 0.02
  - Efficiency: 10.32 — 0.37
  - General Digitalization: 9.34 — 0.33
  - Others: 4.86 — 0.17
  - Total: 208.80 — 7.43

### CPAT mitigation model: scenarios and key results
- CPAT is a “model of models” with mitigation, distribution, air pollution, and transport components; analysis focuses on the CPAT mitigation model.
- Model distinguishes energy consumption by sector and source; includes an autonomous annual energy efficiency improvement parameter.
- Baseline energy efficiency parameter: around 0.5–1 percent annually; scenario increases used for analysis.
- Key scenario result to achieve net zero by 2050:
  - Increase carbon tax to €150 per ton by 2030, and
  - Accompany with efficiency gains of at least 5 percent in power, transport, and residential sectors.
- Carbon tax only is insufficient to achieve carbon neutrality.
- Macroeconomic and energy consumption implications of €150/tCO2 by 2030:
  - Fiscal revenues from fossil fuel excises estimated to reach between 0.5–0.8 percent of GDP depending on efficiency gains.
  - Impact on GDP growth estimated to be limited (model excludes potential impact on fuel tourism).
  - Energy price changes (weighted by consumption) for €150/tCO2 in 2030: large increases for oil and other fuels.
  - Fuel price impacts (unit; baseline; under carbon tax; percent change):
    - Gasoline US$ per liter 1.49 1.89 26%
    - Diesel US$ per liter 1.27 1.72 35%
    - LPG US$ per liter 0.66 0.95 44%
    - Kerosene US$ per liter 0.69 1.12 61%
    - Oil US$ per barrel 65.31 140.51 115%

### Assessment and policy recommendations (climate)
- Overall assessment:
  - Strategy is ambitious and comprehensive on mitigation; adaptation measures need strengthening and scaling up.
  - Funding gaps remain; FEDA’s investment plan is the most concrete commitment to date.
- Policy recommendations:
  - Gradually but proactively raise the carbon tax (CPAT indicates €150 per ton by 2030 combined with efficiency gains to meet net zero).
  - Complement pricing tools with large-scale energy efficiency improvements; 5 percent efficiency gains are challenging without rapid technological progress.
  - Major transformation of transport sector is essential: reduce absolute number of vehicles transiting the country and transition to cleaner, more efficient transport for locals and tourists.
  - Accelerate adaptation planning and implementation; assess feasibility and estimated costs given infrastructure and structural transformation required.
  - Diversify and enhance resilience of tourism (reduce seasonality) to reduce dependence on winter tourism.

*Source: 1andea2024002 — IMF staff analyses and Survey of Living Conditions (chapter excerpts).*

### 1. Number of Immigration Authorization in Force by Type _________________________ 4

### 1. Number of Immigration Authorization in Force by Type

### Overview and context
- Housing affordability in Andorra is primarily a rental affordability problem driven by an exceptionally high share of tenants and sustained demand for rental housing.
- In a 2023 sentiment survey, 67 percent of the population considers that housing affordability needs to improve, compared to only 3 percent in 2015.
- The limited supply of housing due to geography, combined with strong demand (including reliance on temporary migrant workers and permanent residents), has pushed up rents and created housing stress that is macro-critical for labor market attractiveness and investment decisions.

### Key statistics on immigration authorizations (2018–2022)
- Total immigration authorizations in force by year (percent of total population): 
  - 2018: 60.5
  - 2019: 60.9
  - 2020: 60.8
  - 2021: 59.3
  - 2022: 62.4
- Footnote detail preserved: Out of them, 82 percent were associated with a work authorization, either temporary or permanent, and most of them entailed residence in the country. Access to citizenship in Andorra requires 20 years of residence.

### Implications of immigration on the rental market
- Nearly 65 percent of households were renting the property they lived in as of 2019 (described as “nearly 65 percent” and reflected in figures showing tenant shares around 62.4 percent).
- Immigrants are more likely to be tenants, adding pressure to the rental market; almost half of immigration authorizations have resided in the country for more than 10 years.
- Anecdotal evidence: demand for rental housing increased during and after the pandemic as foreign residents arrived, contributing to a 7 percent population increase.

### Data developments enabling analysis
- A new System of Housing Statistics and a rental supply-and-demand simulation tool, together with microdata from the Survey of Living Conditions, permit a granular analysis to identify groups most affected and to better target housing policies.

---

### Rental affordability: stylized facts and measurements
- Two standard measures used:
  - Housing cost overburden rate: Share of population within households whose housing costs (including rent, mortgage payments, services, etc., net of housing allowances) represent more than 40 percent of the total disposable income of the household (net of housing allowances).
  - Rent-to-income ratio: Median across households of the annualized rent as a share of disposable household income.

Key findings (aggregate and ownership-disaggregated)
- Aggregate and ownership-level overburden rates (2019):
  - Aggregate housing cost overburden rate reported as 13.9 percent of the population (2019).
  - Homeowners (disaggregated): overburden rate estimated at 3.7 percent and 1.3 percent of owners without mortgage and owners with mortgage, respectively (as presented).
  - Renters: overburden rate estimated at 13.6 percent (2019).
- Tenant dominance and distribution:
  - 62 percent of the total population lived in rented houses in 2019 (62.4 percent depicted).
  - Tenant share by income quintile (2019): Quintile 1: 70.7 percent; Quintile 2: 81.6 percent; Quintile 5 (highest): 35.9 percent.
  - Tenant overburden rate by quintile: Quintile 1 (lowest): 42.6 percent of renters in that quintile are overburdened; second quintile rates fall to about 1/4 of bottom rates.

Rent levels and heterogeneity
- Median rent-to-income ratio in Andorra prior to the pandemic was about 20 percent (computed as the median of the ratio of annualized rent over household disposable income).
- Although median rent-to-income is close to the EU average, the aggregate overburden rate in Andorra is higher than the EU average (9.5 percent in Andorra in 2019 vs 7 percent in the EU), driven by the large share of tenants.
- Distributional heterogeneity: interquartile range of the rent-to-income ratio is about 15 percentage points, and some households face rent-to-income ratios above 50 percent.

