IMF Executive Board Concludes 2022 Article IV Consultation with the Principality of Andorra
June 21, 2022
Washington, DC : On June 10, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Principality of Andorra and endorsed the staff appraisal without a meeting.
The Andorran economy rebounded strongly from the large contraction caused by the COVID-19 pandemic. Growth in 2021 (8.9 percent) was supported by a recovery in tourism, retail trade, construction, and professional services. Headline inflation rose to 4.9 percent in March 2022, the highest reading in the last 10 years. However, price pressures were more limited than in neighboring countries thanks to long-term contracts with foreign energy suppliers that mitigated the rise in electricity prices. Labor market conditions tightened due to declining unemployment and a sharp rise in job vacancies but did not create significant wage pressures. Despite the roll back of most COVID-related measures, the overall policy mix remained supportive in 2021.
With growth projected at 4.5 percent in 2022, activity is expected to return to pre-crisis levels in the second half of 2022. However, downside risks to the outlook are significant, related to the economic impact in Europe of the war in Ukraine, the sharp increase in commodity prices, an unfavorable evolution of the pandemic, weaker recoveries in neighboring countries, and tighter financial conditions. Strong fiscal buffers, a large current account surplus, newly accumulated external reserves, and liquid and well-capitalized banks, will help in this highly uncertain environment. In the medium term, real GDP growth is expected to converge to its 1.5 percent potential. Still, 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. As in neighboring countries, high inflation will likely persist in 2022 and early 2023 due to still high energy prices but should ease thereafter.
Executive Board Assessment [2]
In concluding the Article IV consultation with the Principality of Andorra, Executive Directors endorsed the staff’s appraisal as follows:
The Andorran economy is recovering strongly from a deep pandemic-related recession. Growth surprised on the upside in 2021 and is expected to remain strong in 2022. Labor market conditions improved, with unemployment amongst the lowest in Europe. Headline inflation accelerated, but less so than in neighboring countries, and pressures are expected to recede in the second half of 2023. Despite the gradual withdrawal of COVID measures, the policy mix remained supportive in 2021. Over the medium term, output is projected to converge to the pre-pandemic trend with limited scarring. Risks to the outlook are tilted to the downside, notably related to the war in Ukraine.
Rapid fiscal consolidation should be balanced with growth-enhancing spending. Considering the strong economic recovery, the focus adequately shifted from providing emergency support to rebuilding policy space. Fast consolidation will continue in 2022. Fiscal discipline and an active debt management strategy will quickly bring down the public debt ratio, which is projected to meet the fiscal rule target by 2023. Given low potential growth and ample evidence of an investment gap across all sectors, it is important to balance fiscal prudence with growth-enhancing spending.
Pension reform is imperative to restore the system’s sustainability while ensuring adequacy of pensions. The social security system will accumulate rising deficits of 9 percent of GDP per year by 2040. Given the magnitude of the assessed shortfall in the system and specific measures still under discussion, it is critical to act early with a comprehensive set of measures, including increases in the contribution rate, the conversion factor, and in the retirement age.
Close monitoring and stronger supervision of the banking sector are needed to ensure continued resilience. Andorran banks are well capitalized and highly liquid. However, vulnerabilities associated with the private banking model and the internationalization strategy, including overreliance on foreign funding and large off-balance-sheet assets under management, require close supervision. Strengthening liquidity supervision and endowing AFA with more solid funding and staffing would help in this direction. Enforcement of new measures to limit the risks associated with related party lending and large exposures is also critical. The ongoing consolidation of the banking system could improve bank profitability, but it should not result in lower competition.
Raising potential growth calls for a multi-pronged approach focused on diversifying the economy, boosting investment, and building human capital. Reducing red tape and administrative rigidities and improving access to credit would support diversification and boost investment. Expanding the supply of affordable housing and easing immigration requirements will help attract the needed high-skilled workers, while training will improve human capital. Andorra’s vulnerability to natural events calls for continuing building resilience to climate change, including by greening transportation and energy, and reducing dependency on imported energy. Current negotiations on an EU Association Agreement have the potential to unlock substantial benefits.
