Principality of Andorra: Staff Concluding Statement of the 2022 Article IV Mission

April 7, 2022

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Andorra La Vella:

Economic Outlook

The Andorran economy is recovering strongly from a deep pandemic-related recession. Positive growth surprises in the second half of 2021 resulted in an 8.9 percent real GDP growth despite the Omicron resurgence. Labor market conditions improved, with unemployment amongst the lowest in Europe. Headline inflation accelerated amid high energy prices, but inflationary pressures have been more contained than in neighboring countries thanks to long-term contracts with foreign energy suppliers. While COVID support measures were gradually withdrawn, the policy mix remained supportive in 2021.

The growth momentum is expected to remain strong in 2022 but downside risks dominate. With growth projected at 4.5 percent, activity should return to pre-crisis levels in the second half of 2022. Risks to the outlook are significant, related to the economic impact in Europe of the war in Ukraine and the sharp increase in commodity prices, the evolution of the pandemic, weaker recoveries in neighboring countries, and tightening financial conditions. Strong fiscal buffers, a large current account surplus, newly accumulated external reserves, liquid and well-capitalized banks, will help in this highly uncertain environment. However, the missed 2020-21 winter season and the sharp contraction in investment during the pandemic caused an estimated permanent income loss of about 3 percent. Real GDP growth is expected to converge to its 1.5 percent potential in the medium term. As in neighboring countries, high inflation will likely persist in 2022 and early 2023 due to still high energy prices but should ease thereafter.

Balancing fiscal prudence and growth-enhancing spending

Given the strong economic recovery, support measures were rolled back in 2021 and the focus has adequately shifted to rebuilding policy space. 2022 budget projections imply a deficit of 0.3 percent of GDP . However, if conditions deteriorate, fiscal support should be reinstated flexibly and in a targeted manner to aid those sectors most in need and prevent scarring. Thanks to fiscal discipline and an active debt management strategy, the debt ratio is set to decline rapidly to pre-pandemic levels after 2022 and to reach the fiscal rule target of 40 percent of GDP by 2024. However, the right balance needs to be found between fast consolidation to meet the fiscal rule targets and allowing for growth-enhancing spending. With broad evidence of an investment gap across sectors, available fiscal space could be used to sustain higher public investment. A well-designed investment strategy would help raise potential growth and reduce external imbalances, without compromising the prudent fiscal framework.

Reforming the pension system is a key priority to ensure sustainability and reduce contingent liabilities for the public sector. With an ageing population and a pension system characterized by low contribution rates, the Andorran social security system will accumulate deficits starting in 2024 and deplete its reserve fund by 2039. The Andorran Parliament has appointed a special commission to elaborate a reform plan before end-2022. The magnitude of the needed reform requires acting early and considering all available options (including increases in contribution and conversion rates and the retirement age), while ensuring social fairness.

The authorities have taken steps to build up international reserves on a precautionary basis. The 2021 allocation of IMF Special Drawing Rights (SDRs) increased international reserves by €96 million to about 5 percent of GDP. In addition, the authorities allocated €100 million of the debt issued in 2021 (equivalent to 3.6 percent of GDP) to international reserves.

Financial Policies to ensure resilience

Building on recent measures will strengthen the banking sector further as Andorran banks still face significant risks despite emerging from the pandemic with solid balance sheets. Banks, with assets worth 600 percent of GDP and very large assets under management off balance-sheet, are systemically important to the Andorran economy. They emerged from the crisis in a strong position, well capitalized, highly liquid and with a declining nonperforming loans ratio. However, as in many other small countries with large banking sectors, risks can be significant. The private banking model and the internationalization strategy have resulted in higher cost-to-income ratios and overreliance on foreign funding, particularly nonresident deposits that can become less stable. Large exposures and related party lending create additional risks. The Andorran Financial Authority (AFA) adopted measures encouraging banks to reduce their related party exposure to less than 15 percent of capital and transposing into its legal framework the EU regulation limiting large exposures to less than 25 percent of the bank’s capital. Enforcement remains critical to keep risks at bay.

Close monitoring and stronger supervision of the banking sector are needed to ensure continued resilience. As support measures are rolled back, detecting any deterioration in asset quality early is key. Continuing to strengthen liquidity supervision is also important, notably given the significant risk associated with the overreliance on nonresident deposits. Strengthening the AFA’s supervisory role, including by more solid funding and staffing, would help in this direction. With the ongoing consolidation of the banking system, the AFA should remain vigilant about negative impacts of lower competition.

Structural reforms and investment to boost growth in the medium-term

Raising potential growth in Andorra calls for a multi-pronged approach focused on diversifying the economy, boosting investment and building human capital. The economy faces multiple structural challenges, notably difficult geographic accessibility, a limited stock of affordable housing and a small internal market. The pandemic-induced recession exposed the vulnerability of the Andorran economy to exogenous shocks and to strong seasonality that results from high dependance on a few economic sectors and on neighboring countries. The economic loss suffered during the pandemic is large. Policies to diversify the economy are multi-pronged and should induce higher productive investment. Reducing red tape and administrative rigidities that stifle private sector initiatives, favoring access to credit and alternative sources of financing, and easing immigration requirements would support diversification and boost medium-term growth. The ongoing digitalization program is welcome progress in this direction. Designing appropriate measures to tackle frictions and bottlenecks, notably in the housing market, will help attract the needed high-skilled workers, while training will improve human capital. Current negotiations on an EU Association Agreement have the potential to unlock substantial benefits from the Andorran economy. Such reforms will facilitate investment in high-value-added sectors. Andorra’s vulnerability to natural events calls for continuing to build resilience to climate change, including by greening transportation and energy, and reducing dependency on imported energy.

Sustaining the momentum on governance reform to boost investor confidence

Strengthening economic governance further is key to Andorra’s presence in the global financial market. Since Andorra’s accession to the IMF in October 2020, the authorities have made rapid strides, have closed data gaps and have enhanced the AML/CFT framework through better and more regular monitoring of cross-border flows. The significant progress made so far should continue. Efforts to improve the quality and comprehensiveness of data and to align Andorra’s anti-corruption framework to international standards should continue. This encompasses ratifying the United Nations Convention Against Corruption, developing an anti-corruption strategy, advancing the reform of the public procurement framework, and publishing beneficial ownership information. Andorra should also persist in its efforts to close data gaps, including by fully adopting the Enhanced General Data Dissemination System (e-GDDS), refining the recently created Balance of Payments data, and developing other real, financial, and external sector statistics that are needed for effective surveillance.


The mission thanks the authorities and all our counterparts for a constructive policy dialogue, for engaging in a productive and transparent collaboration, and for their hospitality during the first official visit of the IMF to Andorra.

IMF Communications Department


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