Vulnerability concentrated among low-income households
- The housing cost overburden rate for those in the lowest income quintile is estimated at 34 percent in 2019.
- For the lowest income quintile: 33.8 percent overburden rate shown for Quintile 1 in one figure; sectoral narrative reports about 42.6 percent of renters in the lowest quintile are overburdened.
- Overburden rates decline to 10 percent in the second income quintile; top income quintiles generally do not face affordability issues.

---

### Household-level descriptive statistics (selected figures from Survey of Living Conditions)
- Average annual disposable income (euros) shown (by ownership status and year cluster in table):
  - Tenants: 32,430.0 (one cell shown)
  - Owners with mortgage: 53,470.4 (one cell shown)
  - Owners without mortgage: 56,664.1 (one cell shown)
  - Additional table entries include values such as 36,258.8; 56,125.4; 55,781.2; 38,581.2; 48,643.6; 58,908.2 (as presented).
- Average household size (number of members): Tenants ~2.1; Owners with mortgage ~2.6; Owners without mortgage ~2.2 (as reported).
- Share by nationality (percent, reference person): Nationals vs Foreigners
  - Tenants: Nationals 28.4 / Foreigners 71.6 (example cell)
  - Owners with mortgage and without mortgage cells reported (e.g., Owners with mortgage: Nationals 59.0 / Foreigners 41.0; Owners without mortgage: Nationals 52.8 / Foreigners 47.2 in table).
- Share by educational attainment (percent, reference person): Tenants skew lower-educated (e.g., Low education ~43.9 percent for tenants in one table cell); owners show higher shares of middle or high education in other cells.
- Employment status (percent, reference person): Share employed among tenants ~78.0 percent; owners with mortgage ~89.2 percent; owners without mortgage ~52.8 percent (selected table cells shown).

---

### Policy-relevant implications summarized (based on analysis presented)
- The rental market structure—high tenant share, large immigrant workforce, and smaller household sizes among tenants—creates concentrated affordability stress on low-income and low-skilled workers essential to the service sector.
- The supply–demand mismatch is concentrated in the affordable segment of the housing market and limited housing market fluidity exacerbates shortages of short-term rentals, complicating the hiring of foreign and seasonal workers.
- A multipronged policy approach is needed to increase medium-term housing stock while minimizing market distortions; targeting must be informed by granular microdata to protect vulnerable groups (low-income renters, low-skilled workers).

*Source: 1andea2024002 - 1. Number of Immigration Authorization in Force by Type, February 9, 2024 (Survey of Living Conditions and IMF staff calculations).*

### 11.      Moreover, within the lowest

### 11.      Moreover, within the lowest

### Housing cost overburden in the lowest income quintile
- Close to 40 percent of foreigners in the lowest quintile residing in Andorra are overburdened by their housing costs compared to 26 percent of Andorrans in the same income group.
- Almost half of those with at least a bachelor’s degree in said income group face housing affordability issues.
- 61 percent of the unemployed in the lowest quintile are facing housing affordability pressure.
- Charted values related to the lowest quintile (2019):
  - Housing Cost Overburden Rate (by citizenship): 33.8; 26.4; 38.0.
  - Housing Cost Overburden Rate (by educational attainment): 33.8; 28.9; 35.0; 48.7.
  - Housing Cost Overburden Rate (by employment status): 33.8; 33.8; 61.6; 32.1.
  - Shares in the lowest income quintile by characteristics (percent of population in the lowest income quintile, 2019): 64.3; 47.6; 36.1; 15.2; 67.6; 2.0; 30.5.
- Housing Cost Overburden Rate: Lowest Income Quintile (Percent of total population in the lowest income quintile, 2019): 48.8; 33.8.

### Data limitations affecting the analysis
- Four data constraints prevented analysis of temporary/seasonal foreign workers and post-COVID trends:
  - The survey records nationality but not the immigration status of the reference person.
  - Temporary/seasonal foreign workers are excluded from the survey, though they add significant pressure to the rental market.
  - 2020 data could be biased by the support package provided to renters during the COVID pandemic; therefore, the analysis does not incorporate 2020 data.
  - Data availability is limited to 2020, not capturing the most recent price developments and most acute increases.

### Growing housing market imbalance — supply and demand dynamics
- Demand factors highlighted:
  - Number of households is the main determinant of quantitative housing demand.
  - Average household size is decreasing, with more people living alone or forming smaller families, increasing demand for smaller houses.
  - Greater immigration and seasonal workers increase demand for rental or purchase contracts; the number of seasonal workers has doubled in the past eight years.
  - Seasonal workers increase the need for short-term housing during the winter season.
- Supply factors highlighted:
  - Supply depends on pre-existing inventory, availability of land, costs of construction materials, and government policies.
  - When supply is inelastic, prices rise faster as increased demand translates into higher prices rather than increased construction.
- Net effect: insufficient supply of affordable units; residential real estate and rental prices have increased faster than wages; market mobility has been reduced.

### Housing stock and recent construction
- Historical and administrative data:
  - 1990 study: 21,627 homes; 65 percent used as primary residence; properties for housing constituted 55 percent of total properties (3,641 building units); 10 percent detached/semi-detached houses and 90 percent apartments.
  - 1990 to 2021 estimates: number of properties increased from 6,653 to 10,468, of which 3,442 were intended mainly for housing.
  - Number of housing units in the country reached 41,215 units in 2021, almost doubled since 1990 in line with population.
- Table excerpts (1990):
  - Properties for housing (main residence): 14,085 — 65.1 percent.
  - Secondary residence: 3,451 — 16.0 percent.
  - Vacant housing: 2,495 — 11.5 percent.
  - Total: 21,627 — 100.0.
- Table excerpts (2021):
  - Type of units: Housing 41,215 — 50.0 percent; Tourist apartment 3,319 — 4.0 percent; Parking 14,561 — 17.7 percent; Storage room 7,792 — 9.5 percent.
  - Type of properties: Housing 3,442; Others 7,026; Total 10,468.