Persevering with rapid progress in improving the governance framework and enhancing transparency will help consolidate Andorra’s presence in international markets. The rapid advances made so far in closing data gaps and strengthening the AML/CFT framework should continue. Further efforts are needed to improve the quality and comprehensiveness of data and to align Andorra’s anti-corruption framework to international standards. 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 address capacity issues and close data gaps, including by refining the recently created Balance of Payments data, and developing other real, financial, and external sector statistics that are needed for effective surveillance.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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Andorra: Selected Economic Indicators, 2017–27 |
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Projections |
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2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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NATIONAL ACCOUNTS AND PRICES |
(annual change, percent, unless otherwise indicated) |
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|
Real GDP |
0.3 |
1.6 |
2.0 |
-11.2 |
8.9 |
4.5 |
2.7 |
2.2 |
1.6 |
1.5 |
1.5 |
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|
Nominal GDP |
1.5 |
2.6 |
3.4 |
-10.2 |
11.2 |
8.2 |
4.7 |
3.7 |
3.2 |
3.2 |
3.3 |
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|
GDP deflator |
1.1 |
1.0 |
1.4 |
1.1 |
2.1 |
3.5 |
1.9 |
1.4 |
1.6 |
1.7 |
1.7 |
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|
(contribution to nominal GDP growth, percentage points) |
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|
Consumption |
… |
3.2 |
2.4 |
-0.7 |
7.6 |
5.4 |
3.1 |
2.4 |
2.0 |
2.1 |
2.1 |
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|
Private |
… |
1.5 |
1.5 |
-3.3 |
6.4 |
4.3 |
2.2 |
1.5 |
1.5 |
1.7 |
1.7 |
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|
Public |
… |
1.7 |
0.9 |
2.6 |
1.2 |
1.0 |
0.9 |
0.9 |
0.6 |
0.4 |
0.4 |
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Investment |
… |
2.4 |
2.0 |
-3.5 |
1.8 |
1.4 |
0.8 |
0.6 |
0.5 |
0.5 |
0.5 |
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|
Private 1/ |
… |
1.9 |
1.7 |
-3.0 |
1.5 |
0.7 |
0.5 |
0.4 |
0.2 |
0.3 |
0.3 |
|||
|
Public |
… |
0.6 |
0.3 |
-0.4 |
0.3 |
0.7 |
0.3 |
0.2 |
0.2 |
0.2 |
0.2 |
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Net exports of G&S |
… |
-3.0 |
-1.0 |
-6.0 |
1.9 |
1.4 |
0.7 |
0.7 |
0.7 |
0.7 |
0.7 |
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Exports |
… |
0.8 |
1.1 |
-16.8 |
10.1 |
6.0 |
4.1 |
3.6 |
3.3 |
3.3 |
3.2 |
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Imports |
… |
3.8 |
2.0 |
-10.7 |
8.2 |
4.6 |
3.3 |
2.9 |
2.6 |
2.6 |
2.5 |
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|
Inflation (percent, p.a.) |
2.6 |
1.3 |
0.7 |
0.3 |
1.7 |
3.9 |
2.0 |
1.3 |
1.6 |
1.7 |
1.7 |
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Inflation (percent, e.o.p.) |
2.4 |
0.8 |
1.0 |
-0.2 |
3.3 |
2.0 |
1.1 |
1.5 |
1.7 |
1.7 |
1.7 |
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Unemployment rate (percent) |
1.7 |
1.5 |
1.8 |
2.9 |
2.9 |
2.0 |
1.8 |
1.7 |
1.7 |
1.7 |
1.7 |
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EXTERNAL SECTOR 2/ |
(percent of GDP, unless otherwise indicated) |
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|
Current account |
… |
… |
18.0 |
14.6 |
15.9 |
16.8 |
17.3 |
17.7 |
18.1 |
18.5 |
19.0 |
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Balance of G&S |
14.2 |
10.9 |
9.6 |
4.0 |
5.3 |
6.2 |
6.6 |
7.0 |
7.5 |
7.9 |
8.3 |
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Exports of G&S |
76.6 |
75.4 |
74.0 |
63.7 |
66.3 |
66.9 |
67.8 |
68.9 |
70.0 |
71.0 |
71.9 |
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Imports of G&S |
62.4 |
64.6 |
64.4 |
59.8 |
61.1 |
60.7 |
61.2 |
61.9 |
62.6 |
63.1 |
63.6 |
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Primary income, net |
… |
… |
9.7 |
12.0 |
12.0 |
12.0 |
12.0 |
12.0 |
12.0 |
12.0 |
12.0 |
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Secondary income, net |
… |
… |
-1.3 |
-1.4 |
-1.4 |
-1.4 |
-1.4 |
-1.4 |
-1.4 |
-1.4 |
-1.4 |
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Capital account |
… |
… |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
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Financial account |
… |
… |
17.6 |
15.1 |
15.9 |
16.8 |
17.3 |
17.7 |
18.1 |
18.5 |
19.0 |
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Errors and omissions |
… |
… |
-0.4 |
0.4 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
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Gross intl. reserves (mill. euros) 3/ |
… |
… |
0.0 |
41.9 |
138.1 |
238.1 |
238.1 |
238.1 |
238.1 |
238.1 |
238.1 |
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FISCAL SECTOR |
(percent of GDP, unless otherwise indicated) |
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General Government 4/ |
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Revenue |
38.0 |
38.5 |
38.0 |
40.4 |
38.9 |
38.3 |
38.9 |
39.1 |
39.2 |