### Composition of recent construction and limitations for affordability
- Recent construction is reported to focus on luxury/expensive housing, unaffordable for most of the population.
- Drivers: demand for higher-end housing (including foreigners) and increases in costs of material and land that push developers toward more profitable housing types.
- Construction permits tend to have a larger number of bedrooms per unit, increasing cost per unit relative to smaller housing.
- Although residential permits increased in 2019 and 2020, the increase was moderate and only in line with population growth, not with increasing demand pressures.

### Prices, transactions, and access to credit
- Between 2015 and 2022 housing prices in the country increased by 61 percent, compared with 48 percent on average in EU countries.
- The number of residential real estate transactions averaged 1,600–1,800 apartment units sold per year over the last decade.
- About half of real estate transactions in Andorra are carried out with mortgage at an average of EUR375,000 in 2022, and a large proportion of them are carried out by Andorrans.
- Access to mortgage financing for residents is constrained by high qualification standards and high interest rates, limiting first-time home buyers and creating disparity between wealthier residents able to borrow and the rest who remain renters.
- Foreign investment in real estate:
  - Total value around EUR70 million in 2015 and EUR183 million in 2022.
  - Average value of transactions by foreigners has almost doubled since 2012; average value of domestic transactions increased by 25 percent only.
  - Almost 30 percent of residential real estate transactions are done by foreigners.
- Change in house prices and average transaction values are reported to have accelerated since 2017, especially for dwellings bought by foreigners.

### Rental market dynamics and affordability
- Andorra’s average net salary: EUR1,200 compared to EUR1,420 in a sample of EU countries.
- Average salary rose by 6 percent between 2017 and 2021.
- Average rental price per m² rose by 20 percent between 2017 and 2021.
- For households that have stayed less than a year, rental prices increased by 32 percent between 2017 and 2021.
- Rents tend to be lower than capitals of other European countries but so are salaries; low-income earners are more severely affected.
- Rent increases are lower with years of residence partly because of rent increase caps and mandatory extension of contracts; newcomers seeking a lease face much higher prices than longer-term renters.

### Tenure lengthening and reduced market fluidity
- Between 2010 and 2021:
  - Share of households occupying their home for more than 5 years increased from 49 to 64 percent.
  - About 13 percent of total households have stayed for 20 years.
  - Share occupying for less than one year decreased from 11 to 6 percent (a decline from 2,100 to 1,350 households).
- Result: households stay longer in the same home, reducing rental market fluidity and making it difficult for newcomers (including seasonal workers) to find available units, exacerbating price pressures.

### Review of policy objectives and next steps
- Two objectives for appropriate housing policies:
  - Address a significant socio-economic concern (affordability and access).
  - Remove a bottleneck to growth (housing shortage lowering attractiveness to necessary foreign workers).
- Need for a comprehensive assessment of costs, benefits, and internal consistency of housing policies.
- Complementary policies across sectors (transport, utilities, public services) should be developed to support more sustainable urban planning.

*Source: PRINCIPALITY OF ANDORRA — INTERNATIONAL MONETARY FUND (excerpts from the provided chapter).*

### 23.      Experience in implementing housing policies other countries provide useful lessons for

### Experience in implementing housing policies other countries provide useful lessons for Andorra’s policymakers

### Lessons from other countries on housing policy instruments
- Income support programs
  - Subsidies in the form of housing allowances or housing vouchers can improve housing affordability for those most in need.
  - In Europe, housing allowances tend to be means- and/or income-tested transfers to households; in the United States these are usually attached to a specific unit of privately-owned housing or given directly to landlords.
  - If well-designed, income support can:
    - provide affordable housing regardless of owner or regulation status (including through the private market),
    - facilitate labor mobility,
    - be effective at providing targeted assistance.
  - Housing allowances make rental income more secure where eviction is difficult to enforce.
  - Risks and distortions:
    - potential to raise rental prices with landlords settling with renters at a higher price,
    - alter the distributions of rents,
    - be ineffective if there is a lack of supply of affordable housing.

- Rent control and landlord-tenant regulations
  - Help prevent sudden and steep increases in rents; can take the form of rent ceilings, freezes, or limits on subsequent adjustments.
  - Advantages:
    - linkable to explainable social objectives,
    - prevent landlords from capturing housing subsidies,
    - increase bargaining power of renters.
  - Drawbacks:
    - distort markets and could discourage investment in rental properties,
    - no clear evidence of lower rents over time; evidence of association with lower housing supply,
    - tend to benefit longer-stay tenants and create a divide between established households and new households.
  - Policy option: gradual de-regularization of tight rent controls to improve landlords’ profits and, in turn, supply and access to private rental options.

- Raising rental housing supply from existing stock
  - Improving use of existing vacant space can increase rental supply in the medium-term.
  - Requires: take stock of vacant properties and identify incentives creating vacancies (speculation, demand for secondary residencies, tax policies).
  - Policy tools mentioned:
    - vacancy tax,
    - limits on short-term rental services,
    - capital controls,
    - tax on foreign homebuyers,
    - requisition/conversion,
    - “gentle requisitioning” or “solidarity leases” to transform commercial properties into dwellings.
  - Caveats:
    - impact often concentrated on high-priced properties and may not reach low-income renters,
    - balancing renter-landlord regulations and equalizing rights could increase supply,
    - compulsory conversion should be last resort in severe shortage/high vacancies areas.

- Boosting the housing stock and access to it
  - Governments can incentivize new construction of affordable housing via:
    - regulatory measures,
    - financing facilitation and subsidies—grants, loan guarantees or low-interest loans,
    - sale of land at below-market prices or long-term leasing,
    - disincentivizing holding of vacant land.
  - Social rental housing can provide below-market residencies for low-income households; can be developed by government or public-private partnerships.
  - Risks of social rental housing:
    - typically costly and less flexible than housing allowances,
    - could intensify poverty traps and other social issues,
    - if not well-targeted, can create distortions (e.g., large eligibility segments or eligibility only at entry).

- Regulatory, zoning, and infrastructure policies
  - Changing zoning regulation, investment in public infrastructure, and urban planning can affect housing supply elasticities and boost new construction and use of vacant housing.
  - Streamlining building permits and reducing bureaucratic hurdles can decrease cost and time needed to build new housing and lower prices.

### Key features of Andorra’s housing affordability problem and priorities
- Core diagnosis
  - The problem of housing affordability in Andorra is associated with rental affordability, given the disproportionate number of tenants in Andorra; rental affordability should be the priority.
  - Distribution issue in the supply of housing—measures should create incentives to boost supply of affordable housing (quotas, mandated share of IZ units, land availability, tax incentives) and reduce profits from higher units (taxes).
  - Policies should balance providing income support to low-income renters (housing allowance) while being cognizant of distortions that are difficult to remove in the medium-term.

- Short-term vs medium-term framing
  - Short-term measures: contain demand pressure by increasing rental availability from existing stock and provide temporary economic and social relief without intensifying market distortions.
  - Medium-term imperative: increase the supply of housing through structural policies.

### Authorities’ planned and implemented measures (high-level items)
- Governance-related policies
  - Creation of the National Housing Institute and establishment of the Housing Fund.
  - Development of a strategic plan for the demographic growth model.
  - Law on the right to adequate housing.
  - Creation of a property registry.
  - Government access to housing data for policymaking.
  - Creation of the system of housing indicators, including an inventory of dwellings, rental contracts, and prices by local governments.
  - Professionalization of the real estate appraiser.

- Short-term policies (income support; rent control and landlord-tenant regulations)
  - Income support programs
    - Flexibilization of requirement and increase of rent aid (EUR3.5 million; 1,471 households in 2022) and other rental housing support measures.
    - Additional benefits, within the Renova Plan, for owners that introduce energy-efficient improvements to rental properties.
    - Guarantee program for the purchase of a first home, through which it will guarantee 20 percent of the value of a mortgage loan.
    - Exemption from real estate transfer tax for the first home purchase.
  - Rent control and landlord-tenant regulations
    - Mandatory extension of rental contracts (2019–23), and new extension until 2027 of current contracts.
    - Temporary cap on rent increases (5 percent for extended contracts, 2 percent for contracts in place for at least one year) for rents above EUR8/m².
    - Creation of an inventory of dwellings, rental contracts, and prices by local governments.
    - Preparation of a reference price index and determination of the affordable price.
    - Creation of a guaranteed rental agency of public management.
    - Creation of a property management fund at a guaranteed price.
    - Establishing protocols to ensure timely evictions and adequate provision of support to vulnerable households.
    - Implementation of a tax on foreign real estate investment.

- Medium-term policies
  - Raising rental availability from existing stock
    - Tax incentives for owners who offer affordable housing (5 percent IS, IRPF).
    - Limit tourist accommodation licenses (HUT) and increase standards.
    - Creation of a tax on vacant properties (EUR20 m² and proposed to increase to EUR50 m²) and to be supplemented by an annual Tax Inspection Plan with the aim of bringing 3,000 houses back to the market.
    - Aid for rehabilitation and exemptions to the compliance with certain rules of rehabilitation of houses intended for rent (accessibility, energy efficiency, parking).
    - Tax incentives for the acquisition of rental properties.
    - Promoting expedite resolution of conflicts related to rental contracts.
  - Boosting the housing stock and access to it
    - Creation of a public housing park of up to 300 homes at an affordable price (EUR50 million).
    - Define preferential acquisition rights, program for the acquisition/rental of buildings of public housing.
    - Public-private partnership, in collaboration with local governments, for the construction of affordable housing through administrative concessions.
    - Reservation of 10 percent of housing developments intended for sale, in favor of residents of more than 10 years in the country.
    - Slowdown of construction permits for buildings to sell instead of renting.

### Analytical conclusions and policy considerations
- Strategic framing
  - Given sector complexities, map housing policies into an overarching national-level strategy to provide a coherent picture of costs, benefits, and internal consistency of measures, including links to related policy areas (public transportation, labor, etc.).
  - Well-designed housing and complementary policies have the potential to:
    - enhance long-term income opportunities for low-income households,
    - allow the young population to benefit from structural transformation of the economy,
    - avoid the emergence of economic disparities through targeted rental housing assistance,
    - stimulate demand, create employment, and reduce carbon intensity if investment leads to greater energy efficiency.
- Priorities emphasized
  - Focus on improving affordability for tenants as the core Andorran policy priority; promoting ownership helps a small fraction and is limited as a structural solution.
  - Immediate priority: use existing housing stock more efficiently by mobilizing vacant properties, increasing residential mobility, and reducing under-occupation.
  - Medium-term priority: expand stock of affordable and social housing; tax unused land and empty dwellings; create a public social housing stock with transparent, targeted, and periodically reviewed eligibility criteria.
  - Create right incentives for private sector to play a critical role via fiscal, regulatory, zoning, and land measures.
- Cautions on administrative controls
  - Administrative controls (mandatory extensions and caps on rent increases) provide temporary relief but contribute to:
    - lengthening of rental tenure and decreased market fluidity,
    - a gap in rental prices between new and old tenants,
    - severely limited availability of housing for seasonal workers.
  - Income support measures are welcome in the short-term but have limited effectiveness absent supply responses.
- Need for a broad medium-term agenda
  - Increasing housing supply is a medium-to long-term effort requiring structural policies beyond traditional measures: reduce elevated construction costs, provide land access, and align with broader economic model choices (regional integration, services-sector deepening, diversification of tourism, immigration policies, infrastructure, public investment).