39.3 |
39.3 |
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Expenditure |
34.6 |
35.8 |
35.7 |
43.2 |
39.5 |
36.8 |
36.7 |
36.4 |
36.0 |
35.7 |
35.5 |
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of which: Interest |
0.7 |
0.5 |
0.5 |
0.6 |
0.7 |
0.6 |
0.9 |
0.8 |
0.8 |
0.8 |
0.8 |
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Primary balance |
4.0 |
3.2 |
2.8 |
-2.2 |
0.2 |
2.1 |
3.1 |
3.6 |
4.0 |
4.3 |
4.6 |
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Net lending/borrowing |
3.3 |
2.7 |
2.3 |
-2.8 |
-0.5 |
1.5 |
2.2 |
2.7 |
3.2 |
3.5 |
3.8 |
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Public debt 5/ |
37.8 |
36.3 |
35.4 |
46.3 |
48.5 |
44.3 |
42.0 |
39.9 |
38.6 |
37.4 |
36.2 |
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Central Government 6/ |
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Revenue |
||||||||||||||
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Expenditure |
19.6 |
19.6 |
19.5 |
20.2 |
20.3 |
19.2 |
19.4 |
19.5 |
19.5 |
19.6 |
19.7 |
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of which: Interest |
19.3 |
19.7 |
19.3 |
24.4 |
21.7 |
19.6 |
19.2 |
19.1 |
18.9 |
18.8 |
18.7 |
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Primary balance |
0.5 |
0.5 |
0.4 |
0.5 |
0.7 |
0.5 |
0.7 |
0.7 |
0.7 |
0.6 |
0.6 |
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Net lending/borrowing |
0.8 |
0.4 |
0.6 |
-3.7 |
-0.7 |
0.2 |
0.9 |
1.0 |
1.3 |
1.5 |
1.6 |
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Public debt 5/ |
0.3 |
-0.1 |
0.2 |
-4.2 |
-1.4 |
-0.3 |
0.2 |
0.4 |
0.7 |
0.8 |
1.0 |
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BANKING SECTOR |
(percent, unless otherwise indicated) |
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Regulatory capital to risk-weighted assets |
… |
20.4 |
21.8 |
22.5 |
21.5 |
… |
… |
… |
… |
… |
… |
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|
Nonperforming loans to total gross loans |
… |
7.1 |
7.3 |
6.1 |
5.2 |
… |
… |
… |
… |
… |
… |
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Credit to nonfinancial private sector |
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|
Level (percent of GDP) |
… |
147.9 |
135.9 |
150.3 |
135.0 |
… |
… |
… |
… |
… |
… |
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Corporates |
… |
72.0 |
70.3 |
76.8 |
68.7 |
… |
… |
… |
… |
… |
… |
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Households |
… |
75.9 |
65.6 |
73.5 |
66.3 |
… |
… |
… |
… |
… |
… |
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Growth (nominal) |
… |
… |
-5.0 |
-0.7 |
-0.1 |
… |
… |
… |
… |
… |
… |
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Corporates |
… |
… |
0.9 |
-1.8 |
-0.6 |
… |
… |
… |
… |
… |
… |
|||
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Households |
… |
… |
-10.6 |
0.6 |
0.4 |
… |
… |
… |
… |
… |
… |
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Credit to public sector |
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|
Level (percent of GDP) |
… |
7.5 |
7.5 |
6.1 |
2.7 |
… |
… |
… |
… |
… |
… |
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Growth (nominal) |
… |
… |
3.0 |
-27.2 |
-50.2 |
… |
… |
… |
… |
… |
… |
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Memorandum items |
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Exchange rate (€/USD, period average) 7/ |
0.89 |
0.85 |
0.89 |
0.88 |
0.85 |
… |
… |
… |
… |
… |
… |
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Nominal GDP (millions, euros) |
2,656 |
2,725 |
2,818 |
2,531 |
2,815 |
3,045 |
3,187 |
3,303 |
3,408 |
3,518 |
3,633 |
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Sources: Govern d'Andorra Department of Statistics, Andorran authorities, Eurostat, and IMF staff calculations. |
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1/ The contribution of private investment is derived as a residual. Since the fiscal accounts are covered at the general government level, investments of state-owned enterprises are subsumed under private investment. |
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2/ Balance of Payments data are only available starting from 2019, except the goods and services balance, which are available starting from 2017. Data for 2021 are an estimate. |
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3/ The increase of gross international reserves in 2021 is due to the general SDR allocation made in August 2021 to all IMF members (SDR 79.1 million to Andorra). |
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4/ The general government comprises the central government, local governments and the social security fund. |
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5/ The sharp increases of debt in 2020-21 are partly explained by a pre-financing strategy to cover large amortization due in 2021-22. |
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6/ The central government comprises Govern d'Andorra, as well as nonmarket, nonprofit institutional units. |
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7/ The table reports the exchange rate €/USD because Andorra is a euroized economy. |
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