### Microdata and methodological notes (study basis)
- Data source and coverage
  - Analysis based on microdata of the Survey of Living Conditions, provided confidentially by the Andorran authorities.
  - The sample covers 2018–20; does not allow analysis of post-COVID developments.
  - Dataset includes household and person characteristics, as well as housing costs and income.
  - Data on household/person characteristics and housing costs correspond to the survey year; disposable income corresponds to the previous year.
  - Some person variables (country of citizenship, educational attainment, employment status) were asked only to individuals older than 16 prior to 2020; calculations use the reference person (older than 16) when filtering.
- Calculation specifics
  - Housing costs reported monthly were annualized by multiplying by 12 to compute rent-to-income ratio and housing cost overburden rate.
  - Income quintiles calculated in terms of income per consumption units.
  - Housing costs overburden determination:
    - Compute housing costs (sum of rent and other housing expenses, multiplied by 12), net of housing allowances.
    - Compute disposable income net of housing allowances.
    - A household is classified as overburdened if:
      - Housing costs net of housing allowances are greater or equal than 0, and
      - One of three conditions holds:
        - Disposable income net of housing allowances is less or equal than zero.
        - Housing costs net of housing allowances are greater or equal than the disposable income net of housing allowances.
        - Housing costs net of housing allowances are greater than 40 percent of the disposable income net of housing allowances.
    - Housing costs overburden rate:
      - Numerator: number of persons in overburdened households (using household size and cross-sectional weights).
      - Denominator: total number of persons in the sample (using household size and cross-sectional weights).
      - Rate is numerator divided by denominator.

*Source: International Monetary Fund (chapter section "Experience in implementing housing policies other countries provide useful lessons for Andorra’s policymakers").*

### 2.      Compared to peers, Andorran banks operate in a different regulatory and institutional

### 2. Compared to peers, Andorran banks operate in a different regulatory and institutional environment—and tend to self-insure through large prudential buffers

### A. Banking landscape, institutional framework, and prudential buffers
- A different banking landscape
  - Only 3 banks operate currently in Andorra after several mergers.
  - All banks are majority privately owned by local families.
  - Andorran banks are banking groups that consist of diversified financial services companies in Europe, Latin America, and the U.S.
  - Some banks have ownership in real sector companies in Andorra.
- A different institutional framework
  - Andorra adopted the euro after signing a Monetary Agreement with the EU in 2011 but does not have a central bank.
  - Andorran banks do not have direct access to a national central bank or to ECB refinancing facilities unlike banks in peer countries.
  - Introduction of the lender of last resort facility in 2022 provides a backstop for a solvent, but temporarily illiquid bank, but is unlikely to change bank holdings of significant liquidity buffers as a self-insurance.
- Solid prudential positions
  - System-wide total capital ratio as of 2023Q3: 16.3 percent.
  - System-wide Tier 1 ratio as of 2023Q3: 15.6 percent.
  - System-wide LCR ratio as of 2023Q3: 200 percent (regulatory minimum: 100 percent).

### B. Business model: private banking, AUM, and on-balance-sheet commercial activity
- Scale of asset management and AUM dynamics
  - Assets under management (AUMs) held primarily off-balance sheet reached €64 billion- or 20-times GDP in 2022.
  - By the ratio of AUMs to GDP, Andorran banks are the third largest group among their peers.
  - AUMs have been growing consistently (chart reference: Assets under Management, 2018-2023).
- On-balance-sheet composition and recent trends
  - About half of Andorran on-balance sheet bank assets were in loans, a fifth in debt securities, and 6 percent in cash at the end of 2022.
  - Domestic credit is primarily allocated to private companies and households; domestic loans to the government are small as the central government switched to borrowing externally from 2020.
- Commercial banking relevance and profitability
  - Credit to the private sector to GDP: 190 percent (highest compared to the peer group), despite a decline from the peak in 2020.
  - About 41 percent of those loans are given to non-residents (majority short-term loans to foreign banks to manage liquidity).
  - Andorran banks led their peer group in 2022 with ROA of 0.6 percent and ROE of 6 percent (though ROE was below the EU average).
  - Net fees and commissions historically represented more than half of total operating income; net interest income share was about 20 percent historically.
  - Interest rate increases boosted net interest margin to account for an estimated half of operating income in 2023.

### C. Funding, cost structure, and international expansion
- Funding structure
  - Deposits account for almost 90 percent of funding (end-of-2022).
  - One third of deposits comes from nonresidents; these deposits are typically tied to investments and tend to be sticky.
  - Andorran banks rely significantly less on debt securities and other funding sources than the EU average.
- Cost structure and operating efficiency
  - Cost-to-income ratio is between 70 and 85 percent; Andorran banks are in the middle of their peer group and similar to other private banks.
- International expansion
  - Growth focused on new markets abroad and new sources of revenue via private banking and asset management in Europe and the Americas.
  - Andorran banks receive a significant share, sometimes a majority, of their profits from international operations.
  - Subsidiaries abroad are subject to host countries’ regulations and, in euro area countries, have access to ECB liquidity facilities.

### D. Determinants of private banks’ profitability (empirical findings)
- Dataset and approach
  - Sample: 275 private banks from 39 countries (2013–2022), including 5 banks from Andorra (3 existing and 2 that existed before).
  - Profitability measures: return on average assets (ROAA) and return on average equity (ROAE).
  - Explanatory variables: log Total Assets, Equity/Total Assets, Real GDP growth, Lagged interest rate.
- Regression results (Table 1 — coefficients with p-values in parentheses)
  - ROAA
    - log Total Assets: 0.302** (0.026)
    - Equity/Total Assets: 0.118*** (0.000)
    - Real GDP growth: 0.304** (0.02)
    - Lagged interest rate: 0.692** (0.049)
    - Constant: 0.925 (0.413)
    - Observations: 1,919
    - Adjusted R-squared: 0.166
    - F statistic: 94.9 (0.000)
  - ROAE
    - log Total Assets: 0.129 (0.605)
    - Equity/Total Assets: 0.07*** (0.000)
    - Real GDP growth: 0.352 (0.143)
    - Lagged interest rate: 2.263*** (0.000)
    - Constant: 3.664* (0.077)
    - Observations: 1,919
    - Adjusted R-squared: 0.022
    - F statistic: 11.74 (0.000)
- Interpretation
  - Size, capitalization, economic growth, and interest rates are positively associated with bank profitability.
  - Higher interest rate and capitalization are significant for both ROAA and ROAE.
  - Real GDP growth and bank size are significant for ROAA.
  - Findings support that larger size and better capitalization are associated with greater profitability for private banks.

### E. Systemic features, risks, and institutional arrangements
- Systemic scale and risk profile
  - Total banking system assets: 5.5 times the country’s economy.
  - Consolidated assets of each bank exceed GDP.
  - Private banking characteristics: lower credit risks (loans collateralized), market risks primarily on clients’ side; main risks are compliance, reputational, and operational risks.
  - Concentration and related party risk exist due to the small internal market, though these exposures have been decreasing.
- Regulatory and supervisory framework
  - Andorran Financial Authority (AFA): established 1989; responsible for all financial institutions; conducts annual and thematic on-site inspections of the three banks; staff of 25 at the end of 2022.
  - UIFAND (Financial Intelligence Unit of Andorra): created in 2000 for AML/CFT issues.
  - Agency of Resolution of Banking Entities: created in 2015, responsible for recovery and resolution.
  - Andorra has adopted a capital conservation buffer, a capital buffer for systemically important institutions, and a countercyclical capital buffer.
  - Authorities have strengthened the AML/CFT framework with a new AML/CFT law, closer cooperation between UIFAND and international organizations, and enhanced coordination in joint inspections between AFA and UIFAND.
- International lessons and implications
  - Box 1 highlights lessons from countries with large banking systems (Hong Kong SAR, Iceland, Ireland, Singapore, Switzerland) including risks from rapid asset growth, reliance on foreign/wholesale funding, benefits of stringent regulation and hands-on supervision, and the role of sovereign guarantees and liquidity swap lines.
  - The recently agreed EU Association Agreement provides a 15-year transitional period to align financial sector legislation, supervision, and regulation with the EU; it covers banking, insurance, asset management, and securities markets.
  - The Association Agreement offers opportunities to access the single market via passporting, with the Liechtenstein example cited as precedent (Liechtenstein: 2022 AUM 411 billion Swiss francs, about 60 times GDP).

### F. Policy implications (high-level)
- Maintain and reinforce solid capital and liquidity buffers given limited financial safety nets and the systemic size of banks.
- Continue strengthening AML/CFT frameworks and supervisory cooperation with international partners.
- Prepare for opportunities and adjustments associated with the EU Association Agreement, including harmonization of regulation, supervision, and potential entry of European banks under the same conditions.
- Monitor and manage cross-border expansion risks through appropriate host–home coordination, subsidiarization where relevant, and contingency arrangements given lack of national central bank access.

*Source: IMF staff analysis in 1andea2024002 - 2. Compared to peers, Andorran banks operate in a different regulatory and institutional environment—and tend to self-insure through large prudential buffers.*

### 14.      Diversification helps to stay competitive. Evidence shows that Andorran banks are large,

### 1andea2024002 - 14.      Diversification helps to stay competitive. Evidence shows that Andorran banks are large,

### Banking structure, diversification, and risks
- Andorran banks are large, notably in terms of AUMs from their private banking activities, and are important financial intermediaries in the domestic economy.
- Banks are actively expanding abroad to diversify revenues, which exposes them to foreign macroeconomic and other risks.
- Andorran banks keep high liquidity that signals their strong position and acts as self-insurance given the absence of a direct access to a central bank liquidity facility.
- The relative diversification between private and commercial banking activities allows banks to balance their performance over changes in market conditions.
- Finding: size is associated with profit in the private banking industry.

### Supervision, macroprudential policy, and resilience
- Recommendation: Close and proactive supervision using macroprudential tools is necessary to contain risks associated with a large banking system.
- Recommendation: Given the size of Andorran banks, keeping substantial capital and liquidity buffers is a prudent strategy.
- Empirical finding: Besides signaling solid solvency, higher capitalization is associated with higher profitability.
- Policy action: Activation of the countercyclical capital buffer by the AFA to 0.5 percent from Oct 1, 2024, is timely given that the economy is growing above potential, allowing to build buffers in good times.
- Recommendation: Strengthen the recovery and resolution process in Andorra in light of the 2023 banking stress experience in the U.S. and Europe.
- Recommendation: Implementing of the EU Bank Recovery and Resolution Directive will further strengthen the supervisory framework in Andorra.

### Capacity building and the Association Agreement transition
- Context: The Association Agreement with the EU is a test for banks and supervisors.
- Implication for banks: Over the transition period, banks need to prepare for greater competition; size is associated with profit and Andorran banks are likely to grow further to compete with foreign banks.
- Implication for supervisors: The AFA should work together with banks to help them transition and will need expanded resources, notably staffing, to supervise a likely larger financial sector.
- Macro requirement: Continuing financial and macroeconomic stability during and after the transition period will be key.

### Climate change: macro-critical exposure and context
- Macro exposure: Climate change is macro-critical to Andorra because (mostly winter) tourism accounts for one third of the economy.
- Direct risks: Shorter winter seasons, declining snow falls, and higher costs from artificial snow making negatively affect the economy’s main business.
- Resilience note: Because of its higher altitude, Andorra is more resilient than other winter tourism locations in the region and should use this window of opportunity to enact needed policies.

### Climate trends, projections, and impacts
- Observed trend: Since 1950, the country has experienced an increase in temperature averaging 0.20°per decade—most evident during the summer season—resulting in higher annual maximum and minimum temperatures.
- Observed precipitation change: Annual rainfall has decreased by—22.01 mm per decade since 2050.
- Projected change: The upward trend temperature is projected to persist; projected annual snow cover in Andorra is expected to decline by 75–1  00cm by 2090 with deep consequences for both the ecosystem and the economy.
- Energy impacts: Climate change is forecast to negatively affect hydropower, thermoelectric and wind production, and increase frequency/intensity of extreme weather impacting energy production and distribution systems.
- Consumption patterns: Higher temperatures will increase summer energy demand, partly offset by decreased winter heating demand.

### Emissions, energy dependency, and sectoral features
- Emissions level: CO2 emissions level in Andorra is estimated at 5.6 metric tons per capita, at the same level as the EU average and slightly higher than neighboring France and Spain (data from 2017).
- Forest absorption: Andorra’s forest mass absorbs 23 percent of CO2 emissions.
- Energy sector share: The energy sector emits more than 95 percent of greenhouse emissions in Andorra.
- Mobility share: The mobility subsector accounts for more than half of energy demand; fossil fuels amount to 75 percent of the demand, of which 2/3 are related to mobility.
- Electricity/local production: Imported electricity from France and Spain amount to 76 percent of the demand; the remaining 24 percent is locally produced, almost all renewable, of which 81 percent is hydraulic and the remaining is also green.
- Idiosyncratic feature: Fuel tourism is significant: 76 percent of the fuels sold in Andorra for road transport are consumed in neighboring countries.
- Energy intensity: Andorra’s energy intensity has been relatively stable between 98 and 115 units of energy per unit of GDP since the early 2000s and is comparable to 118–122 in the Eurozone.

### Climate change strategy, targets, and regulatory framework
- Strategic goal: Reduce 37 percent of non-absorbed emissions compared to 2005 levels by 2030, and achieve carbon neutrality by 2050.
  - Note: The authorities plan to revise the target on reduction of non-absorbed emissions from 37 to 55 percent by 2030.
- Sectoral 2030 targets:
  - Mobility: Reduction of 50 percent internal emissions from mobility; 20 percent electric vehicles.
  - Buildings: Reduce consumption by 40 percent.
  - Electricity: 33 percent electricity consumption from national production; 100 percent imported electricity with zero emissions.
- Sectoral 2050 targets:
  - Mobility: Decarbonization.
  - Buildings: Decarbonization.
  - Electricity: 50 percent electricity consumption from national production.
- Regulatory and strategic instruments (excerpt):
  - Decree of 29-4-2015 creating the Office of Energy and Climate Change.
  - Nationally Determined Contribution: first submitted in 2017, updated in 2020 and 2022.
  - National Law 21/2018 of 13 September on promotion of the energy transition and climate change.
  - Sustainable Development Goals national plan approved on 17 April 2019.
  - Declaration of state of climate and ecological emergency in January 2020.
  - National energy strategy against climate change for 2020-2050.
  - Edict of the 27-1-2021: Renova program grants for 2021.
  - Andorran strategy for environmental education for sustainability: approved in 2022.
  - Green Fund: 2022 general budget law creates Green Fund for the energy transition and fight against climate change.
  - Carbon Tax: as an additional element of the general branch of the excise tax on hydrocarbons.
  - Law 25/2022 on circular economy (LEC).
  - Law 31/2022 for the development and diversification of the livestock and agricultural sectors.
- Assessment note: Using the Climate Policy Assessment Tool (CPAT), achieving the decarbonization objectives would require very substantial efficiency gains in the power, transport, and residential sectors and a considerable increase in the carbon tax.
- Policy emphasis: The adaptation component of the government’s climate change strategy is paramount given the macro-criticality of climate change but is still at an incipient stage.

*Source: IMF — Principalitiy of Andorra (extract from the referenced chapter).*

### 14.      The key activities of the strategy are outlined in five actions programs (see Table 2).

### Andorra — Climate Change Strategy: Key Activities and Assessment

### Strategy Overview
- Five action programs aim to:
  - Reach carbon neutrality by 2050.
  - Develop a climate change adaptation plan.
  - Structure a funding system to carry out planned actions.
  - Sensitize and educate the population on climate topics.
  - Conduct research, innovation, and observation to understand and respond to environmental and technological challenges.

### Programs and Priority Areas (Table 2)
- Decarbonization
  - Energy transition.
  - Sustainable, connected, and safe mobility.
  - Agriculture and forest management respectful towards the territory’s sink capacity.
  - Circular economy.
  - Industry and use of industrial products.
- Adaptation and Resilience
  - Plan for adaptation to climate change.
  - Promotion of nature-based solutions for greater resilience.
- Financing Tools
  - National carbon credit market and renewable energy.
  - Green Fund and other taxation tools.
- Social Transition
  - Sensitization and dissemination on carbon neutrality.
  - Educational transition.
  - Training to achieve carbon neutrality.
  - User information and protection.
  - Participation of different agents in the process to achieve carbon neutrality.
- Innovation, Research and Observation
  - Innovation.
  - Research and knowledge transfer.
  - Systemic observation.

### Climate Mitigation: Measures and Sectoral Focus
- Key mitigation measures:
  - Promote renewable energies and high-efficiency energy technologies.
  - Improve the electricity sector; FEDA executing infrastructure and digitalization investments.
  - Encourage energy savings and energy efficiency, particularly in construction.
- Transport sector statistics and policy:
  - Transport represents 56 percent of GHG emissions in Andorra and 52 percent of the energy demand.
  - National mobility strategy priorities:
    - Prioritize public transport and promote motorized or assisted non-public mobility (walking, biking, etc.).
    - Electrify motorized mobility with clean energy.
    - Study alternative transport modes (e.g., cable transport).
    - Consider requiring companies with more than one hundred workers to have collective and sustainable mobility plans.
  - Charging infrastructure deployment is required to support electric mobility.
  - Tourism-related cars and improvements in car efficiency in neighboring countries are important external factors.
- Other sectors:
  - Promotion of agriculture and forest management cognizant of sink capacity.
  - Move towards a circular economy to save raw materials, energy, and water.
  - Develop a green economy with high value-added industries based on clean and sustainable technologies.

### Climate Adaptation: Status and Priorities
- Rationale:
  - Impact of climate change already noticeable; accelerating adaptation is essential to increase socio-economic and environmental resilience.
  - Guarantee quality and supply of water and maintain tourist appeal of the Pyrenees are vital.
- Current status:
  - A participatory vulnerability assessment conducted in 2014 produced an initial roadmap.
  - Further studies are being conducted to identify adaptation measures, assess costs, design monitoring systems, and improve impact indicators.
  - Focus sectors: tourism, energy, health, and agriculture.
- Recommendation:
  - Further develop adaptation components and accelerate implementation to strengthen resilience.

### Financing Tools and Fiscal Instruments
- Financing overview:
  - Decarbonization and adaptation are expensive; financing vehicles exist but resources may be insufficient and need scaling up.
  - Full cost of implementing the strategy is unknown pending better understanding of adaptation efforts.
  - A voluntary and regulated emission offset system is being implemented.
- Green Fund:
  - Established to finance mitigation and adaptation initiatives and existing aid programs (Engega Plan, Renova program), and to provide universal access to public transportation.
  - Fund composed annually into the draft general budget law; sustained by earmarked taxes, complementary budgetary allocations, donations, and other contributions.
- Carbon tax:
  - Introduced in 2022; CO2 branch tax rate set at €30 per ton of carbon dioxide equivalent.
  - Half of the €30 per ton is assumed by the government.
  - Current carbon tax compared to peers:
    - Below the regional average of €42 per ton of CO2.
    - IMF estimate that a floor of USD75 per ton of CO2 is needed for advanced economies to reduce emissions by 29 percent by 2030.
    - More recent estimates suggest a rate of €120 per ton of CO2 would be needed in 2030 to decarbonize by 2050 in euro area countries.
- FEDA investments:
  - FEDA 5-year investment plan at cost of €208.80 million (7.43 percent of 2024 GDP), currently being executed.
  - Investment plan main projects (2024–28) by subsector (Millions of EUR; Percent of 2024 GDP):
    - Electricity Generation 97.62 3.47
    - Transmission 45.01 1.60
    - Distribution 8.34 0.30
    - Heating Generation 9.70 0.35
    - Heating Distribution 19.56 0.70
    - Mobility Electric charge 1.32 0.05
    - Mobility 2.03 0.07
    - Waste Environment 0.70 0.02
    - Efficiency 10.32 0.37
    - General Digitalization 9.34 0.33
    - Others 4.86 0.17
    - Total 208.80 7.43
- Green bonds and public debt:
  - All public debt issues since 2021, amounting to EUR1.175 billion, provide financing to be used under the “Green, social and Sustainability Framework”.

### CPAT Mitigation Model: Approach and Key Parameters
- CPAT overview:
  - The CPAT toolkit is a “model of models” developed by the IMF and World Bank to estimate economic and non-economic effects of climate mitigation policies.
  - Four components: mitigation, distribution, air pollution, and transport.
  - Analysis in this paper focuses on the CPAT mitigation model (reduced-form macro-energy model).
- Model features and parameters:
  - Distinguishes energy consumption by power, industry, transport, buildings, and other sectors; energy sources by fossil fuels and electricity.
  - Energy efficiency captured via an autonomous annual energy efficiency improvement parameter.
  - Examples of observed sectoral efficiency improvements:
    - Vehicles (between 2020 and 2020) improved by 1.7 percent.
    - Residential buildings annual average 1.3 percent.
    - Power plants: coal 0.5 percent annual productivity growth; natural gas, nuclear, and hydro around 1 percent annually.
    - Renewables observed productivity growth rate of 5 percent.
  - Baseline CPAT energy efficiency parameter set around 0.5–1 percent annually; scenario increases used for analysis.

### CPAT Results and Scenarios
- Net zero by 2050 target:
  - Achieving decarbonization requires a significant increase in the carbon tax and very ambitious efficiency gains.
  - Decarbonization assessed by comparing scenarios to the net zero by 2050 path.
- Key scenario result:
  - The decarbonization target can be achieved by:
    - Increasing the carbon tax to €150 per ton by 2030, and
    - Accompanying this with efficiency gains of at least 5 percent in the power, transport, and residential sectors.
  - Note: Efficiency gains of at least 5 percent may be too ambitious with existing technologies and current pace of innovation; transport sector emissions are largely exogenous and present a major challenge.
- Carbon tax only:
  - Carbon tax without additional efficiency measures is insufficient to achieve carbon neutrality in Andorra.
- Macroeconomic and energy consumption implications of a carbon tax of €150 per ton by 2030 (with and without additional efficiency gains):
  - Fiscal revenues from fossil fuel excises estimated to reach between 0.5–0.8 percent of GDP depending on efficiency gains.
  - Impact on GDP growth estimated to be limited (model excludes potential impact on fuel tourism).
  - Energy price changes (weighted by consumption) for €150/tCO2 in 2030:
    - Potentially leading to an over 100 percent increase in oil prices.
    - Other energy sources expected to increase between 26 and 61 percent depending on the energy type.
  - Fuel price impacts (unit; baseline; under carbon tax; percent change):
    - Gasoline US$ per liter 1.49 1.89 26%
    - Diesel US$ per liter 1.27 1.72 35%
    - LPG US$ per liter 0.66 0.95 44%
    - Kerosene US$ per liter 0.69 1.12 61%
    - Oil US$ per barrel 65.31 140.51 115%
  - Electricity and other fuel unit impacts presented in model outputs (no change or small changes reported for some fuel/generation types in CPAT figures).

### Assessment and Policy Implications
- Overall assessment:
  - Andorra’s climate change strategy is ambitious and comprehensive, with well-designed mitigation initiatives, but adaptation measures need strengthening and scaling up.
  - Funding gaps remain; FEDA’s investment plan is the most concrete funding commitment so far.
  - The Green Fund aids allocation to key projects but may need to be scaled up.
- Policy recommendations and implications highlighted:
  - Gradually but proactively raise the carbon tax (model indicates €150 per ton by 2030 combined with efficiency gains to meet net zero).
  - Complement pricing tools with large-scale energy efficiency improvements; 5 percent efficiency gains may be difficult without rapid technological progress and sectoral transformation.
  - Major transformation of the transportation sector is essential, including reducing the absolute number of vehicles transiting the country and transitioning to cleaner and more efficient transport for locals and tourists.
  - Accelerate adaptation planning and implementation, and assess feasibility and estimated costs given the structural transformation and infrastructure required.
  - Diversify and enhance resilience of tourism (reduce seasonality) as structural change to tourism is slow and resource-intensive but can help reduce dependence on winter tourism.

*Source: IMF staff summary of Andorra climate change strategy and CPAT analysis (content from the provided chapter).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1andea2024002.pdf_